Illinois sells Build America Bonds as premium to treasuries climb

Illinois sold $300 million of Build America Bonds at a yield premium over Treasuries about 40 percent higher than two months ago after lawmakers failed to close a $13 billion budget deficit for the year starting July 1.

The fifth most-populous U.S. state sold the taxable debt maturing in 2035 priced to yield 7.1 percent yesterday, or 297 basis points over the 2040 Treasury to which it was benchmarked, according to data compiled by Bloomberg. Illinois offered Build Americas of similar maturity at spreads of 205 basis points and 210 basis points in two April issues, Bloomberg data show. A basis point is 0.01 percentage point.

Risk aversion among investors amid Greece's efforts to impose austerity measures contributed to swell the state's borrowing costs, said Tom Boylen, a managing director and municipal-bond trader in Chicago for BMO Capital Markets.

"A lot of this is a global thing," Boylen said. "There's a bigger magnifying glass on credit."

Illinois lawmakers passed a provisional $25.9 billion fiscal 2011 budget that's about $13 billion short, and are resisting Governor Pat Quinn's plan to sell $3.7 billion in debt to make a pension payment and help bridge the gap. Legislators recessed last month without covering the pension obligation and $4.5 billion in unpaid bills.

Citigroup Inc. provided the winning bid for the Illinois sale, which will finance capital projects. Alex Samuelson, a spokesman for the New York-based bank, declined to comment. Kelly Kraft, a spokeswoman for Quinn, didn't immediately reply to telephone or e-mail messages requesting comment on the Build America sale.

Default InsuranceThe sale took place as the price of insuring Illinois bonds against default climbed to a record. The cost of a five-year credit-default swap to protect Illinois debt rose 7 basis points to 309.1 basis points, or $309,100 to insure $10 million of debt, according to CMA DataVision, a data provider owned by CME Group Inc. The Markit MCDX CDS index of 50 municipal issuers held close to an 11-month high.Illinois's credit-swap costs surpassed California's, the largest U.S. municipal borrower, which saw its default-insurance contracts rise 1 basis point to 299.6 basis points from 298.7 basis points yesterday. Illinois is rated A+ by Standard Poor's, two levels higher than California. Moody's Investors Service puts both at A1, the fifth-highest, and the lowest-rated among U.S. states."If the spread is the widest, it says the problem is bigger than it's ever been before," said Peter Hayes, who oversees $106 billion of municipal bonds for New York-based BlackRock Inc. "It's a reaction to the inability to pass a budget. We've seen a greater unwillingness from Illinois and the market is reacting to that."Moody's, Fitch DowngradesMoody's and Fitch Ratings downgraded Illinois this month, citing the lack of political will to deal with budget issues. Moody's also cited strengths including a diverse economy and changed the outlook to stable from negative.Illinois plans to sell $900 million more in Build America securities later this month. The bonds, created as part of last year's economic-stimulus measures, are the fastest-growing part of the $2.8 trillion municipal-debt market. States and local governments have sold almost $113 billion of the obligations, according to Bloomberg data. Build America issuers are eligible for a 35 percent federal subsidy on their interest costs.