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updated: 1/31/2013 8:00 AM

Illinois delays $500 million bond offer after rating downgrade

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Bloomberg News

Illinois postponed a $500 million offer of general-obligation bonds planned for today, citing unfavorable market conditions after Standard & Poor's cut its credit rating last week and threatened to drop the grade again.

Illinois still plans to sell the securities, though it has "no set date at this point," said John Sinsheimer, the state's director of capital markets, in a telephone interview. The borrowing would fund school construction and transportation improvements.

"It was straightforward -- today is Wednesday, we had ratings actions Friday afternoon," Sinsheimer said. "When we feel that the market has had the time it needs to digest the news and has settled down, we'll be back."

Today's offer was to be sold competitively, with banks bidding for the securities, as required in the state's first sale of the year, Sinsheimer said.

The delay followed two trading days in which interest rates climbed across the $3.7 trillion municipal-debt market, tracking losses in Treasuries. The yield on benchmark tax-exempts due in 10 years touched 1.76 percent yesterday, the highest since Jan. 8, data compiled by Bloomberg show.

Investors will want added compensation on Illinois debt given the jump in yields and the rating action, said Daniel Solender, who helps oversee $19.5 billion in munis at Lord Abbett & Co. in Jersey City, New Jersey.

Compensation Call

"When a deal comes and they have to sell this larger amount of bonds, given the headlines and given that we've been down for a few days, it leads to discussion of spreads getting wider," Solender said.

S&P cited Illinois lawmakers' "poor track record" on fixing the state's retirement system in reducing its rating Jan. 25 to A-, six levels below AAA, and tying it with California for the lowest state grade in the nation.

Illinois has the weakest state retirement system in the U.S., with just 39 percent of assets needed to cover projected obligations for five major groups of public employees, according to the Civic Federation, a Chicago-based nonprofit research group. It also has a backlog of $9 billion in unpaid bills.

Legislators ended their 2012 session Jan. 8 without a pension overhaul, after also failing to act during a special session in August.

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