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Frerichs pushes back on bond sale

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Illinois

[Treasurer Michael Frerichs] argued that the budget situation should be resolved before the administration goes back to the bond market, as it plans to do Thursday. The state is seeking to sell $550 million in bonds to fund mass transit, road construction and general construction projects. Frerichs said the state will end up paying “inordinate interest rates.”

Rauner defended the move, saying it’s “the appropriate way” to invest in infrastructure.

* AP…

Gov. Bruce Rauner says many bond buyers support the pro-business changes he’s pushing and want to invest in Illinois despite its worst-in-the-nation credit rating.

The Republican said Tuesday that taking on more debt is appropriate because the money is for improvements to roads and bridges, not daily operating expenses.

Illinois will go to market Thursday to sell $550 million in bonds.

Rauner says Illinois has strengths including its location and the city of Chicago. Rauner says many bond buyers “have indicated confidence in what we’re trying to do.”

* Joe Cahill…

(F)rom a bondholder’s perspective, risk of a payment default appears low, explains Moody’s senior credit officer Ted Hampton.

Despite its fiscal chaos, Illinois still brings in plenty of revenue to cover debt service on bonds. What’s more, state law gives bondholders first crack at those revenues, meaning they’ll likely get paid before any money goes to struggling social services agencies stiffed by the state. “We don’t think the state of Illinois is likely to default on its (bond) debt anytime soon,” Hampton says.

What Hayes’ comments do suggest, however, is that skepticism toward Illinois is growing among bond investors. Ciccarone notes that some have begun to back away from Illinois bonds, relegating the state to a costlier corner of the market. “With conservative investors you’re seeing resistance,” he says. “The investors that are stretching for yield are interested.”

As demand for Illinois paper shrinks, its borrowing costs will rise. How high? Possibly a lot higher, if paralysis endures in Springfield and Illinois’ credit rating keeps falling. Moody’s has a negative outlook on Illinois, a sign that at least one more downgrade may be coming. A drop into junk territory would be extremely expensive—junk-rated Chicago Public Schools bonds carry a rate of 8.5 percent.

A far-fetched scenario, perhaps, but Illinois’ current fiscal predicament seemed unimaginable not so long ago. As Hampton says, “We’re sort of in uncharted territory here with Illinois.”

* And speaking of uncharted territory…

Illinois has never missed a bond payment, but the state for the first time is addressing that doomsday scenario in a document filed ahead of a scheduled $550 million bond sale this week.

In the prospectus for its June 16 sale of $550 million of bonds, dated June 6, Illinois warned that if it were to miss a payment, bondholders’ ability to collect their money could be delayed by court proceedings or other actions out of the state’s control. This is the first time the state has highlighted such a warning, though its lawyers have given similar notice in opinions appended to prior offering documents.

“It’s a pretty cautious, if alarming, statement,” said Richard Ciccarone, who heads Merritt Research Services, which analyzes municipal bond issuer data. The warning should increase investor anxiety over buying the bonds, he added.

Standard & Poor’s last week also questioned whether the state could “maintain adequate debt-paying capacity” because of deteriorating finances and political gridlock.

Highly unusual for sure, but probably not without cause in the wake of Puerto Rico’s troubles, etc.

posted by Rich Miller
Wednesday, Jun 15, 16 @ 10:03 am

Comments

Wait, so can the Governor just order that to be done and sell the bonds? Does he have that authority? Or does it need to come from the Treasurer’s office, and can he refuse?

Comment by Just Arrivin' Wednesday, Jun 15, 16 @ 10:12 am
Then why did Frerichs sign off on it if he disagrees with it?

Comment by Fusion Wednesday, Jun 15, 16 @ 10:13 am
But wait….wasn’t it just a week or so back that Rauner was dissing the City of Chicago for schools like prisons, crime, etc.
Now? The City is attractive to potential bond-holders. This guy cannot stay on track or just says whatever comes to mind.

