CHICAGO, March 26 (Reuters) - Yield-hungry investors on Tuesday snapped up more than $1.1 billion of general obligation bonds offered by Illinois and Chicago, two of the U.S. municipal market’s most financially troubled issuers.
While the state and its largest city continued to pay a high price for their fiscal woes, their deals benefited from low supply in the $3.8 trillion market and “a ton of cash” looking for bonds to buy, according to Greg Saulnier, a Municipal Market Data (MMD) analyst.
“Yields are so low that some guys are willing to take a risk for the yield grab,” he said.
Shaun Burgess, a portfolio manager at Cumberland Advisors, agreed. “Clearly, demand is discounting some of the credit risks associated with these issuers,” he said. MMD narrowed so-called credit spreads for Illinois, the lowest-rated U.S. state, at a notch or two above junk, due to its huge unfunded pension liability and chronic structural budget deficit, in the wake of a $440 million bond sale. The state’s spreads remain the widest among U.S. states.
Chicago, which is also struggling with pension funding and deficits, increased the size of its bond offering to nearly $728 million and moved pricing up by a day. There was enough demand to allow underwriters to lower yields by 5 basis points in most maturities through a repricing.
For the Illinois deal, Kelly Hutchinson, the state’s capital markets director, said competitive bidding for the debt was strong amid market conditions that were “opportune” in the wake of the U.S. Federal Reserve’s recent shelving of interest rate hikes for the remainder of 2019.
Bank of America Merrill Lynch beat out eight other bidders for Illinois’ $300 million of taxable bonds and 13 other bidders for $140 million of tax-exempt bonds, according to the state.
Yields on the tax-free refunding bonds topped out at 3.60 percent in 2028 with a 5 percent coupon. MMD narrowed Illinois spreads over its scale by 1 to 10 basis points with the spread for bonds due in 2028 shrinking 1 basis point to 182.
The refunding also resulted in a $10.6 million present value savings, the state reported.
Yields reached 6 percent in 2044 for Illinois’ taxable bonds. Proceeds from that deal will help fund a pension benefit buyback program the state launched last year.
Chicago’s bond pricing came just a week before the city elects a new mayor to replace the retiring Rahm Emanuel, who served two terms. The debt was priced with a top yield of 4.40 percent for bonds due in 2044 with a 5 percent coupon. That is well over the 2.6 percent yield on MMD’s scale.
Neene Jenkins, a vice president and municipal credit analyst at AllianceBernstein, said the bonds were priced much tighter than where the city’s bonds had been trading in the secondary market.
She added, however, that Tuesday’s pricing “is reflective of a credit that is in distress.” There was no immediate comment from Chicago officials on the pricing. (Reporting by Karen Pierog in Chicago Editing by Matthew Lewis)