Illinois Borrowing $900 Million as Credit-Default Insurance Cost Doubles

Illinois plans to add $900 million in Build America Bonds to the $755 million in securities it sold in June as the cost of insuring the state’s debt against default reached a record high.

The cost of an Illinois credit-default swap has more than doubled since April 5 to a record of 370 basis points, or $370,000 to protect $10 million of debt, according to CMA DataVision. The state rescheduled the Build America sale for mid-July, after originally planning it for as early as this week, Dow Jones reported, citing John Sinsheimer, Illinois’s capital markets director.

The state paid a premium of 80 basis points on 10-year general obligation debt over top-rated tax-exempts, or 5 basis points more than at the start of the month. A basis point is 0.01 percentage point.

Some of the spread can be attributed to the state’s sale of $2 billion in debt in three months, said Mike Pietronico, who oversees $275 million in municipal holdings as chief executive officer of New York-based Miller Tabak Asset Management.

“There’s some saturation of the name and that’s costing them in terms of pricing,” Pietronico said. “Once they move past this borrowing binge, the bonds will begin to perform better.”

Illinois’s debt is rated fifth-highest by Moody’s Investors Service, at A1, and by Standard & Poor’s, at A+. The state’s obligations are the most expensive municipal debt to insure, at 19 basis points above California, the largest U.S. state borrower.

Yield Spread

The yield spread between the average Build America Bond and the 30-year U.S. Treasury widened about 32 basis points this month to about 192 basis points, according to Bloomberg data.

“Look for some stabilization” in the pricing, according to Pietronico, who said the state’s spreads have widened so much that the deal will bring in “value buyers.”

“It’s still a state GO and the appealing yields will bring in demand,” he said, referring to the general-obligation debt.

Illinois lawmakers went home May 27 without resolving the state’s $13 billion deficit in the budget for the fiscal year that begins this week. The $900 million sale would bring the state’s outstanding general obligation debt to $26.9 billion, according to Fitch Ratings.

Proceeds of the offering will fund transportation projects, preliminary documents show.

Rating Cut

The state’s fiscal troubles led to a one-level rating cut last week of the Illinois Regional Transportation Authority, the second-largest public transportation system in the U.S., by both Fitch and Moody’s.

Illinois sold $300 million of Build America Bonds on June 17 in a competitive offering won by Citigroup Inc. The securities mature serially from 2011 through 2021 and in 2025 and 2035. Five-year debt priced to yield 4.5 percent, 250 basis points more than a similar maturity government security. The notes traded June 25 at an average yield of 4.52 percent, a spread of 260 basis points, according to Municipal Securities Rulemaking Board data.

Debt from the sale maturing in 2035 yielded 7.1 percent, 297 basis points over a 30-year Treasury. On June 25 the security traded at an average yield of 6.99 percent, 293 basis points higher.

Peoria, Illinois-based Caterpillar Inc., which is rated on par with Illinois by Fitch and one level below by Moody’s and S&P, offered yields of 5.35 percent on June 24 for debt maturing in 2038. The world’s largest maker of construction equipment paid 145 basis points below Illinois’s higher-rated and shorter- term notes.

Sinsheimer and Kelly Kraft, a spokeswoman for Governor Pat Quinn, didn’t return calls or e-mails seeking comment on the Dow Jones report. The state delayed the sale until the governor decides on signing off on the budget for the year starting July 1, the report said.

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

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