Illinois $250 mln bonds fetch lower yields in stronger market

CHICAGO, April 10 Thu Apr 10, 2014 3:57pm EDT

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CHICAGO, April 10 (Reuters) - Illinois sold $250 million of bonds on Thursday at a lower overall interest rate than the state received for a debt sale in February, state officials said.

Bank of America Merrill Lynch won the general obligation bonds carrying maturities from 2015 through 2039 in competitive bidding at a true interest cost of 4.08 percent. A sale of $1 billion of GO bonds in February resulted in an overall interest rate of 4.46 percent.

Thursday's sale narrowed Illinois' so-called credit spread over Municipal Market Data's benchmark scale of triple-A-rated bond yields. The spread for bonds due in 10 years fell to 100 basis points over the scale from 114 basis points on Wednesday, according to MMD, a unit of Thomson Reuters.

MMD analyst Randy Smolik attributed the narrowing to aggressive bidding on competitive deals and Thursday's strong municipal market, where yields on the scale fell by as much as 6 basis points.

At the beginning of the year, the spread for Illinois 10-year bonds was 145 basis points over the scale.

State officials said market concerns have eased after Governor Pat Quinn proposed a fiscal 2015 budget last month that calls for maintaining income tax rates at higher but temporary levels set in 2011.

"The market has spoken today and clearly investors feel, as the ratings agency has said in recent days, that Governor Quinn's budget 'provides a basis for the state to achieve fiscal balance,'" Acting Budget Director Jerry Stermer said in a statement.

Ahead of the sale, all three credit rating agencies affirmed Illinois GO bond ratings, which are the lowest among the states.

Standard & Poor's Ratings Services, which rates Illinois at A-minus with a developing outlook, said on Wednesday "the next 50 days or so will be pivotal to the state's future structural budget alignment."

"Although the state has implemented improvements in budget and financial management practices, they have not been robust enough to offset the sluggish economy and the accumulated structural budget deficit," the rating agency said in a report.

While the state enacted comprehensive pension reforms in December to ease a $100 billion funding shortfall, labor unions and others are challenging the law in state courts contending that the Illinois Constitution prohibits impairment of retirement benefits for public sector workers. (Reporting by Karen Pierog Additional reporting by Lisa Lambert in Washington)

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