Illinois Penalty Shrinks 29% on Bond Sale After Pension Bill

Illinois sold $350 million of taxable general-obligation bonds via auction, its first borrowing since lawmakers passed a bill aimed at repairing the worst-funded U.S. state pension systems.

Today’s offer included debt maturing in December 2038 that priced to yield 5.65 percent, data compiled by Bloomberg show. The interest rate is 1.84 percentage points above Treasuries with a similar maturity.

The yield spread is down 29 percent from the state’s last sale of taxable bonds in April. The improvement shows investors in the $3.7 trillion municipal market are rewarding Illinois after lawmakers last week approved measures designed to save $160 billion over 30 years. A unit of Bank of America Corp. won the bid for the debt, Bloomberg data show.

The lower relative borrowing costs reflect a two-month rally in tax-exempt Illinois bonds. The extra yield investors demanded on general obligations due in 10 years instead of AAA munis fell to 1.58 percentage points yesterday, the lowest since August.

Illinois is the lowest-rated state by the three biggest rating companies. Before last week, legislators failed five times since August 2012 to address the state’s retirement systems, which face $100 billion in unfunded liabilities.

The state has grades six levels below AAA and pays the highest yield penalty among 17 tracked by Bloomberg. In comparison, bonds of states with top ratings, such as Georgia and Maryland, trade even with or below benchmark munis.

Postponement Penalty

Illinois postponed a bond offer in January after Standard & Poor’s cut its rating. It returned to the market in April with a deal that included taxable general obligations. The portion maturing in April 2038 priced to yield 5.52 percent, or about 2.6 percentage points more than Treasuries.

S&P this week changed its outlook on Illinois to developing from negative, signaling it could raise the rating within two years. An increase depends on implementation of the pension law.

Governor Pat Quinn, a Democrat, said in a statement last week that the pension measure “is very helpful in our discussions with the rating agencies and the bond buyers who purchase the issuances of the state.”

Cuts to Illinois’s bond ratings have cost taxpayers about $180 million this year, according to Abdon Pallasch, its assistant budget director.

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

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