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Pension reform law gives Illinois bond sale a boost

CHICAGO, Dec 12 (Reuters) - Illinois' enactment of sweeping public pension reforms last week gave a boost to its sale on Thursday of $350 million of taxable general obligation bonds.

Yields in the deal topped out at 5.65 percent in 2038 with a spread of 175 basis points over comparable U.S. Treasuries. Bank of America Merrill Lynch won the bonds in competitive bidding with a true interest cost of 5.40 percent, or about 2.5 percent over 10-year Treasuries, according to Abdon Pallasch, an assistant state budget director.

He said Illinois' previous sale of $350 million of taxable GO bonds in April resulted in a 4.97 TIC that was more than 3 percent over 10-year Treasuries.

"So Thursday's bids were in excess of 50 basis points better than the state's last comparable sale," Pallasch said. "That should save Illinois taxpayers in excess of $20 million in interest costs over the 25-year life of the bonds, compared to the rate the state received in April."

Randy Smolik, senior market analyst at Municipal Market Data, a unit of Thomson Reuters, said the state "got a pretty good bid."

He added that spreads narrowed in the deal versus recent trading in Illinois' taxable bonds.

Still, a sale of nearly $396 million of taxable personal income tax revenue bonds for New York's Empire State Development Corp attracted lower yields on Thursday. For example, the bonds, which were rated AAA by Standard & Poor's Ratings Services and AA by Fitch Ratings, were priced with a yield of 2.79 percent for bonds due in 2020.

In contrast, Illinois' bonds, which were rated A-minus by S&P and Fitch and A3 by Moody's Investors Service, fetched a 4 percent yield in 2020.

Inaction on tackling a $100 billion unfunded pension liability hammered Illinois' credit ratings to the lowest levels among states and spurred investors to demand heftier yields for the state's bonds.

In the wake of the passage of pension changes aimed at saving Illinois $160 billion over 30 years, the state's so-called credit spread for 10-year bonds narrowed to 158 basis points over the municipal market's benchmark yield scale for AAA-rated bonds from 173 basis points.

Rating agencies praised the state for finally addressing its pension problem, with S&P on Tuesday revising Illinois' rating outlook to developing from negative.