Illinois Offers $700 Million of Build Americas After Moody's Rating Shift
Illinois, the second-lowest-rated state after California, today is selling $700 million in the largest Build America Bond offering in a month, a day after its standing was recalibrated higher by Moody’s Investors Service.
The fifth-most-populous U.S. state issued $1.3 billion in Build Americas in 2010, including a $300 million sale of the notes earlier this month. Yesterday, Moody’s raised Illinois’s rating two steps to Aa3, its fourth-highest, from A2 as part of its municipal debt recalibration program. Both Moody’s and Fitch Ratings are shifting their state and local grading scale to make them more comparable with corporate debt.
“To recalibrate right now, it’s going to help the marketplace,” said Richard Ciccarone, chief research officer of Oak Brook, Illinois-based McDonnell Investment Management, which oversees $7 billion of municipal debt. “A lot of investors will buy into the recalibration.”
Ten-year Build America Bonds sold in the state’s most recent offering of $300 million had a coupon of 5.65 percent when issued April 6. The security traded with an average yield of 5.406 percent April 15, according to the Municipal Securities Rulemaking Board. The average yield on the Wells Fargo Build America Bond Index reached 6.34 percent on April 6 and fell to 6.13 percent, a one-month low, last week.
The bond market may not have had enough time to process Moody’s ratings shift before the sale, said John Sinsheimer, Illinois director of capital markets, in an interview.
“I’m not sure the market will have time to digest the news,” he said. “We’re hoping that they’d understand that Aa3 is better than A2.”
Fitch recalibrated its ranking of Illinois -- which it cut one level to A- last month -- to A+, its fifth-highest, on April 5. Standard & Poor’s lowered its grading of Illinois debt in December to A+. Both S&P and Moody’s have a negative outlook or watch on the credit, portending possible future downgrades, as the state tries to close a $9.3 billion budget deficit before the start of the next fiscal year in July, according to Fitch.
Top-rated, 10-year tax-exempts, whose yields last rose April 9, have fallen 3 basis points since April 6, according to Municipal Market Advisors. A basis point equals 0.01 percentage point.
Illinois’s sale is the biggest Build America offering since California sold $2.5 billion on March 25 and is the largest municipal debt issue this week. Proceeds from the sale will help fund grants for school districts as well as capital projects. Build Americas are eligible for a 35 percent interest-rate subsidy from the federal government.
Illinois marketed the $700 million sale to institutional investors, including international buyers, yesterday, said Tom Lanctot, a principal at William Blair & Co. in Chicago, which is leading the underwriting.
“It is, from a borrower’s standpoint, a good time,” Ciccarone said. “There’s some recovery in the wind.”
Illinois employers added 3,000 jobs in March, the third- straight monthly increase, the Labor Department said last week. The state has “strong” economic resources and now needs to figure out how to tap them, Ciccarone said.
Following are descriptions of pending sales of municipal debt in the U.S.:
NEW JERSEY, the second-wealthiest U.S. state, will sell $850 million of fixed-rate bonds through the state’s Economic Development Authority as early as next week to refinance existing debt and fund the state’s school-construction program. The bulk of the issue, $715 million, will be tax-exempt, with $100 million in Build America Bonds and $36 million in other taxable debt. Underwriters led by Bank of America Merrill Lynch will market the issue. New Jersey is rated Aa2, third-highest, by Moody’s. (Added April 20)
TEXAS, the second most-populous state behind California, is selling about $185 million in fixed-rate tax-exempt bonds to finance the Water Infrastructure Fund and help pay for water assistance projects in the state. Underwriters led by Barclays Plc will market the debt, which is top-rated according to Moody’s and Fitch, and graded AA+ by S&P, the second-highest. (Added April 20)
CONNECTICUT, the U.S. state with the highest net tax- supported debt, will sell about $642 million in general- obligation bonds and bond-anticipation notes as early as today to retire debt and finance various projects, according to preliminary offering documents. About $184 million will be issued as taxable Build Americas, with $105 million in tax- exempt securities. The obligations will pay the state’s anticipation notes from 2009 and will mature in May 2011. The debt is rated AA+ by Fitch, the second-highest investment grade. (Updated April 20)
PUERTO RICO ELECTRIC POWER AUTHORITY, the commonwealth’s monopoly power utility, plans to sell at least $625 million in revenue debt as soon as today as part of a five-year, $1.7 billion capital improvement plan. The issue will include $275 million in tax-exempt securities to refinance existing debt, preliminary offering documents show, and $350 million in taxable Build America Bonds, according to Fitch. The power authority, which sold $822 million in tax-exempt debt in March, is rated A3 by Moody’s, the fourth-lowest investment grade, and BBB+ by Fitch and S&P, one level lower. (Updated April 20)
MICHIGAN STATE UNIVERSITY, which leads the Big Ten Conference in Rhodes Scholars with 16, plans to sell $205 million in taxable Build America Bonds as early as next week to finance construction and renovation projects on the East Lansing campus. Underwriters Bank of America Merrill Lynch and JPMorgan Chase & Co. will market the federally subsidized debt. S&P and Moody’s rate the issue third-highest of 10 investment grades, AA and Aa2, respectively. (Updated April 20)
CHILDREN’S HOSPITAL LOS ANGELES, one of the top 10 recipients of funding from the National Institutes of Health, according to Moody’s, will sell $141 million in fixed-rate health-care revenue obligations through the California Health Facilities Financing Authority as soon as next week to refinance auction-rate securities from 2004 and a portion of variable-rate debt from 2008. Citigroup Inc. will market the notes, rated Baa2 by Moody’s, two levels above high-risk, high-yield junk. (Updated April 19)
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