Illinois plans to sell $1.8 billion of general-obligation debt tomorrow as its relative borrowing costs may increase by almost a quarter.
The tax-exempt deal for the state, rated lowest by Moody’s Investors Service, includes a 10-year segment that underwriter Jefferies & Co. plans to offer to investors at 1.85 percentage points above benchmark AAA securities, according to a person familiar with the sale.
Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent.
The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.
Investors should get more yield than 1.85 percentage points given those fiscal challenges, John Mousseau, a portfolio manager at Vineland, New Jersey-based Cumberland Advisors, which has $1.2 billion of municipal debt. It doesn’t own Illinois general-obligation bonds.
“The state’s debt should be trading even cheaper,” Mousseau wrote in a report released today. “At some point it is a buy. Not yet.”
Still, the state’s general-obligation debt has first claim on its taxes and revenue to repay bondholders. Investors are ready to buy, said Tom Spalding of Nuveen Investments Inc. in Chicago, whose firm manages $10 billion of municipals, including Illinois general-obligations.
“With a lot of cash out there, I just don’t see it having a problem getting done at these levels, and can probably get done a little bit better,” he said.