Jan. 8 (Bloomberg) --
                Illinois, 
                the second-lowest rated U.S. state, paid more than some comparably ranked U.S. 
                companies when it sold $3.47 billion of taxable bonds to finance its annual 
                contribution to a public employee pension fund.
            
            
                The state, downgraded last month by Standard & Poor’s and Moody’s Investors 
                Service, paid as much as 4.421 percent yesterday on the bonds, which mature in 
                one to five years. The top rate was 182 basis points, or 1.82 percentage points, 
                higher than the yield on five-year U.S. Treasuries, according to data compiled 
                by Bloomberg. Corporate securities rated A that mature in three to five years 
                traded 154 basis points over Treasuries yesterday, indexes from Bank of America 
                Corp.’s Merrill Lynch & Co. show.
            
            
                “They certainly did have to pay a premium to get this deal done,” said
                Matt Buscone, 
                a portfolio manager at Boston’s Breckinridge Capital Advisors Inc., a money 
                manager overseeing $11 billion in assets, which bought Illinois debt maturing in 
                two years. Municipal bonds “are subject to a lot of bad headline risk these 
                days” with deteriorating state and local budgets, he said. “Headline risk” 
                refers to the potential effect of bad news on investment values.
            
            
                Governor
                Pat Quinn 
                is using borrowed money to make the pension fund contribution, to avoid using 
                cash as he attempts to close a budget gap that the
                
                Center on Budget and Policy Priorities estimates at $5 billion at the middle 
                of the fiscal year.
            
            
                ‘Downward Slide’
            
            
                Illinois’ finances are in a “downward slide” with $5.1 billion in unpaid bills 
                to end last year, part of an “ongoing fiscal disaster,” state Comptroller
                Daniel Hynes 
                said in a report the day before the offering. Hynes is challenging Quinn, who 
                replaced Governor
                Rod 
                Blagojevich last year, in the Democratic primary election on Feb. 2.
            
            
                John 
                Sinsheimer, hired in October as the state’s director of capital markets, 
                said the interest rate reflected Illinois’ downgrades. Illinois received more 
                than $8 billion in orders from 200 investors in the U.S., Asia and Europe for 
                the $3.47 billion in securities, he said.
            
            
                “The market is efficient and we paid the right price,” Sinsheimer said in a 
                telephone interview. “The state is very pleased with the results.”
            
            
                Illinois’ credit is rated A2 by Moody’s, its sixth-highest grade, and the 
                equivalent A+ by S&P. Fitch Ratings ranks the state A and said last month that 
                it may also reduce the rating. Only California is lower, at Baa1 from Moody’s 
                and A from S&P.
            
            
                The Illinois offering is taxable since federal rules preclude proceeds of 
                tax-exempt borrowings from going into funds that invest in potentially 
                higher-yielding investments such as stocks.
            
            
                May Have Overpaid
            
            
                Scott Minerd, 
                who helps supervise more than $100 billion as chief investment officer of Santa 
                Monica, California-based Guggenheim Partners LLC, said it looked like Illinois 
                overpaid relative to corporate debt.
            
            
                “It sounds like they had to pay up,” said Minerd, who didn’t participate in the 
                offering, citing the size of the deal and the “saturation” of the market. “I’d 
                have thought they could have gotten a better price.”
            
            
                Illinois paid more than recent sales by Dr Pepper Snapple Group, the soft drink 
                maker, whose debt is rated only one level above junk bond status. Dr Pepper sold 
                two-year bonds on Dec. 14 at 90 basis points more than Treasuries. Those bonds 
                changed hands on Jan. 6 at 56 basis points more than Treasuries in a $3 million 
                trade and 53 basis points in two trades totaling $7 million, according to 
                Bloomberg data.
            
            
                Corporate Debt
            
            
                Dr Pepper Snapple sold a three-year issue at 103 basis points above Treasuries 
                on Dec. 14, which traded yesterday in three transactions of more than $15 
                million at 55 basis points above the benchmark. Sherwin-Williams Co., the 
                largest U.S. paint retailer, rated one level lower than Illinois, at A3 by 
                Moody’s and A- by Standard & Poor’s, sold $500 million of two- year bonds last 
                month at 82 basis points more than Treasuries.
            
            
                Illinois paid 2.77 percent on pension bonds maturing on Jan. 1, 2012, and 3.32 
                percent on bonds maturing on Jan. 1, 2013, both 175 basis points above 
                Treasuries, according to Bloomberg data. New York-based JPMorgan Chase & Co. led 
                a team of more than 10 banks selling the bonds.
                Justin Perras, 
                a spokesman for JPMorgan, declined to comment on the pricing. Chicago-based 
                Peralta Garcia Solutions LLC was the state’s financial adviser.
            
            
                Rise in Trading
            
            
                The state’s bonds rose today in secondary market trading, with more than 15 
                trades of more than $1 million of the securities due in 2015, according to data 
                from the Municipal Securities Rulemaking Board. The 4.42 percent bonds traded as 
                high as 101.36 to yield 4.11 percent, according to the market regulator. 
                Treasury notes due in five years rose about 1/8 point, or $12.50 per $1,000 
                bond, today.
            
            
                The weekly Bond 
                Buyer index of 20-year, tax-exempt bonds rose to 4.31 percent yesterday, up 
                from 4.25 percent the week prior. The index reached its lowest since at least 
                1980 on Oct. 1, at 3.94 percent.
            
            
                In another offering, the New Jersey Transportation Trust Fund Authority sold 
                $859 billion in Capital Appreciation Bonds and taxable Build America Bonds 
                yesterday and Jan. 6.
            
            
                The $359 million in Capital Appreciation Bonds maturing between 2025 and 2040 
                sold with yields of 5.85 percent to 6.25 percent, said
                Tom Vincz, 
                a New Jersey treasury spokesman. The issue pays interest only at maturity, he 
                said. The Build America Bonds that mature in 2040 were priced to yield 6.561 
                percent before a 35 percent federal rebate, Vincz said.
            
            
                To contact the reporters on this story:
                Michael 
                McDonald in Boston at 
                [email protected];
                Michael Quint 
                in Albany, New York, at 
                [email protected].