Illinois Rating Downgrades, Tax Decline Weigh on $500 Million Bond Sale
Illinois, whose projected deficit equals half its proposed $25.9 billion budget, plans to sell $496.7 million of debt backed by sales taxes today after two rating cuts and as consumers unexpectedly curbed buying in May.
The bonds, funded with the state’s 80 percent portion of sales taxes, carry the top rating from Standard & Poor’s and AA+ from Fitch Ratings, the second-highest. That’s better than the state’s grade on general-obligation debt, which is supported by overall revenue. Both Fitch and Moody’s Investors Service cut the rankings on those securities one level this month as lawmakers failed to close a $13 billion revenue shortfall in the budget proposed for the fiscal year beginning July 1.
Even with their top rating, the sales-tax-backed securities may suffer because they carry the name of Illinois. The state’s five-year general-obligation bonds pay investors 33 basis points more yield than California, the lowest-rated state, according to Bloomberg Fair Market Value Data, and the cost to insure Illinois debt is the most among municipal credits monitored by Bloomberg.
“I question this market’s ability on some of the less- than-stellar credits to absorb deals right now,” said Mike McKenna, a municipal bond trader with GMS Group LLC in Livingston, New Jersey. “There’s going to be some pressure to price. You could possibly see some very attractive deals this week.”
Fitch lowered Illinois’ general-obligation credit one level to A, its sixth-highest rank, and Moody’s cut it to A1, on par with California. Sales at U.S. retailers unexpectedly fell 1.2 percent in May, the first decline in eight months, the Commerce Department said June 11. Illinois sales tax collections fell 2.9 percent in the first quarter, the Nelson A. Rockefeller Institute of Government said.
Today’s Illinois sale is of tax-exempt Build Illinois Bonds, a program created in 1985 to fund capital projects with revenue from retail transactions. It’s led by Chicago-based Cabrera Capital Markets LLC. The state also plans to sell $300 million of taxable Build America Bonds to finance transportation in a competitive sale June 17.
The state’s most-recent issue of sales-tax-backed bonds was for $375 million in December. Securities maturing in 2020 priced to yield 3.9 percent, with investors paying more than 107 cents on the dollar.
The yield at pricing was 76 basis points higher than 11- year top-rated debt. The bonds traded yesterday at 3.77 percent, 59 basis points more than comparable maturities, according to Municipal Market Advisors. A basis point is 0.01 percentage point.
Sales Tax Lien
The tax-exempt credit is stronger than a typical general obligation of the state, since there’s a lien on the sales tax revenue before it enters the general fund, said Mitch Kapnick, managing director of municipal securities at Cabrera Capital. Sales tax collections rose 7.6 percent from a year earlier in April and 6.2 percent in May, according to the Illinois comptroller.
“Unfortunately, it’s being tainted by the problems the state is having,” he said.
Yields on Illinois general-obligation bonds maturing in five years have jumped 7 basis points to 2.33 percent since June 4, the day of the Moody’s downgrade. Investors are demanding 60 basis points more for state general obligations maturing in 2015 than for top-rated tax-exempts, according to Bloomberg Fair Market Value data. The so-called yield spread between the two has widened 16 basis points since the beginning of the year.
The cost of insuring Illinois bonds for five years using credit default swaps was the most of any state at $286,700 per $10 million of debt as of yesterday, according to data compiled by Bloomberg. The cost rose $42,700 since the Moody’s ratings cut.
Illinois issued $5.54 billion of Build America Bonds in 2010, the second-most behind New York, which sold $6.33 billion, according to data compiled by Bloomberg. California is third with $5.53 billion.
The state plans to issue an additional $900 million of Build Americas as soon as next week in a deal led by Citigroup Inc.
In the state’s most-recent issue of Build America securities in April, 25-year maturities priced to yield 6.7 percent, 60 basis points above the average yield of the securities, according to a Wells Fargo Index. In a trade yesterday, the bonds had an average yield of 6.48 percent, 68 basis points above the index on June 11.
Following are descriptions of pending sales of municipal debt in the U.S.:
UNIVERSITY OF ARIZONA, spread over four campuses in the Phoenix area, plans to offer $146.7 million in revenue bonds today for construction of a health-science building. The notes will be issued through the Arizona Board of Regents, the governing body for the state’s three public universities, with the sale split into $139.2 million in Build America Bonds and $7.5 million in tax-exempts. JPMorgan Chase & Co. will lead the group marketing the securities. (Updated June 15)
MASSACHUSETTS SCHOOL BUILDING AUTHORITY plans to sell $151 million in Qualified School Construction Bonds for renovations tomorrow. The debt is backed by state sales taxes. The securities mature in 2027 and will be marketed by a group led by Barclays Plc. (Updated June 15)
SAN ANTONIO, the seventh most-populous U.S. city, plans to issue $250.8 million in debt tomorrow. The offering is split into $201.9 million of Build America Bonds, $9.5 million of tax- exempts and $39.4 million of combination tax and revenue certificates of obligation. Proceeds will go toward improvements of streets, bridges and public spaces. The Texas city is rated AAA, the highest, by all three rating companies. The securities will be marketed by a group led by Citigroup. (Updated June 15)