By Al Yoon
Illinois sold $1 billion in general obligation bonds, paying
less to borrow than they did in a similar sale in June, a sign that
the state's efforts to close a gaping pension gap are drawing back
investors.
The sale is the first general-obligation offering since Illinois
lawmakers reached an agreement in December that would close the
state's pension gap by nearly $100 billion.
Illinois sold the bonds with an average interest rate of 4.46%,
down from 5.05% when it sold $1.3 billion of tax-exempt debt in
June, a state spokesman said. Underwriters lowered yields from
preliminary levels, cutting 10-year notes rates by 0.06 percentage
point to 3.81%.
"It sure looks like plenty of investors have gotten comfortable
with the credit now," said Duane McAllister, a portfolio manager at
BMO Global Asset Management, which bought some of the deal.
Yield premiums on Illinois' debt have plunged since Gov. Pat
Quinn signed the pension-reform agreement, easing pressure on the
state, which has $28.3 billion in general obligation debt. The
lower rate will save the state $60 million in interest payments
during the 25-year deal, whose proceeds pay for roads, bridges,
schools and mass transit programs, the spokesman said.
Even so, Illinois' borrowing costs are still the highest among
U.S. states, reflecting lingering uncertainty over its ability to
carry out reforms and boost revenue. Investors demand 0.84
percentage point more to buy Illinois 10-year debt over California
issues, according to Thomson Reuters Municipal Market Data.
Investors said Illinois' deal was also supported by a broader
recovery in the municipal bond market, which in 2013 endured its
worst year for total return 1994. Bond funds saw $63.5 billion in
redemptions last year as Detroit's record bankruptcy filing and
Puerto Rico's fiscal problems thrust the impact of pension costs
into the spotlight.
Much of the recent price gains have been due to a lack of new
debt issuance. In January, municipalities issued $18 billion, 30%
lower than a year earlier, according to Christopher Mauro, a
strategist at RBC Capital Markets who predicted annual issuance
will also decline this year.
Despite investors' response to Illinois' pension reform, Moody's
Investors Service and Fitch Ratings have kept their negative
outlooks on the state. Reforms face stiff opposition from union
groups including We Are One Illinois, which last month sued to stop
the "pension theft" law that it says violates the state's
constitution.
"If upheld by the courts, the law will be positive for the
state," Moody's said in a report on the new issue. But it added
that "the legal process may invalidate the reform altogether, or
reject pieces of it."
Rating firms also warn that revenue will drop if the state
allows a temporary tax increase to expire next year.
Kathy Bramlage, a director at Treasury Partners, a unit of
financial-advisory firm HighTower Advisors, said Illinois probably
benefited more from the lack of new issuance than investors taking
fresh bets on the credit. "But even if it is the weakest state
credit, it has some fairly attractive yields so this is something
that gets attention," she added.
Write to Al Yoon at albert.yoon@wsj.com
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