October 25, 2017 / 8:09 PM / a year ago

UPDATE 3-Repricing boosts yields on Illinois' $4.5 bln of bonds

(Adds overall borrowing cost, upcoming bond sale)

By Karen Pierog

CHICAGO, Oct 25 (Reuters) - Illinois completed a big debt issuance on Wednesday to pay off overdue bills, selling $4.5 billion of bonds to investors who demanded hefty yields from the lowest-rated U.S. state.

After an initial pricing, a team of underwriters repriced the tax-exempt general obligation bonds, boosting yields by 3 to 15 basis points, according to a pricing scale seen by Reuters. The top yield rose to 3.77 percent for bonds due in 2028 with a 5 percent coupon from a preliminary 3.74 percent. For bonds due in 2020, the yield climbed by 15 basis points to 2.53 percent.

The deal was the second part of a $6 billion debt issuance by the nation’s fifth-largest state to raise money to help pay off a huge pile of overdue bills accruing late payment penalties of as much as 12 percent annually. Last week, Illinois sold $1.5 billion of bonds in competitive bidding with mixed results.

The state locked in a combined borrowing cost of 3.5 percent for the $6 billion of bonds, according to Governor Bruce Rauner’s office.

The $4.5 billion of bonds were offered at aggressively low yields before they were repriced, said Nicholos Venditti, a portfolio manager at Thornburg Investment Management, who did not participate in the deal.

“I think for Illinois this is still incredibly cheap money,” he said, adding that the bonds should have fetched even fatter yields given the state’s ongoing financial problems. An impasse between the Republican governor and Democrats who control the legislature left Illinois without complete budgets for an unprecedented two fiscal years and caused the bill backlog to balloon to record levels. As of Tuesday, it totaled $16.5 billion.

In July, the legislature enacted a fiscal 2018 budget that included the bond authorization, as well as an income tax hike, over Rauner’s vetoes.

Wednesday’s sale of bonds due in 2020 through 2028 widened Illinois’ so-called credit spread over Municipal Market Data’s benchmark triple-A yield scale for shorter-term debt and narrowed the spread for longer-term bonds, according to MMD. For bonds due in 2028, the spread eased to 164 basis points over the scale from 170 basis points.

Illinois’ bonds were rated one notch above junk at Baa3 and BBB-minus by Moody’s Investors Service and S&P Global Ratings, and two notches above junk at BBB by Fitch Ratings.

The state will be back in the municipal market by year-end with $750 million of GO bonds. (Reporting by Karen Pierog; Editing by David Gregorio and Matthew Lewis)

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