* Background is here if you need it. Yvette Shields at the Bond Buyer…
Municipal market analysts are brushing off the efforts of a New York hedge fund and conservative think-tank to invalidate $14.3 billion of outstanding Illinois debt as a legal long shot that even if successful would likely draw state support to make bondholders whole.
“We will limit our discussion to the justification behind this lawsuit and quite frankly, we do not think there is any,” Citi’s Vikram Rai and Jack Muller wrote of the legal arguments in a “Global Municipals Flash” report after the firm was “inundated” with calls from clients worried about the impact of the litigation filed Monday. […]
Illinois Policy Institute head John Tillman, acting as a taxpayer, and Warlander Asset Management LP, which holds $25 million of Illinois debt, filed the taxpayer/bondholder litigation Monday. They are asking the court to allow them to file a taxpayer lawsuit against the state to halt further repayment of 2003 and 2017 bonds they argue violate the state constitution. […]
Market participants appear skeptical of the legal arguments given the broad powers and limited rules guiding state issuance and the multiple layers of legal review.
“From all appearances it’s just a crank lawsuit,” said Matt Fabian, partner at Municipal Market Analytics. “Even if these guys do win, which seems unlikely, the state is going to do right by bondholders. Concerns over invalidation are really only a problem when it’s the borrower making the claim. It’s very unlikely to change demand for state bonds.” […]
“Some clients have openly questioned the ethical motivation behind the lawsuit and wondered if the recent surprise ruling by the First Circuit Court of Appeals [about Puerto Rico’s debt] has incentivized opportunistic investors to try their luck in the courts challenging other varieties of debt,” Citi wrote in its report.