Illinois Cuts Yields in $1 Billion Sale as Penalty Drops 26%

Illinois paid a 26 percent smaller yield penalty to issue $1 billion of general-obligation bonds, a sign investors are rewarding lawmakers for passing a bill in December to mend the worst-funded U.S. state pension system.

The sale included debt maturing in February 2024 that was priced to yield 3.81 percent, down from an initial 3.87 percent, according to data compiled by Bloomberg. The interest rate is 1.13 percentage points above benchmark 10-year municipal bonds.

The deal, which the state increased by $25 million, is the biggest since the fifth-most-populous state issued $1.3 billion in June. It serves as the latest example of how Illinois is regaining favor among investors in the $3.7 trillion municipal market with its pension measure, which is designed to save $145 billion over 30 years. In the June offering, 10-year bonds yielded 1.53 percentage points more than benchmark munis, Bloomberg data show.

Illinois’s lower borrowing costs were “due in large part to the state’s passage of a comprehensive pension reform plan,” Abdon Pallasch, the state’s assistant budget director, said in a statement. “Thanks to the lower interest rate, Illinois taxpayers will save more than $60 million in interest payments” over the life of the bonds, he said.

Quinn Validated

The narrowing of the yield spread since June helps validate Democratic Governor Pat Quinn’s claim during his State of the State address last week that Illinois has “turned the corner” toward a fiscal comeback.

Illinois in December sold $350 million of taxable general obligations with a spread 29 percent smaller than eight months earlier. The borrowing, completed less than two weeks after the pension bill passed, saved taxpayers more than $20 million over the life of the securities, Pallasch said at the time.

The pension law hasn’t changed Illinois’s standing as the lowest-rated state. It has an A- grade from Standard & Poor’s, six levels below the top. Moody’s Investors Service gives it an equivalent rank.

Illinois also pays the highest borrowing costs among 17 states tracked by Bloomberg. Its yield spread is almost triple that of California, rated one level higher by S&P.

The state received $5.5 billion in orders from 109 investors, according to a statement. Proceeds will be used to renovate roads, bridges, schools and railways across Illinois.

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

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