* Yvette Shields at the Bond Buyer…
The fate of the lawsuit seeking to block repayment of $14.3 billion of Illinois general obligation debt is in a judge’s hands.
Sangamon County Circuit Court Judge Jack D. Davis II heard oral arguments in his Springfield courtroom Thursday about the case that opponents say is “frivolous” and filed for “a malicious or ulterior purpose.” […]
The two traded swipes over the market impact. “There is damage” to the state from the lawsuit and it “will disrupt the markets” and “it’s going to make borrowing more difficult” if the case moves forward and if the petitioners prevail, [Assistant Attorney General Joshua Ratz] said.
[Daniel Thies, an attorney for the Illinois Policy Institute’s John Tillman] disagreed. “The state’s credit rating is going to be helped…$20 billion of debt will be taken off its books” and there will be a court ruling outlining what is constitutionally allowed in the future. “This will help the state and its ability to borrow.”
* Mark Glennon at Wirepoints…
(T)he actual results for the state, if Warlander were to win, would be far different than some critics seem to think. The state would be destroyed and it’s credit slashed, some are saying.
Nonsense. The state would stop payment on the challenged bonds, indeed freeing up that cash to relieve the budget crunch and ensure that other bonds get paid. Taxpayers would be better off. Only the challenged bonds would be impaired, provided the court’s rationale were limited to those bonds. That’s an important proviso. If the court issued a sloppy or overly broad opinion, many other bonds could become suspect. Regardless, however, the credit rating for bonds to be issued in the future would improve, provided the they are made within the legal limits the court would have laid out in its decision. That point came up yesterday in court.
That’s the part that so many don’t seem to get. It’s the creditworthiness of bonds to be issued in the future that counts. Holders of old bonds are of less concern. They should get what the courts say they have a right to get, and nothing more.
That’s some truly wishful thinking. The state can’t just walk away from bond obligations. If the courts eventually do rule against Illinois (which I seriously doubt, but it’s the courts, so one never knows for sure), Illinois will have to make bondholders whole or undoubtedly face serious consequences with the credit ratings agencies. It can’t just walk away from billions in debt - even with a judicial ruling - and not expect a major downgrade into junk status. After all, most of the same institutions which now hold those old bonds are the ones who will be buying new bonds.
* Back to Yvette…
…Adding… From Glennon…
Rich, the whole point of the suit is to stop payment on just those certain bonds. That’s their specific request for relief. That’s the part that’s wishful thinking because I, like you, think they likely will lose. But if they win you apparently think the state would somehow pay those bondholders anyway. No, the state would be barred from doing that, and the bar would apply only to the challenged bonds. Other bonds and future bonds would benefit, provided, as I said, that the ruling was limited to the challenged bonds. It would be as if a court said you no longer had to make payments on your mortgage because of some claim you had against that lender. Would your credit rating be impaired? No, of course not. It seems very odd to me that you and many of your readers are so concerned about the rights of old bondholders instead of protecting of future bond issues.
This passage is just so goofy it blows my mind…
It would be as if a court said you no longer had to make payments on your mortgage because of some claim you had against that lender.
The lawsuit is not about the lender. The lawsuit is about the borrower (the state) allegedly making false claims when it borrowed the money. If the state is found in the wrong, bondholders and credit agencies would naturally wonder how many other bonds could be suspect. And that would indeed kill the credit rating.
So, to use Glennon’s logic, if you are busted for borrowing money under false pretenses your credit rating is gonna suffer. He has it all bass-ackwards.