* The tax hike is having a positive effect on the state’s bond ratings…
The tax increase approved by Democrats in Springfield has had one positive effect; Fitch Ratings has raised the rating on state bonds from negative to stable. […]
The service said the increase will help stabilize the state’s finances.
The ratings agency said following several years during which the state was unwilling to take action to restructure its budget, the tax increase and enacted spending limits close “a significant portion of the structural gap in the state’s budget through fiscal 2014.”
Fitch added that because the tax increases are temporary, Illinois would need to find a more permanent solution to the mismatch between spending and revenues. Further, despite the significant increase in tax revenues, Illinois is expected to continue to rely on one-time revenues, including the expected use of debt financing for operations, in fiscal 2012.
Fitch said the state’s debt burden is “above average” and rising. Additional borrowing, meanwhile, is expected under the $31 billion capital plan.
The state’s general obligation bonds are currently rated at A, which is five notches into investment-grade territory. Illinois benefits from a large, diverse economy centered on the Chicago metropolitan area, which is the nation’s third largest and is a nationally important business and transportation center, according to Fitch.
Expect others to follow.
* The tax hike may have also brought some needed sanity to muni bond markets in general. If nothing else, a backlash is starting to play out over dire predictions of meltdown…
Lyle Fitterer, the top manager of U.S. municipal-bond funds in the past decade, sides with Bill Gross and against Meredith Whitney in his view that fiscally strained states and cities will avoid widespread defaults.
“The baby has been thrown out with the bathwater,” said Fitterer, who runs the $2.3 billion Wells Fargo Advantage Municipal Bond Fund from Menomonee Falls, Wisconsin. “For every bad story there are hundreds of good ones.”
Investors have pulled money from mutual funds that buy municipal bonds for 10 straight weeks, spooked by rising interest rates and warnings that defaults will escalate. Fitterer used the selloff to buy what he sees as bargains, including debt from Illinois and California, which have the lowest state credit rating from Moody’s Investors Service.
Smart move by Fitterer on buying Illinois.
* Meanwhile, the General Assembly slipped a little-noticed provision into a bill last week…
In the same legislation that raised the debt ceiling, lawmakers included a provision that requires underwriters working with the state to disclose what bets they have made through credit default swaps against a potential state default. State House Speaker Michael Madigan, D-Chicago, modeled the requirements after action taken by California Treasurer Bill Lockyer.
Illinois has had the highest CDS rate among states. It has ranged in recent months from just under 300 basis points to more than 340 basis points.
Under the legislation that has been signed by Quinn, underwriters must disclose their cumulative notional volume of the state’s CDS positions and trades and their outstanding gross and net notional amount of Illinois CDS over the last three months.
Firms must disclose whether their “net position is short or long.” They must also disclose whether they have released any publicly available research or marketing reports that reference state CDS and submit the reports.
In other words, the state wants to know if its underwriters are also betting against it. They have until Friday to disclose their CDS bets.