Everyone buy before the states do, they will send us to that Dow 36k target.
Illinois Sells $10 Billion of Taxable Pension Bonds
June 4 (Bloomberg) -- Illinois sold $10 billion of pension
bonds, tying for the sixth-largest sale of taxable bonds into the
corporate market, to help close the state's budget deficit and pay
money owed to its workers' pension systems.
The fifth-biggest U.S. state by population had planned to
sell $6 billion of the bonds yesterday and today. It boosted the
size of the 20-year and 30-year term issues by $4 billion to sell
the entire $10 billion of the taxable municipal bonds authorized
by the Legislature. Illinois will pay less than AAA rated General
Electric to finance the debt.
``This is a monster,'' said Kenneth Hart, vice president of
National Life Capital Management Inc. in Montpelier, Vermont,
which manages about $8 billion of corporate bonds. ``I don't
remember a deal approaching this size in years.''
Illinois must sell this debt without its typical tax
exemption because the money will be used to buy stocks and bonds
for its state worker retirement systems. The hope is that
investment returns will cover debt repayment costs. The previous
largest pension bond was New Jersey's $2.8 billion sale in 1997.
This is the largest sale into the corporate market since
General Electric Capital Corp. sold $11 billion of bonds in March
2002, and ties for sixth largest with British Telecom's $10
billion sale in December 2000. Bear Stearns Cos. is managing the
sale for a group of investment banks, which stand to make fees of
about $35 million in underwriting fees.
Hart said he put in orders for $10 million of the 30-year
term bonds, which were to yield 0.72 percentage point more than
the U.S. Treasury bond due in 2031. With the Treasury yielding
4.35 percent today, that means the 30-year Illinois pension bond
would yield 5.07 percent. That's about 0.3 percentage point less
than a comparable General Electric bond.
Orders
``They have been able to command a strong price for these,''
said Gregory Serbe, president of Lebenthal Asset Management Inc.
in New York, who manages about $100 million of taxable municipal
bonds.
Serbe said he ordered 20-year Illinois bonds, which were
doubled in size to $1.38 billion. The 30-year bonds were increased
to $7.65 billion from the state's original plan of $4.33 billion.
``We have orders in for the entire $10 billion, and we're
very, very pleased with the reception,'' said David Abel, the
state's debt management director. Abel said he could not confirm
the pricing or the total interest costs until Thursday.
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Copyright (c) 2003, Bloomberg, L. P.
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The Illinois 30-year pension bond at 5.07 percent would yield
about 16 basis points less than Bloomberg's index for the yield on
comparable AAA rated taxable municipal bonds.
Demand
Illinois' 30-year general-obligation tax-free debt yields
0.43 percentage point less than the pension bonds at 4.64 percent,
which is the taxable equivalent of 7.56 percent for a taxpayer in
the top federal bracket. Illinois does not exempt its municipal
debt from the state income tax, unlike most states.
Hart said the large size of the 30-year bond probably kept
down the yield and ensured investors that the bonds will be
actively traded.
``There's been very little long corporate issuance this
year,'' Hart said. ``So there's a lot of pent-up demand.''
European banks, which view the bonds as sovereign debt
because of the low default rate of municipal securities, may buy
as much as 30 percent of the bonds, said Larry Morris of Mesirow
Financial Inc. in Chicago, one of Illinois' financial advisers for
the sale. He said the state obtained a top corporate-equivalent
rating from Moody's Investors Service to help make the bonds more
attractive to European buyers. The underwriters also did
presentations in London, Frankfurt and Dublin.
Moody's in May cut its municipal-scale rating of Illinois'
credit one grade to Aa3, the fourth-highest level, from Aa2.
The following is the final structure and pricing guidance for
the $10 billion sale that was distributed to investors. The 2018,
2023 and 2033 maturities are term bonds that would be paid down
incrementally beginning a few years before the final maturity. The
table includes the maturities, the amounts and the spread in basis
points, or 0.01 of a percentage point, to Treasury bonds:
*T
Maturity Amount Spread to Treasury
2008 $50 million +30 bp vs. 2008
2009 $50 million +60 bp vs. 2008
2010 $50 million +0 bp vs. 2013
2011 $50 million +25 bp vs. 2013
2012 $100 million +43 bp vs 2013
2013 $100 million +55 bp vs. 2013
2014 $100 million +65 bp vs. 2013
2015 $100 million +75 bp vs. 2013
2018 $375 million +103 bp vs. 2013
2023 $1.375 billion +58 bp vs. 2031
2033 $7.65 billion +72 bp vs. 2031
*T
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Copyright (c) 2003, Bloomberg, L. P. |