Comment by Belle Wednesday, Jun 15, 16 @ 10:14 am
There is a cheering section rooting for this that the Treasurer would normally appeal to. Does he think they aren’t watching?

Comment by A guy Wednesday, Jun 15, 16 @ 10:16 am
THE 1% types might be affected like the rest of us slobs buy this governors grandstanding. The horror!

Comment by Chungas revenge Wednesday, Jun 15, 16 @ 10:16 am
Illinois is being more forthcoming on the disclosure due to the SEC having recently sued the state for a misleading bond disclosure statement.

One of the provisions in Dodd-Frank also makes it possible for everyone involved in the bond issue to be held responsible, so something like “You might have to sue us to get paid” is going to be front and center.

Comment by Anon Wednesday, Jun 15, 16 @ 10:16 am
About the potential missed payment statement. It’s just an abundance of caution. The muni market is under greater scrutiny than ever. Higher regulation means everyone is erring on the side of caution when it comes to disclosure.

Comment by Former Bartender Wednesday, Jun 15, 16 @ 10:17 am
so if we can sell bonds for non-daily operational expense then we can sell bonds to fund the pensions to say 60%…. so the gov is selling bonds to pay companies who donate to him to perform work, but not to fix the pensions….

Comment by Ghost Wednesday, Jun 15, 16 @ 10:19 am
That default language in the prospectus could just just be CYA, but it is definitely not a good sign for the state’s finances.

Insiders in Illinois think this all one big partisan fight between Rauner and Madigan like the kind of other nasty partisan things that go on in the state. Illinoisans watch their politics the ways Nebraskans watch their football. But the outside world is watching too and not liking what it sees.

Comment by In a Minute Wednesday, Jun 15, 16 @ 10:22 am
I think Ghost is onto something. This will look good to the 1% sector, they should get a decent ROR. I might try to follow the money.

Comment by Iron Lady Wednesday, Jun 15, 16 @ 10:26 am
–Rauner says Illinois has strengths including its location and the city of Chicago.–

Not to mention that long-term Death Spiral he likes to highlight.

–[Treasurer Michael Frerichs] argued that the budget situation should be resolved before the administration goes back to the bond market, as it plans to do Thursday. –

Is Frerichs proposing to freeze the calendar until that happens? Because the construction season is now.

At the last GO bond sale in January, the overall interest cost was 3.9%.

At any time from 1970 to the Great Recession, you’d have been dancing to get that rate on AAA-rated muni bonds.

See the third chart in the link below.

http://www.munibondadvisor.com/market.htm

Comment by wordslinger Wednesday, Jun 15, 16 @ 10:30 am
===Does he have that authority?===

Yes. Granted by the GA.

Try the Google first, please.

Comment by Rich Miller Wednesday, Jun 15, 16 @ 10:32 am
Treasurer, please have the cake (lay down your warnings and concerns financially) and eat it too (sign off on the sale so road builders have jobs).

Comment by Gone Wednesday, Jun 15, 16 @ 10:45 am
–But the outside world is watching too and not liking what it sees.–

Once the bonds hit the market, the “outside world” will snap them up in less than 20 minutes with demand exponentially exceeding supply.

Comment by wordslinger Wednesday, Jun 15, 16 @ 10:46 am
Does this mean the Wall Street attack on pensions backfired? Beccause pensions are paid by ILSC order. Are bonds possibly subject to appropriation?

Comment by illinois manufacturer Wednesday, Jun 15, 16 @ 10:48 am
Despite Rauner’s efforts in running around the state banging the drum for the downgrade, in advance of the $550m issue, imho there rate will probably be lower than in January.

The world economy has changed since then, and all the
Big Money will snatch up this offering at a lower rate than we think.

I hope I am right. It would be kind of ironic for old market maker Rauner.

