Illinois Bond Spreads Explode As Market Pukes On Latest Batch Of Bad News

Tyler Durden's picture

On June 1, first S&P the Moody's almost concurrently downgraded Illinois to the lowest non-Junk rating, BB+/Baa3 respectively, with both rating agencies warning that the ongoing legislative gridlock and budget crisis need to be resolved, or else Illinois will be the first ever US state downgraded to junk status.

S&P analyst Gabriel Petek explicitly warned that "the unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments" and warned about Illinois' inability to pass a budget for the past two years amid a clash between the Democrat-run legislature and Republican Governor Bruce Rauner. As we have documented previously, the ongoing confrontation has left the fifth most-populous US state with a record $14.5 billion of unpaid bills, ravaged entities like universities and social service providers that rely on state aid and undermined Illinois’s standing in the bond market, where investors have demanded higher premiums for the risk of owning its debt.

Bypassing its traditional 90-day review, a terse S&P also warned that Illinois will likely be downgraded around July 1, when the new fiscal year begins if leaders haven’t agreed on a budget that starts addressing the state’s chronic deficits.

Unfortunately for Illinois, and its bondholders, the downgrade - and the subsequent imminent "junking" - was just the tip of the iceberg.

As Bank of America wrote in its latest muni market report, among the $14.7bn backlog of bills (as of 5 June) to be paid by the state of Illinois due to the protracted budget impasse is some $2bn-plus in Medicaid-related payments owed to the private insurers the state contracted with to manage roughly two-thirds of its Medicaid recipients. Those payments amount to some $300mn per month. A number of private insurers have sued in U.S. District Court for the Northern District of Illinois to prioritize their payments over those due to other vendors.

Then last Wednesday, following the Illinois downgrades, the court ruled against the state. The judge ordered the parties to "continue to negotiate to achieve substantial compliance with the consent decrees in these cases. If they cannot reach a negotiated solution, either party may make an appropriate motion, to be noticed for presentment on June 20, 2017."

The day before the court ruled, the state submitted a filing with the Court, arguing that should the court prioritize those payments - effectively making them on par with so-called "core payments" which include debt service - it could trigger another downgrade from the rating agencies. Indeed, included in Moody's downgrade report under the headline "Factors that could lead to a downgrade," Moody's points to "[c]ourt rulings that increase the volume of payment obligations that are legally prioritized."

The state asked the court in that filing that, if it were to rule against the state and prioritize those Medicaid payments, that it make its order effective 1 July, requesting so for two reasons:

  • It "likely will avoid an immediate downgrade and also would send a message to the Illinois General Assembly and Governor that they have until June 30 to resolve the State's budget impasse and avoid the consequences of the Court's order. If the budget impasse is not resolved by July 1, that fact alone likely will lead to a rating downgrade, regardless of the effective date of the Court's order."
  • It "will give Defendants some additional time to determine how to comply with the Court's order."

Additionally, the Illinois Comptroller warned against an adverse ruling, saying the state would "have to go to the courts and ask them: 'OK, out of all of these court-mandated payments, which ones am I allowed to violate?'"

With all that, the court still ruled against the state saying that the Court said it believes the Comptroller "faces an unenviable situation," though it finds "that minimally funding the obligations of the decrees while fully funding other obligations fails to comply not only with the consent decrees, but also with this court's previous order."

So for anyone confused, here is a summary of what happened: a judge ruled last Wednesday the state is violating consent decrees and previous orders, and instructed the state to achieve "substantial compliance with consent decrees in these case." The order may prioritize those payments, elevating them to the level of "core payments," such as for debt service. The state has warned that could trigger an immediate downgrade from Moody's. The state asked the court that the order become effective on 1 July as it could pressure the state to end its protracted budget impasse.

