Investors go for Illinois bonds

By Kathy Bergen
Posted July 14, 2010 at 3:59 p.m.

Investors demonstrated an appetite for Illinois bonds Wednesday when the state went to market with a $900 million issue, but as expected, they extracted a higher yield because of the state’s dismal financial condition.

More than $2 billion in orders came in for the taxable Build America bond issue, a show of strong demand, said John Sinsheimer, the state’s director of capital markets. Overall, the bonds drew 93 investors, including 17 from overseas who bought about 29 percent of the issue.
“The fact that 17 highly sophisticated international investors made the decision that Illinois credit was worth their investment for the long term . . . is a true statement of their view of the creditworthiness of Illinois,” he said.

But the state interest costs will be steeper than if its finances were in better order and its credit ratings were higher.

The 25-year bonds that make up more than half Illinois’ $900 million issue are yielding 7.34 percent.

In comparison, 20-year taxable municipal bonds issued Tuesday by Hawaii County are yielding 6.1 percent. That county’s credit ratings are a rung or two higher than Illinois’ ratings.

And 30-year bonds of highly rated Texas and Maryland are yielding 5.25 percent in the secondary market, noted Brian Battle, a director at Performance Trust Capital Partners LLC, a Chicago-based fixed-income investment adviser.

A one point difference translates into another $10,000 a year in interest costs for every $1 million in bonds issued.

“It costs more, but Illinois can still borrow,” Battle said.

The 10-year bonds that comprise another large portion of Illinois’ issue are yielding 6.2 percent, and the average yield for all the bonds in the package is 6.96 percent, Sinsheimer said.

“Clearly the [state's] financial situation doesn’t help in pricing on these bonds, but I think the results speak for themselves,” he said.

The net borrowing cost to the state remains attractive, he has said, because interest rates are at historically low levels and because the federal government will pay 35 percent of the state’s interest costs on Build America bonds. That rebate will bring the state’s interest costs on Wednesday issue to 4.56 percent, he said.

Read more about the topics in this post: , ,


  1. Matt Lechner July 14, 2010 at 2:59 pm

    Hello ? The State of Illinois is the borrower, and under American law that means the bonds are tax-free.

    Matt Lechner – CFP, CRPS, FRM
    Chairman – WSSIG, the Wall Street Special Interest Group

    “supporting and growing America’s interests in the global capital markets”

  2. Matt Lechner July 14, 2010 at 3:01 pm

    which means the interest rate is absurdly high

    what is going on here ?

  3. Nick July 14, 2010 at 3:16 pm

    These bonds are being issued through the Build America Bond program and therefore are not tax free. The Fed Govt is picking up 35% of the interest rates, thus this bonds are not tax free bonds by the state of Illinois.

  4. Reed Gerth July 14, 2010 at 3:30 pm

    I think you may need a quick lesson about bonds. First of all, a high quality bond extracts a “premium” – premiums are referred to on the price side, not the yield side. A “premium”, or amount paid in excess of the par value of a bond, actually reduce the yield, as investors pay a higher price (or Premium) for the bond. Since the bond matures at par, this premium reduces the actual yield because it depreciates down to par at maturity.

    A higher risk bond requires a greater “yield”, or interest rate paid to the bond holder as there is greater risk (I’m sure you have heard of the risk reward trade off). Therefore, these bonds did not “extract a premium”, they in fact extracted a higher “yield” to the bond buyer in order to offset the risk.

    The second thing you may want to note was the comment about the Federal Government BAB rebate “bringing the overall Yield to 4.56%”. The 4.56% is the cost of funds – not the yield, as you put it. The interest subvention by the US goverment reduces the 7.43% cost of interest to the municipality, but the municipality is not “yielding” 4.56% – quite the opposite.

    I think it is most important to give correct and accurate facts and correct use of vernacular. Although your storyline was good in capturing the essence of the transaction, the incorrect detail takes the credibility away from the author. I think now, more than ever, journalists have a responsibility to the American public to publish fair, accurate, and unbiased reporting.

  5. Matt Lechner July 14, 2010 at 3:42 pm

    no that is not correct – barring certain very narrow exception cases of which this is not one, when a state, municipality, or political subdivision issues bonds – they are, by American law, tax-free

    the question is who is the borrower, and the borrower is the State of Illinois, not the Federal Government

    that means the bonds, by American law, are tax free

    there are other kinds of municipal bonds that have Federal credit subsidies associated with them, such as GNMA housing bonds, and they are also tax free

    what it comes down to is if, for whatever bizarre reason, a state treasurer or legislature uses the “Build America” bond program, they are incurring astonishingly and needlessly high interest rates, and blimping up their debt levels to do it

    is there some reason why the state is not using the normal municipal bond market ?

  6. Matt Lechner July 14, 2010 at 5:01 pm

    why is the Tea Party not screaming about this ?

    this is ridiculous

  7. Reed Gerth July 14, 2010 at 5:14 pm

    As part of the American Recovery and Reinvestment Act of 2009, a new type of taxable bond issued by municipalities called Build America Bonds (BABs) was created. Build America Bonds provide investors with an attractive rate of taxable income. From the perspective of the U.S. Government the intent behind bonds issued by this program is to encourage spending and create jobs. It is important to understand that bonds issued under the BABs program are solely backed by the issuing municipality and are not, in any way, obligations of the U.S. Government

  8. Matt Lechner July 14, 2010 at 5:58 pm

    it has been established by American law for years and years that the Federal government does not have the right to tax interest associated with the debt of states, municipalities, or the political subdivisions thereof – going back to a famous legal case that is the basis for America’s municipal bond markets

    the resulting American market for tax-free municipal bonds has built America’s schools and universities, built bridges and funds repairs for them, built roads and funds repairs for them, built hospitals and funds repairs and expansions for them

    the Washington set should think very carefully before promoting this pseudo-patriotic program, the “Build America” bond program, because it will destroy America’s tax-free municipal bond markets

    despite the catchy name for the program, it is not patriotic to blimp up state debt loads for nothing

    it is not as though the additional debt will provide additional funds for building schools, bridges, roads, hospitals, etc.

    what it does represent is a subversion of well established tax policy with respect to state-level borrowing – blimping up the debt load literally for nothing

    it has been established by American law for many years that investors who buy debt of a state are not subject to Federal taxation on that investment – and a subversive pseudo-patriotic new bond program with a slick name should not be allowed to undermine the debt markets which built much of America’s backbone

  9. IKnewThat July 15, 2010 at 9:06 a.m.

    Reed, great info, thanks, but take it easy on “Matt”, as it must be an enemy of his trying to make him look like an idiot. Cheers.

  10. Reed Gerth July 15, 2010 at 2:18 pm

    Thanks IKnewThat… This story was originally published shy a couple of key facts – my first comment was intended to reply to the author who was kind enough to edit the article to the current iteration with corrections (note her 3:59PM revision , versus my 3:30PM comment). Matt – I hope you realize no offense to you intended…

  11. Billie C. July 23, 2010 at 3:04 pm

    Hi All,

    I’m totally new to the bond world and would appreciate your insights.

    How risky do you think these bonds are?