CHICAGO, Jan 22 (Reuters) - Illinois will sell $500 million of general obligation bonds on Jan. 30 in its first deal since a state legislative session ended this month without any resolution to a huge unfunded public pension liability, a state official said on Tuesday.
John Sinsheimer, the state’s capital markets director, said the 25-year bonds to fund capital projects should benefit from the light supply of deals so far in 2013. However, he added the new bonds could be hurt by inaction on pension reform.
Governor Pat Quinn, who has pushed for action on pensions, has warned that the state could pay higher borrowing costs for its ongoing multibillion-dollar capital program if rating agencies continue to pound Illinois’ credit rating lower.
Lawmakers adjourned their lame-duck session on Jan. 8 without voting on a fix to the state’s $96.8 billion unfunded pension liability.
Legislative inaction led Fitch Ratings on Jan. 11 to warn it could downgrade the state’s A rating. Moody’s Investors in December said it could also cut Illinois’ A2 rating, which is the lowest among states it rates. Standard & Poor’s Ratings Services dropped Illinois to A with a negative outlook in August due in part to the pension problem.
Investors continue to demand hefty yields for Illinois debt although the state’s so-called credit spread over Municipal Market Data’s benchmark triple-A scale for 10-year bonds narrowed slightly to 135 basis points in the week ended Jan. 18 from 137 basis points in the prior week. It stood at around 136 basis points in mid-January 2012. In contrast, the spread for California bonds was just 42 basis points in the latest week, down from around 74 basis points one year ago.
Sinsheimer said investment banks looking for inventory and that are aware Illinois sets aside money for principal and interest payments on its outstanding bonds every month should be bidders for next week’s competitive sale.
He added that new bond sales for Illinois could reach the $2 billion to $2.5 billion range in 2013.
The state was the sixth-biggest issuer of debt in the $3.7 trillion municipal bond market in 2012 at $5.1 billion in seven deals, according to Thomson Reuters data.