Illinois Turmoil Sparks Ratings Warning; Debt Sale Postponed
Still, municipal bond market participants saw no unusual trading of Illinois bonds and notes amid the political upheaval from the Tuesday arrests. Two investors expect the postponed deal to get done eventually, albeit at more onerous pricing terms for the state.
But the blow to Illinois' credibility adds onto the raft of issues the state, like other municipal governments, faces already. Borrowing costs for municipalities are soaring to unprecedented levels, from a combination of pressures from hedge fund selling to recessionary woes.
"(The) faster the political taint is lifted, then the quicker the state returns to being priced just off the economics. And the economics are bad enough," said David Kotok, chief investment officer and chairman at investment advisory firm Cumberland Advisors in Vineland, N.J.
Even before the turmoil, Illinois was facing a daunting fiscal landscape. The governor's office recently estimated the state budget deficit at $2 billion, with other estimates running as high as $2.3 billion, even after $1.4 billion in cuts made by the Blagojevich administration.
"The ratings agencies are understandably looking at states that are putting these numbers out there," said John Filan, executive director of the Illinois Finance Authority, which issues bonds for the state, in an interview with Dow Jones on Thursday.
S&P, in its release late Wednesday, placed Illinois' double-A general obligation bond rating on a downgrade watch because the criminal charges "may challenge the state to respond to this fiscal situation on a timely basis."
The prospect of impeachment "does not bode well for future cooperation between the governor's office and the legislature," the report added.
Little impact is seen for those who already hold Illinois GO bonds. "It's not going to hamper the state's ability to pay principal and interest (on its bonds) over the next 30 years," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management.
But it forced the state to postpone the sale of $1.4 billion in general obligation certificates aimed at addressing a $4 billion backlog of unpaid bills.
"None of the allegations have any relationship to or impact on the state of Illinois' cash position, the need for short-term financing, or the ability of the state to repay the short-term financing," said state budget director Ginger Ostero in a statement.
And muni market participants expect the state to raise its funds, which one person said could happen next month.
"In the end, they'll put enough structural checks and balances and security provisions for the bondholders, and they'll get the deal done," said John Flahive, director of fixed income at BNY Mellon Wealth Management.
But one investor believes the market hasn't fully grasped the extent of Illinois' fiscal problems. For instance, the state has the largest percentage of unfunded pension liabilities in the country. It reduced its contribution to pension funds by $2.3 billion over the past two years, due in part to burgeoning returns from equity investments.
"The shortfalls in the pension obligations for government employees and teachers are really rather large," said John Mauldin, president of asset management firm Millennium Wave Advisors in Arlington, Texas, which manages more than $500 million. "Illinois is going to be one of those states that will have to seriously impact its spending and taxing habits in order to deal with this."
- By Romy Varghese, Dow Jones Newswires; 201-938-4287; romy.varghese@dowjones.com
- By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com
(Andrew Edwards contributed to this report.)
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Publié le 11 Décembre 2008 Copyright © 2008 Dowjones
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