Investors go for Illinois bonds

By Kathy Bergen

Posted July 14, 2010 at 3:59 p.m.

Investors demonstrated an appetite for Illinois bonds Wednesday when the state went to market with a $900 million issue, but as expected, they extracted a higher yield because of the states dismal financial condition.

More than $2 billion in orders came in for the taxable Build America bond issue, a show of strong demand, said John Sinsheimer, the states director of capital markets. Overall, the bonds drew 93 investors, including 17 from overseas who bought about 29 percent of the issue.

The fact that 17 highly sophisticated international investors made the decision that Illinois credit was worth their investment for the long term. is a true statement of their view of the creditworthiness of Illinois, he said.

But the state interest costs will be steeper than if its finances were in better order and its credit ratings were higher.

The 25-year bonds that make up more than half Illinois $900 million issue are yielding 7.34 percent.

In comparison, 20-year taxable municipal bonds issued Tuesday by Hawaii County are yielding 6.1 percent. That countys credit ratings are a rung or two higher than Illinois ratings.

And 30-year bonds of highly rated Texas and Maryland are yielding 5.25 percent in the secondary market, noted Brian Battle, a director at Performance Trust Capital Partners LLC, a Chicago-based fixed-income investment adviser.

A one point difference translates into another $10,000 a year in interest costs for every $1 million in bonds issued.

It costs more, but Illinois can still borrow, Battle said.

The 10-year bonds that comprise another large portion of Illinois issue are yielding 6.2 percent, and the average yield for all the bonds in the package is 6.96 percent, Sinsheimer said.

Clearly the [state’s] financial situation doesnt help in pricing on these bonds, but I think the results speak for themselves, he said.

The net borrowing cost to the state remains attractive, he has said, because interest rates are at historically low levels and because the federal government will pay 35 percent of the states interest costs on Build America bonds. That rebate will bring the states interest costs on Wednesday issue to 4.56 percent, he said.