Saturday, February 26, 2011

Illinois is Good at Debt

The Illinois pension bond auction to fund the State of Illinois' current pension systems contribution was moderately successful attracting a bid-to-cover of 1.65 from 128 bidders bidding $6.1 billion for $3.7 billion.  The 2014 bonds had a spread of 280 basis points above comparable Treasuries, while the 2019 bonds had a spread of 240 basis points over comparable Treasuries.  The high yield for the 2019 bonds was 5.877%.  This was 179 basis points more than Phillip Morris corporate debt.  Only twenty percent of bids were from foreign investors who should have seen this offering as an attractive high yield diversification from European debt.

This bond issuance had been delayed to let the market digest Governor Quinn's proposed budget. As we have previously written, Illinois has serious deficit, revenue, unfunded pensions, budgeting, and credibility problems.  During the week the bond spreads over Treasuries narrowed down from 300 basis points to market whisper spreads to finally settle five basis points each below what the State expected.  Given that Illinois' credit default swaps are higher than California,  the large spreads and high yields are to be expected, however, the State tries to portray the average yield of 5.56% as "good".

Unfortunately, this was a necessary restructuring of debt to make this fiscal year's pension contribution, although the SEC is investigating how the pension contributions were calculated and disclosed to investors.

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