Most people looking at the state of Illinois’s financial position would run screaming to the nearest exit. But not “sophisticated investors,” who are lining up to buy Illinois pension bonds. The Wall Street Journal reports:Despite its well-publicised fiscal woes, Illinois hasn’t had any trouble attracting investors for its $3.7 billion pension bond deal, expected to price later Wednesday in the municipal-bond market.
Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said. Such buyers were introduced to the muni market over the past two years, through the now-defunct federally subsidized Build America Bond program.
The strong demand for this week’s pension debt comes in part from the deal’s hefty yield, which is on average around 1.5 to 2 percentage points above some comparably rated corporate debt, said Peter Demirali, managing director and portfolio manager at Cumberland Advisors.
According to a term sheet, the state launched the longest maturity in the deal, due in 2019, at 2.40 percentage points above the 10-year Treasury, to yield roughly 5.84%.
“That’s what makes this sector compelling … you’re picking up that yield, and [munis] have a significantly lower default rate than corporates,” said Mr. Demirali, who placed an order for the deal’s five-year debt.
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