Armed with stronger ratings, Illinois sells competitively into rallying market

BY SourceMedia | MUNICIPAL | 11/29/23 10:23 AM EST By Lynne Funk

Illinois sold the first general obligation bonds of its fiscal year into a favorable market Tuesday, seeing spreads continue to tighten considerably from what the state could garner prior to a trifecta of ratings upgrades throughout 2023, in line with recent institutional secondary trading.

The state saw its spreads to triple-A yield curves on $875 million of tax-exempt and taxable GOs sold in the competitive market come in by up to 85 basis points lower on its long bonds compared to the beginning of the year.

"Illinois is very pleased with very aggressive bids received today from as many as 10 bidders," Paul Chatalas, director of capital markets for the state, said in a statement Tuesday. "This results in tighter credit spreads and a lower interest cost to Illinois residents in a relatively volatile market."

After long years in the investment-grade basement of triple-B-minus, the state's GO ratings are all in the A category after a series of upgrades that began in 2021.

The state sold two tranches totaling $700 million of tax-exempt GOs to BofA Securities with serials out to 2048, the proceeds of which will be used to finance capital expenditures, largely for Rebuild Illinois, the state's $45 billion capital program.

The other bidders on the first series of tax-exempts, maturing in 2029 to 2038, included Jefferies LLC, Morgan Stanley & Co. LLC; Wells Fargo Bank; J.P. Morgan Securities LLC; RBC Capital Markets; Citigroup Global Markets Inc.; Barclays Capital Inc.; Goldman, Sachs & Co.; and BNYMellon Capital Markets.

Bidders on the second $350 million, maturing 2039 to 2048, also included RBC Capital Markets; Morgan Stanley & Co. LLC; J.P. Morgan Securities LLC; Wells Fargo Bank, National Association; Jefferies LLC; Citigroup Global Markets Inc.; Barclays Capital Inc.; and Goldman, Sachs & Co.

J.P. Morgan Securities LLC bought $175 million of taxable Illinois GOs, proceeds of which are to finance the state's ongoing accelerated pension benefit buyout program.

The state said the other bidders vying for the taxables included BofA Securities, Wells Fargo Bank, Barclays Capital Inc., Jefferies LLC, Morgan Stanley & Co., LLC, RBC Capital Markets, Goldman, Sachs (GS) & Co. and Citigroup (C/PN).

For the tax-exempt sales, spreads were mostly in line with recent institutional trading of the state credit, as investors had already baked in the upgrades prior to the sale.

At the beginning of the year, though, Illinois saw its five-year spreads at +153 basis points to Refinitiv MMD's AAA curve, its 10-year at +173, the 20-year at +185 and the 30-year at +185 basis points.

Its pricing Tuesday saw the six-year at +65 basis points, the 10-year at +70 to Refinitiv MMD, the 20-year at +75 and its long bond, 5s of 2048 at +80 basis points, or a 4.70% yield.

By comparison, after S&P upgraded the state in February, Illinois sold $2.3 billion of bonds in April when spreads were at about +104 basis points on the five-year maturity.

"Spreads have been contracting for this credit ever since as the state's finances continue to improve," noted Peter Franks, director of market analysis at Refinitiv MMD.

"Investors and rating agencies have cited the state's actions in paying down bill backlogs, repaying debts, increased fiscal transparency, building financial reserves, and balancing the state budget as factors in the upgraded ratings," Chatalas said.

Chapman and Cutler LLP and Hardwick Law Firm, LLC were co-bond counsel. Chapman and Cutler LLP was also disclosure counsel. Acacia Financial Group, Inc. is the financial advisor.

Illinois' ratings upgrades came in waves this year, with S&P Global Ratings in February raising the state's rating to A-minus with a stable outlook from BBB-plus; Moody's Investors Service (MCO) in mid-March upgraded the state to A3 and stable from Baa1; and Fitch Ratings, which first lifted the state's outlook to positive from stable in March, upgraded to A-minus from BBB-plus in early November ahead of this sale.

Pricing details:
The first series, $175 million of taxable GOs, Series of December 2023A, was sold to J.P. Morgan, with bonds maturing in 12/2024 with a 5.8% coupon yielding 5.84% and bonds maturing in 2028 with a 5.25% coupon yielding 5.31%. The taxable bonds, the proceeds of which will go toward the state's ongoing accelerated pension benefit buyout program, were not callable.

The state sold $350 million of tax-exempt GOs, Series of December 2023B, to BofA Securities, with bonds maturing in 12/2029 with a 5% coupon at 3.50%, bonds maturing in 2033 with a 5% coupon yielding 3.60% and 2038 at 4.14%, callable 12/1/2033.

Illinois sold $350 million of tax-exempt GOs, Series of December 2023C, to BofA Securities, with 5s of 12/2039 at 4.22%, 5s of 2043 at 4.42% and 5s of 2048 at 4.70%, callable 12/1/2033.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.