High yield may up demand for $3.7B Illinois bond

By Dow Jones Newswires-Wall Street Journal
Posted Feb. 23 at 10:13 a.m.

The cash-strapped state of Illinois will likely offer juicy yields to entice buyers of a $3.7 billion taxable pension bond expected to be sold Wednesday in the municipal-bond market.

According to a term sheet, initial price talk for the longest maturity in the offering, dated 2019, is about 2.40 percentage points above comparable Treasurys, for a yield of about 5.85%. That is about 1.79 percentage point more than comparably rated nine-year debt from cigarette maker Philip Morris International Inc., which traded at 0.61 percentage point above Treasurys on Tuesday. It is also 0.05 percentage point tighter than the initial price target on the deal for that maturity.

“The yield is there” compared to corporate debt, said Matt Dalton, chief investment officer of Belle Haven Investments in White Plains, N.Y. “It should be enough to bring buyers to the table.”

Initial indications of demand for the pension debt have been strong. According to a term sheet, there have been about $5.8 billion in orders. The longest maturity in 2019 had more than $2 billion in interest, more than twice the amount of bonds available in that maturity.

The Illinois bond is controversial among some potential buyers because it is intended to fund a payment to the state’s pension plan for the current fiscal year. The apparent strong appetite for the debt shows that financially struggling states can still tap the bond market, though at a hefty price.

Big foreign investors, such as sovereign-wealth funds and private banks, are particularly enamored with the deal, observers said. Such investors were major buyers of federally subsidized, taxable Build America Bonds before the stimulus program expired at the end of last year.

Such buyers “may sort of fill the void,” said Mr. Dalton, as there has been little other taxable muni-bond issuance this year. According to data provider Thomson Reuters, only about $1.7 billion in taxable muni debt has been sold thus far in 2011.

Illinois marketed the bonds heavily to overseas investors a few weeks ago, holding 31 separate meetings with European and Asian buyers, said John Sinsheimer, director of capital markets for the state of Illinois.

Foreign investors have shown interest in Illinois’s debt in the past. They placed orders for more than a quarter of a $900 million Build America Bond deal sold last summer via lead bookrunner Citigroup Inc.

Morgan Stanley, Loop Capital and Goldman Sachs Group Inc. are joint bookrunning senior managers on this week’s pension bond deal.

Mr. Sinsheimer said that the main reason Illinois pushed back the pension-bond sale to this week was to field foreign investors’ questions about Gov. Pat Quinn’s fiscal 2012 budget announcement, made last Wednesday.

Illinois has already borrowed heavily, and it looks likely the state will continue to do so. Last year, Illinois sold $6.72 billion in taxable debt, according to Thomson Reuters, and Gov. Quinn’s budget proposal suggests the state borrow an additional $8.75 billion to pay overdue bills.

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One comment:

  1. Milton Esbitt Feb. 23 at 3:52 pm

    The annual interest is over $216 million for the first year, not counting any sinking fund payments. Where is the state going to get the money? OF COURSE! THE TAX PAYERS!!