Comment by cdog Wednesday, Jun 15, 16 @ 10:50 am
–Despite its fiscal chaos, Illinois still brings in plenty of revenue to cover debt service on bonds. What’s more, state law gives bondholders first crack at those revenues, meaning they’ll likely get paid before any money goes to struggling social services agencies stiffed by the state. “We don’t think the state of Illinois is likely to default on its (bond) debt anytime soon,” Hampton says.–

Yet Moody’s keeps whacking the rating like the state is a Banana Republic.

See the ongoing scam here?

Comment by wordslinger Wednesday, Jun 15, 16 @ 10:50 am
I’m sure the Laborers and Operating Engineers appreciate Frerich’s comments. /s

Comment by phocion Wednesday, Jun 15, 16 @ 10:58 am
“===Does he have that authority?===

Yes. Granted by the GA.

Try the Google first, please.”

But I like coming *here* for all the answers!

Comment by Just Arrivin' Wednesday, Jun 15, 16 @ 11:23 am
Better to be cautious than have the state face another securities fraud charge by the SEC.

Comment by Formerly Known As... Wednesday, Jun 15, 16 @ 11:32 am
== so if we can sell bonds for non-daily operational expense then we can sell bonds to fund the pensions to say 60%… ==

The pension debt will never be bonded out because then the State would have to make all bond payments on time. An IOU to yourself offers too much flexibility.

Comment by RNUG Wednesday, Jun 15, 16 @ 11:58 am
Good story on NPR yesterday on bond sales:

http://www.npr.org/2016/06/14/482044543/bonds-pay-less-than-zero-as-investors-flee-to-safety

Comment by Anon221 Wednesday, Jun 15, 16 @ 12:00 pm
== Are bonds possibly subject to appropriation? ==

Payments on bonds and payments into the 5 pension funds are both authorized by ongoing appropriations.

Comment by RNUG Wednesday, Jun 15, 16 @ 12:00 pm
Unless we could get negative rates RNUG a thousand year bond of 200 billion at minus .00001 percent solved all our problems.

Comment by illinois manufacturer Wednesday, Jun 15, 16 @ 12:05 pm
- illinois manufacturer -

LOL. Can I add my personal debt into that deal? About $150K would do it.

Comment by RNUG Wednesday, Jun 15, 16 @ 12:08 pm
- illinois manufacturer -

Speaking of which, that reminds me of the “loan” deal Billy Carter got from the Arabs when Jimmy Carter was President. If memory is good, it was zero interest with no repayment schedule.

Comment by RNUG Wednesday, Jun 15, 16 @ 12:14 pm
+1 to Gone. Or is Frerichs really wanting to say we shouldn’t have a summer roads and bridges program?

Comment by More Courage Wednesday, Jun 15, 16 @ 1:47 pm
Does anyone care that Bruce’s and Rahm’s banker friends make gobs of money of us from all this instability? Higher rates go to someone. It’s either their friends, Dubai or some other non-tax payer.

Comment by Jerry Wednesday, Jun 15, 16 @ 3:47 pm
Jerry, do you have a source for your assertion at 3:47?

Comment by Arthur Andersen Wednesday, Jun 15, 16 @ 4:33 pm
Maybe this is too much in the realm of conspiracy theory, but I firmly believe part of Rauner’s master plan is to make IL so bloated with debt, we HAVE to declare the equivalent of bankruptcy. The ultimate reset for IL.

Comment by cailleach Wednesday, Jun 15, 16 @ 5:22 pm
Probably not the vote of confidence Rauner was hoping for from Moody’s.

But kind of them to go on record noting that Bruce Rauner is reckless borrowing more than half a billion dollars that places services for the elderly in even higher jeopardy at the height of the state’s fiscal crisis.

And, Democrats can now attribute that to a Crain’s Chicago Business story.

If there is one thing less popular that raising taxes, it’s more borrowing.

Comment by Juvenal Wednesday, Jun 15, 16 @ 5:32 pm