What does it mean when the state halts a bond offering?

January 31, 2013

Earlier this week, Illinois abruptly halted a bond offering because officials said the markets were “unsettled” by it.

Think of it this way: Illinois creating a bond offering is like a person trying to take out a home equity line of credit. (It's not a perfect analogy: When the state of Illinois issues bonds, they don't have to put up collateral in the way a person would. But, they're backed by the millions of taxpayers across Illinois investors assume will foot the bill.)

That’s what the state was doing Wednesday with its $500 million bond offering that was intended to fund infrastructure projects, including for transportation, schools and other construction work.

Illinois's director of capital markets, John Sinsheimer, shopped the offering around for the state - mostly with big banks. But he found that the buyers were offering too big of a range on interest rates for the bond.

"So we decided it was appropriate to pull the bonds off the street, cancel the sale for the time being and really let the markets digest the news of the downgrades," Sinsheimer said.

He said the state started working on the offering in late December, around the time that Moody's revised its opinion of the state's credit standing to negative.

Those negative revisions were followed by Fitch and just last week, Standard and Poor's, which rates Illinois as the same credit risk level of the nation of Botswana. (The Chicago Tribune bemoaned the insult to Botwsana.)

It wasn’t just the Illinois’ credit rating downgrade that canceled the sale. Performance Trust Capital Partner's Brian Battle explained it this way:

"It’s sort of like bringing a Picasso to auction and people aren’t quite sure it’s a Picasso," he said. "If you get a bid for a $1, the next time you come to auction it’s going to hurt, because it’s always going to be that piece of art that had a $1 bid and maybe it’s not a Picasso."

In other words, the market is so unsure about lending to Illinois that the interest rates it offers varied widely. By pulling the plug on the offering, none of those rates were published - so no one knows what the bond market really thinks of Illinois right now.

Sinsheimer said the decision to pull the plug on the long-planned offering came from the Governor's office, but that it was not done to send a message to legislators that they need to act on fixing the state's fiscal crisis.

"We didn’t cancel the sale to get legislators to act, but obviously I hope they understand what the market is telling us and will react accordingly," he said.

He said they plan to try again within a few months.

The state says they’re hoping the market will be more willing to lend to Illinois soon. Sienshimer says they’ll try again in the next few months.