(Changes amount of bonds to nearly $966 mln from $968 mln to reflect official revision, adds comments from governor's office)
CHICAGO, Aug 22 (Reuters) - Yield-hungry investors snapped up nearly $966 million of Illinois bonds on Wednesday as the state was once again penalized in the U.S. municipal market for its big fiscal woes.
Illinois' general obligation refunding bonds fetched a top yield of 4.34 percent for debt due in 2033 with a 5 percent coupon. That widened the state's so-called credit spread over the market's benchmark yield scale for 15-year bonds by 10 basis points to 160 basis points.
The nation's sixth-largest state "definitely paid a price" to access the market, according to Shaun Burgess, a portfolio manager at Cumberland Advisors.
"They clearly found buyers for the paper - people willing to gamble," he said.
Illinois has the lowest credit ratings among the U.S. states at a notch or two above junk due to financial problems that include a $129 billion unfunded pension liability and a chronic structural budget deficit estimated at $1.2 billion in fiscal 2019.
Strong demand, which allowed underwriters to reduce yields from an initial pricing, resulted in an overall borrowing cost of 4.19 percent, according to Governor Bruce Rauner's office.
While yields for Wednesday's bond sale were mostly lower than for the state's last GO debt offering in April, spreads over Municipal Market Data's triple-A yield scale generally widened by 5 to 10 basis points.
The state earmarked most of the bond proceeds to redeem its only outstanding variable-rate debt and pay about $74 million in swap termination fees to four banks. The $600 million of bonds sold in 2003 and related letters of credit and interest rate hedges on the debt have been a costly problem for Illinois.
The deal also included a refunding of some outstanding fixed-rate bonds that resulted in a present value savings of 5.89 percent, according to Rauner's office.
"By refunding other outstanding bonds with higher fixed rates as part of the same bond sale, we maximized savings and minimized the costs of the sale. Taxpayers will realize these savings for years to come, said Illinois Budget Director Hans Zigmund in a statement.
Heading into the bond sale, Illinois touted higher revenue, due largely to last year's income tax rate hike that was enacted over a veto by Rauner, who wants to roll back rates. Another highlight was the state's unpaid bill pile, which ended fiscal 2018 on June 30 at $6.8 billion, $900 million lower than expected. (Reporting by Karen Pierog in Chicago Editing by Matthew Lewis and Tom Brown)