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Coverage calms down a bit

Wednesday, Jul 3, 2019

* Background is here and here if you need it. Reuters

Yields on Illinois bonds spiked higher on Tuesday in the U.S. municipal market after a constitutional challenge to $16 billion of the state’s general obligation bonds was launched on Monday.

Illinois already pays the biggest yield penalty among states in the $3.8 trillion market due to its low credit ratings, which are a notch or two above junk.

Greg Saulnier, an analyst at Municipal Market Data (MMD), said the spread for Illinois GO bonds over MMD’s benchmark triple-A yield scale had tightened over the past two months as investors gobbled up higher-yielding debt, leaving the state’s bond prices at a greater risk of falling.

“The lawsuit headline was like adding a spark to a powder keg so to speak and trading swiftly indicated spreads wider by 20-25 basis points,” he added.

* Interesting point from Bloomberg

Pritzker and Illinois Comptroller Susana Mendoza dismissed the lawsuit as a political tactic by John Tillman, the chief executive officer of the Illinois Policy Institute, a conservative think tank, that will be tossed out of court. The case, also filed by New York hedge fund Warlander Asset Management claims the state’s record pension bond sale in 2003 and debt issued in 2017 to pay a backlog of unpaid bills were deficit financings prohibited by the constitution.

Warlander owns $25 million Illinois general-obligation bonds issued in 2001, 2014, 2017 and 2018. Those bonds would be more secure if the firm succeeded in having the other securities invalidated, since there would be more money available to service the debt.

* More

Analysts are skeptical. Citigroup Inc.’s Vikram Rai and Jack Muller published a note on the case after the bank was inundated with calls. They said the lawsuit is unjustified because the Illinois Constitution allows debt to be incurred as long as the law details the specific purpose of the debt and how it will be repaid. Even if it did succeed, they said, the government would likely find a way to repay the debt to avoid being penalized in the bond market. […]

Jason Appleson, a portfolio manager at PT Asset Management LLC, said he believed market consensus is that the lawsuit was frivolous. […]

Appleson attributed the initial widening to “a couple of scared buyers” affecting a light trading day in a slow market. “If this moves forward in court, I think we could see some more widening but if it’s shut down we could see a snap-back in spreads given the market conditions.”

- Posted by Rich Miller        

8 Comments
  1. - Chicago Cynic - Wednesday, Jul 3, 19 @ 10:44 am:

    Someone should quickly take a look at Warlander’s trading activity around Illinois debt before and after the suit was filed. Could this whole thing have been an arbitrage play?


  2. - Moe Berg - Wednesday, Jul 3, 19 @ 10:57 am:

    A Grifter’s Tale: The John Tillman Story

    Also, since we are in a reflective mood in light of terrible recent events, would just like to state that I appreciate all the times Rich takes note of and systematically debunks foolery like this. As best I’m aware, it doesn’t happen anywhere else in the IL media ecosphere. It’s invaluable.

    We suffer from too much BS and badly need BS callers.

    Truth matters. Without it, we are lost.


  3. - State of DenIL - Wednesday, Jul 3, 19 @ 11:16 am:

    Tillman should apply for one of those out of control State jobs so he can cash in on that Tier 2 pension.

    Grifters gonna grift.


  4. - the Edge - Wednesday, Jul 3, 19 @ 11:16 am:

    this follows the same ploy as the IPI saying a progressive income tax will hurt the middle class; say it often, rouse the ramble.


  5. - Cook County Commoner - Wednesday, Jul 3, 19 @ 11:32 am:

    Presumably, the plaintiffs believe there is enough meat on the bone of the complaint to avoid sanctions for filing a frivolous pleading. And it is doubtful that an Illinois court would grant any relief.
    The strategic aspect of such a filing may be worthy of a closer look-see. Illinois debt is climbing to a major holding in the high yield municipal closed end fund space. I’ll presume the same is true in the open end fund space.
    Maybe this is a shot over the bow, albeit a minor one, by some big bond owners to Illinois state and local governments that more than bond rating agencies are watching their debt sales.
    But those fed and tax free yields to Illinois holders do look yummy.


  6. - A Jack - Wednesday, Jul 3, 19 @ 12:54 pm:

    I do hope the SEC looks into this and there are some new members of the Martha Stewart country club.


  7. - Soccermom - Wednesday, Jul 3, 19 @ 2:29 pm:

    Cynic — my thought exactly. Do you know anybody who could look into this?

    Seriously — this seems like a fairly transparent attempt to bump up yields.


  8. - Shevek - Wednesday, Jul 3, 19 @ 3:59 pm:

    @Cook County Commoner - Wish it wasn’t the case, but Illinois courts almost never grant those kinds of sanctions. If they did we would see a whole lot less congestion on their dockets.


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