Illinois Sells $700 Million After Moody’s Shifts State Higher

Illinois, the second lowest-rated state after California, sold $700 million today in the largest Build America Bond offering in a month, a day after its credit standing was recalibrated higher by Moody’s Investors Service.

The fifth most-populous U.S. state obtained an all-in interest cost of 6.31 percent across serial maturities from 2011 through 2035, said John Sinsheimer, Illinois director of capital markets. That compares with an average yield of 6.15 percent yesterday on the Wells Fargo Build America Bond Index.

“There was a lot of sponsorship on the name, it did very well,” said Tom Boylen, a managing director and municipal bond trader in Chicago for BMO Capital Markets. Yields were high because “that’s Illinois, which is at the bottom end of the credit scale,” Boylen said.

Moody’s raised Illinois’s rating two steps to Aa3, its fourth-highest, from A2 as part of its municipal debt recalibration program yesterday. Both Moody’s and Fitch Ratings are shifting their state and local grading scale to make them more comparable with corporate debt.

The cost was 4.14 percent with the federal 35 percent Build America Bond subsidy, Sinsheimer said. That compares with a yield of 3.24 percent on top-rated, 10-year tax-exempts, according to Municipal Market Advisors.

Illinois has sold a total of $2 billion in Build Americas so far this year, including a $300 million sale earlier this month. Ten-year Build America Bonds in the state’s $300 million offering yielded 5.65 percent when issued April 6. The security traded at a yield of 5.4 percent today, according to the Municipal Securities Rulemaking Board.

Recalibrating Rankings

Fitch recalibrated its ranking of Illinois to A+, its fifth-highest, on April 5. The move came after it cut the assessment one level to A- last month. Standard & Poor’s lowered its grading of Illinois debt in December to A+. The three rating companies have a negative outlook or watch on the credit, portending possible downgrades. The state is trying to close a $9.3 billion budget deficit before the start of the next fiscal year in July, according to Fitch.

Ten-year, top-rated, tax-exempt debt is yielding 86.1 percent of comparable government notes, the highest since Feb. 1, according to data compiled by Bloomberg.

Illinois’s is the biggest Build America offering since California sold $2.5 billion on March 25 and is the largest municipal issue this week. Proceeds from the sale will help fund grants for school districts as well as capital projects.

International Buyers

Illinois marketed the $700 million sale to institutional investors, including international buyers, yesterday, said Tom Lanctot, a principal at William Blair & Co. in Chicago, which is leading the underwriting.

“It is, from a borrower’s standpoint, a good time,” said Richard Ciccarone, chief research officer of Oak Brook, Illinois-based McDonnell Investment Management, which oversees $7 billion of municipal debt. “There’s some recovery in the wind.”

Illinois employers added 3,000 jobs in March, the third-straight monthly increase, the Labor Department said last week. The state has “strong” economic resources and now needs to figure out how to tap them, Ciccarone said.

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