Oh Illinois!

July 25, 2011


Oh Illinois!

Illinois has massive problems: the state has more liabilities than assets, and the credit-default swap market says they are the number one state at risk for default (see chart above). The Bond Buyer ran an excellent story on how the liabilities of Illinois are rapidly increasing:

In a sign of Illinois’ ongoing fiscal challenges, its net assets deteriorated by $8.4 billion in fiscal 2010, pushing its deficit in that category of financial reporting up to a negative $37.9 billion, according to a new report from state auditor general William Holland.

The figure takes into account the state’s accounts payable that were $9.1 billion in fiscal 2010 and $55.1 billion of debt obligations, including outstanding bonds and pension obligations. The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers.

Even with their credit problems, analysts at Thomson Reuters Municipal Market Data see Illinois’ general obligations bonds as tradeable. From their Municipally Speaking note today:

[T]his credit is not “out of the woods” but nevertheless (perhaps due to higher personal and corporate income taxes) Illinois spreads have decreased quite dramatically.

In January we were very optimistic about investors’ ability to achieve outperformance with Illinois paper. Spreads were +240bps for 5yrs and +223bps for 10yrs.

Today we are more cautious as this credit’s GO trading may be a little bit ahead of itself. Spreads are +140bps for 5yrs and 10yrs.

Muniland debt offerings

Projected municipal bond issuance for the week of July 25 is $4,355,989,000. See the details here: Ipreo Muni Deal Calendar. Your state may have bonds coming to market.

Bankruptcy watch

Muniland will be on watch this week for what will potentially be the largest bankruptcy filing that has ever occurred in the U.S. Jefferson County, Alabama has been sliding towards this filing for over three years. The massive weight of $3 billion of debt is too much for the citizens of the county. County commissioners are waiting for bondholders, led by JP Morgan, to respond to a settlement offer before filing. Reuters reports:

Alabama’s troubled Jefferson County faces an 80 percent chance of declaring bankruptcy, one of its commissioners said on Thursday, as U.S. experts gathered to discuss the implications of a possible Chapter 9 filing.

Another commissioner said the county has yet to hear a response from creditors over its proposal that $1.3 billion be shaved off its crippling $3.2 billion sewer bond debt as part of a settlement to avoid what would be the largest municipal bankruptcy in U.S. history.

Money still dribbling in

From a research note by Chris Mauro of RBC Capital Markets:

Municipal bond funds posted positive aggregate net flows of $123 million in the week ended July 20, 2011 according to the Lipper US Fund Flows Service.

This is the second consecutive week of positive net fund flows and the fifth positive week in the last seven. However, once again, the flows were concentrated in short/intermediate funds and high yield funds.

Long term municipal funds are still not participating in the improvement in municipal bond fund flows we have seen since early June.

Twitter talk

@michele_norris: Overheard circle of gray-haired women tsk-tsking abt pols acting like little children while the nation’s economy teetered on the brink

@zerohedgeProjected Treasury August Daily Cash Sweep Balance http://is.gd/xh6cnm

@EllnMllr:  Do you live there? The 20 most toxic states. http://bit.ly/pfFIm9

@CorbinHiar: Insane: RT @mental_floss Americans spent $50B on lotteries in ’09. 11 states had more revenue from lotteries than corporate income taxes.

@StatesideAssoc: MN a proposed law would prevent future government shutdowns http://bit.ly/oZ8OpM

@munigov20: 10 Reasons Why City Governments Should Embrace Hackathons: bit.ly/oh5Jac. What reasons would you add?

Good links

Zerohedge: Summarizing The Various Debt Plans And What Happens After The Now Assured US Downgrade

U.S. News and World Report: Meet 3 Ratings Agencies That Have Already Downgraded the U.S.

Bloomberg: Meredith Whitney Wins If We Lose Meaning of Default: Joe Mysak

Wall Street Journal: When States Default: 2011, Meet 1841

Financial Times: New York’s brush with bankruptcy

Stateline: Is Nebraska’s cash balance pension a model?

Wall Street Journal: Softer Approach on Pension Problems

Bloomberg: Low-Rated Hospitals Selling as Changes in Health Funding Loom: Muni Credit

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