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Today’s number: $175 million

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Illinois

When Illinois returns to the municipal market after its unprecedented 18-month borrowing drought, it may find its budget impasse will cost taxpayers millions of dollars in the coming decades.

On a $1 billion offering of 25-year tax-exempt bonds, it would cost about $175 million more now than if an equal amount was issued with spreads at 2014 levels, based on data compiled by Bloomberg that assumes the yield equals the interest rate paid. Now in its fifth month without a spending plan, signs are mounting that debt sales for cash-strapped Illinois are only going to get more expensive.

* But, really, this quote shows how this whole thing is a bit rigged…

Long-term, the budget situation is fixable, according to Ty Schoback, a senior analyst in Minneapolis at Columbia Threadneedle Investments LLC, which holds some Illinois debt among its $30 billion of municipal holdings.

“As long as there’s adequate compensation in price, in addition to us having a view that they will ultimately come to a fix and get past this political gridlock, we certainly would consider additional purchases,” said Schoback. “You need to be compensated for the headline risk and the political uncertainty and these BBB+ downgrades.”

“Headline risk”? C’mon. What is that about?

Illinois has some of the strongest bond payback legal requirements in the country. Right now, child care, higher education and other programs are being slashed at least partly so the state can afford to make its bond payments on time.

The only people who truly believe Illinois is about to default on its bonds are newspaper website commenters.

posted by Rich Miller
Thursday, Nov 5, 15 @ 9:19 am

Comments

“The only people who truly believe Illinois is about to default on its bonds are newspaper website commenters.”

And their editorial boards.

– MrJM

Comment by @MisterJayEm Thursday, Nov 5, 15 @ 9:25 am
It’s a crock.

Tne rating agencies don’t actually measure “risk,” they make comparisons among similar securities — in this case, other state GO bonds.

It’s absolutely loopy to think there is more “risk” in an Illinois GO bond than a AAA-rated corporate security.

Comment by Wordslinger Thursday, Nov 5, 15 @ 9:27 am
“Headline risk” is an honest descriptor.

What agencies measure is marketability. Facts mean less than images. Like with pols.

Comment by walker Thursday, Nov 5, 15 @ 9:44 am
I think Bloomberg missed that the Governor has stopped pushing to allow Illinois to declare bankruptcy.

Comment by SAP Thursday, Nov 5, 15 @ 9:59 am
Absolutely. It’s why the Moody’s downgrade of Chicago was so laughable. They said their rating equates to a 5% default rate in the next three years. Newsflash - they ain’t gonna default in the next three years.

Comment by Chicago Cynic Thursday, Nov 5, 15 @ 10:00 am
It isn’t rigged - these people are vultures and love opportunities to get money they haven’t earned.

Just remember Bruce Rauner - these people don’t earn what they have, and they make really bad governors.

Comment by VanillaMan Thursday, Nov 5, 15 @ 10:03 am
“It’s absolutely loopy to think there is more “risk” in an Illinois GO bond than a AAA-rated corporate security.” Word, thank you for clearing that up.

Comment by Mama Thursday, Nov 5, 15 @ 10:03 am
not to be all tin foil hatty but this benefits the bond holders. it almost looks like a market manipulation by the rating agencies to benefit bond holders…. given that they give higher ratings to private companies with riskier debt payback potential, and that they gave tripple aaa ratings to the junk mortgage bonds that crashed the world economy.

Comment by Ghost Thursday, Nov 5, 15 @ 10:05 am
I am very skeptical of Big Liabilty, Big Equity, etc.

These industries’ SOPs are very similar to how Rauner operates–message manipulation for unpublished and undisclosed true motives. Restated, it’s all about the money that can be made off the suckers.

Comment by cdog Thursday, Nov 5, 15 @ 10:09 am
Clog, what exactly is “Big Liability?”

Comment by Arthur Andersen Thursday, Nov 5, 15 @ 10:37 am
===The only people who truly believe Illinois is about to default on its bonds are newspaper website commenters.===

Rich,

I agree with the premise that the downgrades on Illinois’ general obligation bonds is kind of silly but in the bond market reputation matters.

