(Adds details about Great Lakes Water Authority deal, paragraphs 9, 10)
By Rory Carroll
SAN FRANCISCO, Oct 7 (Reuters) - Illinois will bring $1.35 billion in general obligation refunding bonds to the municipal market next week, to take advantage of low U.S. interest rates ahead of December, when the Federal Reserve may hike rates.
Illinois is the lowest-rated U.S. state but also its highest yielding, so the offer is expected to receive buyside interest from so-called "yield hogs," Alan Schankel, municipal strategist at Janney Fixed Income Strategy, said in an email on Friday.
Illinois saw its credit rating dropped one notch by S&P Ratings to BBB last week. The agency cited weak financial management and increased pressure from declining pension funded levels.
The deal, which is being managed by Bank of America Merrill Lynch, is structured with serial maturities from 2018 through 2033, according to the preliminary official statement.
The Illinois GO refunding bond offer became the largest deal for next week after Alaska pushed back by a week its $2.35 billion of pension obligation bonds.
The delay came after S&P assigned Alaska's bond rating a "negative outlook" due to concerns about the governor's plan to borrow money for the state's underfunded pension funds. The negative outlook could lead to another credit downgrade of the state by S&P.
The Detroit area's Great Lakes Water Authority will debut in the muni market with a two-part $1.315 billion revenue bond sale through Citigroup on Thursday.
The authority will sell $899 million of water supply system bonds and $416 million of sewage disposal system bonds.
The Great Lakes Water Authority, which operates water and sewer systems for southeast Michigan, grew out of federal court-ordered mediation in the biggest-ever U.S. municipal bankruptcy Detroit filed in 2013 and exited in December 2014.
The deal includes the refunding of bonds the authority assumed from Detroit and is viewed as another effort to lock in low interest rates.
"The Detroit deal should do well and has seen upgrade recently," Schankel said in an email. Moody's Investors Service and Fitch Ratings have upgraded the authority's bond ratings.
Next week's deals include $7.49 billion from the negotiated calendar and $820 million in competitive offerings. (Additional reporting by Karen Pierog; Editing by David Gregorio)