Just two days ago we wrote about how, despite a budget deal signed back in July that called for a massive tax hike, Illinois' unpaid payables balance had ballooned to a new all-time record high of $16,046,145,423.20 according the comptroller's office (see: Illinois Unpaid Vendor Backlog Hits A New Record At Over $16 Billion).
...which was a 3-fold increase over the past two years.
Given that, you can imagine our surprise to wake up to the latest Illinois Bloomberg headline this morning declaring that all is well in the Prairie State and that bondholders are cheering the upcoming, massive $6 billion new GO bond deal by driving existing bonds to all-time highs.
As Illinois prepares for what may be its biggest debt sale in over a decade, its largest investors are celebrating a rally that’s transformed the state’s bonds from one of this year’s worst performers to one of the best.
Since the state in July resolved a two-year budget impasse that pushed its rating to the brink of junk, debt issued by Illinois and its local governments has vaulted to a 7 percent return this year, more than any other state, according to S&P Municipal Bond Indices. Until June 8, they were the worst performer among the five most-indebted states, which include Texas, California, Florida and New York.
The reversal came after lawmakers enacted a budget -- and raised taxes -- over Governor Bruce Rauner’s objections. They also extended Illinois authority to reduce a record pile of leftover bills by selling as much as $6 billion of bonds. It would be the state’s biggest sale since 2003 if done in a single offering.
Even more surprising was some of the praise offered up by asset managers on a state that, for all practical purposes, appears to be on a inevitable crash course with bankruptcy...this takes 'talking your book' to a whole new level.
Nuveen Investments: “It has turnaround potential,” said John Miller, co-head of fixed-income at Nuveen, which bought more Illinois bonds in late June and July as the budget came together. The firm plans to take a “hard look” at the $6 billion borrowing, calling it a “benchmark-type deal” because it may be one of the largest of the year, according to Miller, who cautioned that the state’s rising pension-fund debts are still posing risks
AllianceBernstein: “They’ve stopped the bleeding,” said Guy Davidson, director of municipal investments at AllianceBernstein. He said the firm is interested in buying more Illinois debt. “It’s not like we think they have solved their problems. We just think they’ve stabilized their problems.” Davidson said investors are “getting paid more than we think the risk entails”
Wells Fargo Asset Management: “They’re not under the gun as much as far as ratings go,” saidDennis Derby, a portfolio manager at Wells, which holds $40 billion of municipal debt. The firm would be “more comfortable” if the state took action soon to reduce the $16 billion of unpaid bills
BlackRock: The tax hike gives the state “more tools” to meet their expenses and obligations, marking an improvement, said Joe Gankiewicz, a credit-research analyst in Princeton, New Jersey, for the company, which oversees about $124 billion of municipal debt. The state’s unfunded retirement liabilities -- $130 billion, according to the Commission on Government Forecasting and Accountability -- remain an issue. “The pension expense is likely to outstrip the organic revenue growth in the state in the coming years,” Gankiewicz said
Perhaps these bondholders overlooked the fact that Illinois' 5 largest publicly-funded pensions are now $130BN underwater and only 37.6% funded?
Ironically, bondholders cheered tax hikes as the savior of Illinois' financial problems but repeated income tax hikes, property tax hikes and the state’s political dysfunction have resulted in record population losses over the last three years...
...to put it into perspective, Illinois loses 1 resident every 4.6 minutes.
Last time we checked, non-residents weren't on the hook to pay Illinois taxes...