Illinois Pays 17% More Than in April for $1.3 Billion Muni Sale

Illinois paid 17 percent more in extra yield than in April as it issued $1.3 billion of general obligations, less than a month after lawmakers failed to bolster the nation’s worst-funded state pension system.

The deal was Illinois’s first since its credit rating was cut after legislators left the state capital on May 31 without striking a deal on retirement costs. The issue included uninsured bonds maturing in July 2023 that yielded 4.46 percent, down from 4.56 percent in preliminary marketing, data compiled by Bloomberg show.

The revised yield is about 1.5 percentage points more than benchmark munis. In April, the state sold 10-year securities yielding 3.3 percent, or 1.29 percentage points above AAAs.

The state was still able to lower borrowing costs from preliminary levels as investors said the biggest losses since 2008 in municipal bonds signal a buying opportunity. The $3.7 trillion municipal market has lost about 5 percent this month as of June 25, Bank of America Merrill Lynch data show.

Yields on 10-year debt have risen to the highest since April 2011, leading issuers such as Georgia to cancel sales this week. Individuals have pulled $5.3 billion from muni mutual funds in the past three weeks, the most since February 2011, Lipper US Fund Flows data show. Detroit this month became the biggest U.S. city to default on bonds since the 1970s.

Buy Call

David Kotok at Cumberland Advisors and Chris Mauro at RBC Capital Markets said in reports today that the rising interest rates signal a buying opportunity in local-government debt.

Illinois lowered yields even more in the longest-maturing portion of the sale. Uninsured debt maturing in July 2038 priced at 5.65 percent, down 0.2 percentage point from initial marketing, Bloomberg data show.

The new interest rate on the 25-year debt is equivalent to a 9.4 percent taxable yield for individuals in the highest federal income-tax bracket.

Fitch Ratings cut Illinois on June 3 to A-, the fourth-lowest investment grade. Moody’s Investors Service on June 6 dropped it to A3, equivalent to Fitch’s rank.

Democratic Governor Pat Quinn called a special session for June 19, and that gathering also proved unsuccessful. Unable to produce majority support for comprehensive changes, house and senate lawmakers created a committee to produce a compromise bill to be voted on in July.

The debt sold today will mature from 2014 to 2038 and proceeds will be used for projects including rebuilding the Chicago Transit Authority’s Red Line train. Wells Fargo Securities was the lead underwriter. For the second time this year, Illinois issued general obligations that included portions backed by Assured Guaranty Municipal Corp. (AGO)

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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