Illinois Sells Build America Bonds as Premium to Treasuries Climbs 40%

Illinois sold $300 million of Build America Bonds at a yield premium over Treasuries about 40 percent higher than two months ago after lawmakers failed to close a $13 billion budget deficit for the year starting July 1.

The fifth most-populous U.S. state sold the taxable debt maturing in 2035 priced to yield 7.1 percent yesterday, or 297 basis points over the 2040 Treasury to which it was benchmarked, according to data compiled by Bloomberg. Illinois offered Build Americas of similar maturity at spreads of 205 basis points and 210 basis points in two April issues, Bloomberg data show. A basis point is 0.01 percentage point.

Risk aversion among investors amid Greece’s efforts to impose austerity measures contributed to swell the state’s borrowing costs, said Tom Boylen, a managing director and municipal-bond trader in Chicago for BMO Capital Markets.

“A lot of this is a global thing,” Boylen said. “There’s a bigger magnifying glass on credit.”

Illinois lawmakers passed a provisional $25.9 billion fiscal 2011 budget that’s about $13 billion short, and are resisting Governor Pat Quinn’s plan to sell $3.7 billion in debt to make a pension payment and help bridge the gap. Legislators recessed last month without covering the pension obligation and $4.5 billion in unpaid bills.

Citigroup Inc. provided the winning bid for the Illinois sale, which will finance capital projects. Alex Samuelson, a spokesman for the New York-based bank, declined to comment. Kelly Kraft, a spokeswoman for Quinn, didn’t immediately reply to telephone or e-mail messages requesting comment on the Build America sale.

Default Insurance

The sale took place as the price of insuring Illinois bonds against default climbed to a record. The cost of a five-year credit-default swap to protect Illinois debt rose 7 basis points to 309.1 basis points, or $309,100 to insure $10 million of debt, according to CMA DataVision, a data provider owned by CME Group Inc. The Markit MCDX CDS index of 50 municipal issuers held close to an 11-month high.

Illinois’s credit-swap costs surpassed California’s, the largest U.S. municipal borrower, which saw its default-insurance contracts rise 1 basis point to 299.6 basis points from 298.7 basis points yesterday. Illinois is rated A+ by Standard & Poor’s, two levels higher than California. Moody’s Investors Service puts both at A1, the fifth-highest, and the lowest-rated among U.S. states.

“If the spread is the widest, it says the problem is bigger than it’s ever been before,” said Peter Hayes, who oversees $106 billion of municipal bonds for New York-based BlackRock Inc. “It’s a reaction to the inability to pass a budget. We’ve seen a greater unwillingness from Illinois and the market is reacting to that.”

Moody’s, Fitch Downgrades

Moody’s and Fitch Ratings downgraded Illinois this month, citing the lack of political will to deal with budget issues. Moody’s also cited strengths including a diverse economy and changed the outlook to stable from negative.

Illinois plans to sell $900 million more in Build America securities later this month. The bonds, created as part of last year’s economic-stimulus measures, are the fastest-growing part of the $2.8 trillion municipal-debt market. States and local governments have sold almost $113 billion of the obligations, according to Bloomberg data. Build America issuers are eligible for a 35 percent federal subsidy on their interest costs.

Following are descriptions of pending sales of municipal debt in the U.S.:

UNIVERSITY OF TEXAS, with more than 202,000 students at nine academic locations and six health institutions, plans to sell $520 million in Build America debt as early as next week mainly to fund campus improvements. The bonds, to be marketed by an underwriter group led by Morgan Stanley, carry top ratings from Moody’s, Fitch and S&P. (Added June 18)

GUAM POWER AUTHORITY, which serves 47,000 customers in the westernmost U.S. territory, plans to sell $146.5 million in revenue bonds as soon as next week. The debt is rated BBB, the second-lowest investment grade, by S&P and will be split into tax-exempts and taxable Build America Bonds. The deal is led by Morgan Stanley and may also include $55.3 million of a subordinate lien tranche rated BBB-, the lowest investment grade, according to S&P. Proceeds will go to refunding debt, adding so-called smart-grid technology and projects such as a new administrative building. (Added June 17)

ALAMOGORDO, the New Mexico city nearest to the site of the first nuclear tests in the U.S., plans to issue $89 million in debt as soon as next week. The deal is split into $73.1 million of tax-exempts that mature from 2022 through 2026, in 2030, 2035 and 2040 and $16.3 million of taxable securities that mature serially from 2011 through 2022. Marketing will be led by Morgan Keegan Inc. and proceeds will go to refunding improvement bonds for the Gerald Champion Regional Medical Center. The securities are rated BBB+, third-lowest, by S&P. (Added June 17)

PUERTO RICO SALES TAX FINANCING CORP., created in 2006 to help the island commonwealth lower borrowing costs, plans to offer $1.4 billion in tax-exempt revenue bonds as soon as next week. The bonds, rated the fifth-highest level at A1 by Moody’s and A+ by S&P, will be marketed by a group led by Citigroup Inc. The securities are backed by 1.5 percentage points of the state’s 5.5 percent sales tax and will refund debt from 2007, 2008 and 2009. (Added June 17)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net.

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