Illinois budget impasse hits $550 million
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[June 17, 2016]
By Karen Pierog and Dave McKinney
CHICAGO (Reuters) - Illinois' long-running
budget impasse stung the state on Thursday in the U.S. municipal market
where buyers of its $550 million bond issue demanded bigger yields over
the market benchmark.
The pricing was "surprisingly soft," considering a strong rally in
muni bonds on Thursday, said Greg Saulnier, a Municipal Market Data
analyst. The results demonstrate that the market is increasing its
penalty due to the state's worsening fiscal and political problems,
leaving Illinois unable to take full advantage of the historically
low borrowing rates.
Bank of America Merrill Lynch won the tax-exempt general obligation
deal in competitive bidding, pricing bonds due in 2026 with a 5
percent coupon to yield 3.32 percent, which is 185 basis points over
MMD's triple-A yield scale. The spread was 175 basis points ahead of
the bond sale, according to MMD, a unit of Thomson Reuters.
It was also wider than the 154 basis-point spread in 10 years for
Illinois' $480 million GO bond sale in January.
Illinois is poised to be the only U.S. state since at least the
1930s to end a fiscal year without a complete budget.
Its Republican governor and Democratic-controlled legislature have
so far failed to reach a deal on fiscal 2016 or 2017 spending plans.
That leaves unaddressed the growing structural budget deficit and
huge $111 billion unfunded pension liability in the fifth-biggest
The bond issue itself was seen as a weapon in the political war to
pressure Democrats to cave in to Governor Bruce Rauner's demands,
while losing money for the cash-strapped state.
ILLINOIS SELLS INTO MARKET RALLY
Muni yields have been hitting new record lows on MMD's scale in
recent days, driven by cash-heavy investors chasing low supply of
Rauner's office said the true interest cost for the bonds, which
carry maturities from 2017 to 2041, was 3.74 percent, down from 3.99
percent in the January sale, and the lowest ever for similar general
obligation bonds issued by the state.
"It's clear from today's bond sale that investors realize Illinois
now has a governor that is trying to turn the state around and right
its fiscal ship," Rauner spokeswoman Catherine Kelly said in a
Some market participants thought Illinois' so-called credit spread
should be even wider.
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The downtown skyline is seen in Chicago,
September 26, 2015. REUTERS/Jim Young
"It's odd to me," said Nicholos Venditti, a portfolio manager at
Thornburg Investment Management. "Illinois has proven time and time
again they can't get anything done."
Heading into the deal, Illinois' credit ratings, which were already
the lowest among the states, were downgraded by Moody's Investor
Service and Standard & Poor's.
The governor's office also revealed on Wednesday that the state
lacks appropriations to actually spend all the proceeds earmarked
mainly for road construction and mass transit projects due to the
State Treasurer Michael Frerichs, a first-term Democrat, predicted
the bond issue could be a net money-loser for Illinois if the
borrowed funds go unspent and must be invested short-term.
"We’ll make far less in interest than we’ll be paying in interest to
the bondholders," Frerichs said in an interview. "I think we need to
make these investments in infrastructure, but we're going about it
in the wrong order. It seems backwards issuing the bonds and hoping
they get an appropriation to spend them."
On Wednesday, Rauner administration officials warned of the imminent
shutdown of transportation projects and the loss of 25,000
construction jobs without a budget deal.
Spokesmen for House Speaker Michael Madigan and Senate President
John Cullerton, both Democrats, declined to speculate on the chances
of either legislative chamber granting the Rauner administration the
spending authority it needs to fully tap the bond issue.
(Editing by Daniel Bases and Matthew Lewis)
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