Market penalty eases in $549 million Illinois revenue bond sale

08/25/2016 17:33

CHICAGO, Aug 25 (Reuters) - Illinois sold nearly $549 million of revenue bonds in competitive bidding on Thursday, dodging a steep market penalty the financially struggling state has paid for its general obligation bonds.

The Build Illinois bonds, backed by the state's sale tax revenue, have high-quality credit ratings of AAA from Standard & Poor's and AA-plus from Fitch Ratings versus Illinois' low-investment-grade GO ratings, which are the weakest among the 50 states.

Illinois has a huge $111 billion unfunded pension liability and a chronic budget deficit. It was the only state without a complete fiscal 2016 budget due to a political impasse.

Bank of America Merrill Lynch won the biggest chunk of the bond issue - nearly $187 million of tax-exempt refunding bonds.

The pricing resulted in a spread over Municipal Market Data's benchmark triple-A yield scale for 10-year bonds of 48 basis points, about 20 basis points narrower than the state's last tax-exempt Build Illinois bond sale in June 2013.

The spread was also almost 3.5 times narrower than Illinois' 166 basis-point spread over the scale for 10-year GO bonds.

Another $152 million of refunding bonds was won by PNC Capital Markets. The two bond refundings resulted in a present value savings of $56 million, according to Governor Bruce Rauner's office.

RBC Capital Markets won $150 million of new bonds at a true interest cost of 2.387 percent, and J.P. Morgan Securities won $60 million of taxable bonds at a true interest cost of 2.750 percent.

"We were pleased with strong interest from the public finance community that enabled the state to borrow at historically low interest rates," Rauner's office said in a statement.

Moody's Investors Service, which was not asked to rate the issue, maintains a Baa2 rating with a negative outlook on $2.75 billion of outstanding Build Illinois bonds and $26 billion of the state's GO debt. (Reporting by Karen Pierog; Editing by Matthew Lewis)

08/25/2016 17:33