If Illinois wants to go to the market and ask bond buyers to grant them money, Illinois should recognize that regardless of the fact that a court could order the state to issue a tax levy for a general obligation bond, that the investor might have some qualms about a body politic that refuses to address their situation and in an era of tremendous budget shortfalls, they want to add more debt service to their outlays.

If Illinois went to the bond market, aside from needing to produce a disclosure that discusses the state’s plan or lack of plan for the unfunded pension liabilities, it would also need to address the revenues or lack of revenues being generated, the structural budget gap, and more.

So, while I agree that the risk may not actually exist for investors, that really doesn’t matter because ultimately the traditional bond buyers aren’t worried about that.

They can go buy a bond that is just as risk free from a state that can enact a budget and raises enough taxes to pay their bill. If you want a bond buyer to do business with the State of Illinois when it is being operated like it is now, you shouldn’t expect the same rate as a state that has their kit together.

A bond issue is a business venture, and it’s not really a good place to start from to mock the people you’d need to come and buy your bonds, especially when the issuer is a fiscal laughing stock.

Bonds are negotiated in basis points, literally 100ths of a percent. It’s not unreasonable to expect a state that can’t enact a budget and is unwilling to raise enough revenues to pay for it’s government functions to not have a few hundredths, or several hundredths of a a percent higher, and when your borrowing billions that translates into millions.

Would I buy an Illinois General Obligation bond right now?

You bet.

Would I buy it at the same rate as an Iowa general obligation bond?

No. Why not? Iowa has a better reputation than Illinois does. So does Missouri, Minnesota, Kentucky, Ohio, Michigan, and Wisconsin.

When a municipality issues a bond they’re coming to the world with their hand out and if they can’t get the rates they want, they better be prepared to walk away.

If that issuer wants rates that don’t reflect their reputation, good luck. They’re going to need to do a lot of begging.

Comment by Anon Thursday, Nov 5, 15 @ 11:05 am
AA - my term for bond market makers. You know, like “liability” on a balance sheet. Sorry, no confusion intended.

Comment by cdog Thursday, Nov 5, 15 @ 11:07 am
===No. Why not? Iowa has a better reputation than Illinois does.===

You’d pass on earning higher interest despite almost zero risk, because of “reputation?” Well OK then.

I wish I had the means to get in on the Illinois bond market right now. They are paying a premium and there is next to zero risk. It’s the easiest money to be made right now.

Comment by 47th Ward Thursday, Nov 5, 15 @ 11:34 am
Anon, what in the world are you talking about, “qualms?”

The last Illinois GO bond sale was oversubscribed by a factor of nearly six. It sold out in less than 20 minutes.

The federally required rating, which has no basis in reality in regards to risk, is a license to steal, an artificial rigging of the market.

Investors know it and jump when they get the chance.

Comment by Wordslinger Thursday, Nov 5, 15 @ 12:03 pm
Chicago cynic-dont bet on it.

Comment by blue dog dem Thursday, Nov 5, 15 @ 12:33 pm
The bond sale must come first, then Rauner proposes a budget. Illinois Bond buyers get higher interest rates then a capital gain when the “budget crisis” is resolved. And we thought Rauner just wanted to govern…

Comment by otherwise Thursday, Nov 5, 15 @ 5:05 pm
And a heck of a way to pay back your donors.

Comment by otherwise Thursday, Nov 5, 15 @ 5:16 pm
Anon

good explanation of the bond market.

Comment by ejhickey Thursday, Nov 5, 15 @ 6:44 pm
The best money, the easiest money is through the vendor payment program. You pay 90% of an overdue bill, and the state pays you 1% per month. When they pay the bill off, you pay the remaining ten % and keep the 12% you’ve been earning on interest. This is even better than being owed as a vendor because this program can’t be used until the prompt payment act applies, 90 days after the bill was accept by the State.

Comment by Me too Friday, Nov 6, 15 @ 8:22 am
Accepted. Oops. Only special institutions can p participate though lol.

Comment by Me too Friday, Nov 6, 15 @ 8:24 am