Illinois Looks to Europe for Funding

The great irony of the year continues:

(Bond Buyer) Market participants attribute the fresh foreign interest to the perception that U.S. government credits are relatively safe and have value, especially following this year’s European sovereign debt crisis. Also helping is better marketing by broker-dealers with foreign trading desks like Citi and the generally improving view of BABs as an asset class with federal legislation pending to extend the stimulus program.

For Illinois, the need to expand its universe of buyers is all the more urgent as it has asked domestic buyers to digest a steady flow of paper amid an ongoing deluge of negative fiscal news from rating downgrades to columnists raising the specter of insolvency.

Bloomberg LP reported last week that the price of a five-year credit-default swap to insure state debt hit a record high and surpassed California. The state’s CDS spread mid last week was about 60% higher than last month, according to Municipal Market Data......

“It’s unceasing on both the BAB and tax-exempt sides. Every week there’s another deal. Everybody is up to their eyeballs in it,” said Thomas Spalding, portfolio manager at Nuveen Investments. Nuveen placed an order on the state’s sales tax-backed refunding last week.

The BAB program really looks like the gift that just keeps on giving. One part that does seem a little interesting is the use of Morgan Keegan in the transactions:

Citi, with Morgan Keegan as a co-manager, won the $300 million BAB sale last week with a true interest cost of 4.39%. The taxable bonds mature from 2011 through 2019, with term bonds in 2021, 2025, and 2035. Yields ranged from 3.40% priced at par in 2013, or 2.12% after the 35% federal subsidy, to 7.10% priced at par in 2035, or 4.62% after the subsidy. The 7.10% rate was 297 basis points over Treasuries, more than 80 basis points higher than the spread on the state’s April competitive BAB sale.

Morgan Keegan is the company that the NY Times took down in a scathing piece about abuses in the muni-bond industry:

LEWISBURG, Tenn. — Five years ago, this small factory town was struggling to pay the interest on a bond for new sewers. Bob Phillips, Lewisburg’s part-time mayor and full-time pharmacist, was urged by the town’s financial adviser, an investment bank named Morgan Keegan & Company, to engage in a complex financial transaction to lower interest rates.

When a Lewisburg official attended a state-sponsored seminar intended to lay out the transaction’s benefits and risks, he was taught by investment bankers from Morgan Keegan.And when Lewisburg decided to go ahead with the transaction, who was there to make the deal? Morgan Keegan.

In January, local officials were shocked to discover that annual interest payments on the bond had quadrupled to $1 million. Morgan Keegan, they said, did not serve them well in any of its roles.

And to think there is now an SEC task force!