Pension reform passage narrows Illinois' credit spread
CHICAGO Dec 9 (Reuters) - The credit penalty paid by Illinois in the U.S. municipal bond market eased in the latest week in the wake of the state's enactment of pension reforms, according to data released Monday.
Illinois' so-called credit spread for 10-year bonds narrowed to 158 basis points over the market's benchmark yield scale for triple-A-rated bonds in the week ended Dec. 6 from 173 basis points in the previous week, according to Municipal Market Data, a unit of Thomson Reuters.
Randy Smolik, a Municipal Market Data analyst, said the passage of comprehensive changes in Illinois' underfunded state retirement system last week appeared to be the decisive factor in the spread narrowing. He added that media reports noting that states cannot file for bankruptcy also helped Illinois bonds in the market.
"Without bankruptcy rules to divvy up assets between creditors, bondholders still have the upper hand as first in line for payment," Smolik noted.
The tighter spread comes as Illinois prepares to sell $350 million of taxable general obligation bonds via competitive bidding on Thursday.
Robert Amodeo, a portfolio manager at asset manager Western Asset, said Illinois' issuance costs could shrink for the deal.
"I think investors have breathed a sigh of relief that they finally addressed the issue (of pension reform)," he said, adding that the state continues to face a nagging pile of unpaid bills and a partial rollback in 2015 of income-tax rate hikes.
Illinois still has the second widest credit spread over Municipal Market Data's benchmark scale among major muni debt issuers tracked by the unit. Topping the list is Puerto Rico, which saw its spread widen 10 basis points to 630 basis points in the latest week. By contrast, California's spread is just 51 basis points and Michigan's is 38 basis points.
Inaction on tackling a $100 billion unfunded pension liability hammered Illinois' credit ratings to the lowest levels among states and spurred investors to demand heftier yields for Illinois bonds.
Last week, the Democrat-controlled legislature sent Governor Pat Quinn legislation aimed at immediately shrinking the unfunded liability by 20 percent and saving Illinois $160 billion over 30 years by reducing and suspending cost-of-living increases for retiree pensions along with other changes. Quinn promptly signed the reforms into law.
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