* * *

Separately, there was a glimmer of hope for the woefully underfunded state: according to the Illinois Commission on Government Forecasting and Accountability's (CGFA) May Monthly briefing, May net revenues of $2.19bn were up $144mn, or 7.0% compared to the same month a year ago. Personal income tax collections performed well during the month, bringing in $1.17bn, $179mn, or 18.1% more than in April 2016. Sales tax collections also performed well, outperforming April 2016's collections by $36mn, or 5.5%. However, the state's other significant revenue stream - the corporate income tax - underperformed, with collections of $81mn coming in $72mn, or 47.1% less than a year ago.

And while April marks the third consecutive month of Y/Y outperformance, a glimmer of sunshine in an otherwise dready Illinois monetary landscape, the recent burst in receipts is likely a fluke especially since fiscal year-to-date collections of $26.54bn are $955mn, or 4.3% behind last year. The culprit: local businesses, as corporate income tax collections have been the main cause under-performance, falling $909mn, or 41.3% on a year-over-year basis.

What happened next? As Bank of America writes, with bondholders still digesting the recent downgrades and the inevitable downgrade to junk, news of the adverse court ruling caused spreads on Illinois' GOs to blow out. As of last Thursday, the month-to-date spreads on Illinois widened by 69bps, surging just shy of 250 bps as the market absorbed the headlines. Then according to Bloomberg, the OAS on Illinois 5% GO due Mah 2015, soared nearly 40 bps since last Thursday.

The chart below shows how the spreads have moved wider each day since the month began. On Thursday the spread widened out by 28bps, compared to average 8.2bps it moved the previous five days. Since then the move has accelerated.

Finally, Reuters today reported that Illinois appears to have essentially thrown in the towel on getting junked,  and has negotiated lower credit rating termination triggers for its interest-rate swap deals with banks, "which stood to pocket fat fees if the state is downgraded to junk as soon as next month, a spokeswoman for the governor's office said on Monday. "

Eleni Demertzis, the governor's spokeswoman, said the rating levels that would trigger the termination of four swaps - two with Barclays Bank, and one each with Bank of America and JP Morgan - were dropped a notch to the second level of junk - BB with S&P or Ba2 with Moody's.

Without this step, downgrades to the first level of junk by S&P or Moody's Investors Service could have forced the cash-strapped state to pay the banks as much as $39 million in fees to end the swaps, according to the Illinois Comptroller's office.

In short, while Illinois won't be punished with higher swap termination costs when the downgrade to junk hits, all other negative side effects of being the first "fallen angel" state in history will remain, chief among them far higher borrowing costs.

* * *

And while the recent blow out in spreads has been nothing short of stunning for the otherwise sleepy muni market, a far bigger problem awaits both Illinois, which faces substantially higher borrowing costs, and bondholders, whose principal losses are starting to hurt, if the state fails to pass a budget for the third consecutive year and is downgraded to junk. A default is also not out of the question.

Traditionally, sharp moves in the bond market - such as thise one - have been sufficient to prompt politicians to reach a compromise, although in a world in which central banks have always stepped in to make things better, we fail to see how or why the Illinois auto pilot, which is currently set on collision course with insolvency, will change direction any time soon.

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NoPension's picture

They don't care.

No one. Not one....will EVER be held responsible in any way, shape or form. No pol will lose his or her pay or pension....or go to jail for malfeasance.

No adverse repercussions personally. None. So....why give a flying fuck?

WorkingFool's picture

Awe that's a shame. Who could have seen this coming?

And fuck Obama

gregga777's picture

The Demo-Marxist Party and Repussican Party political parasites are more interested in lining their pockets from the carcass of government and through accepting bribes from CONporate interests than they are in being faithful public servants looking out for the best interests of all Americans.  The American People are going to have to step up and look out for their own interests because the system is in the process of a slow-motion collapse all over the United States of America.  

frank further's picture

Everyone should give YUUUUUGE thanks that Odumbo is no longer president.  Can you imagine the bailout talk by now if he still was?

Kprime's picture

I think 3 new libraries should funnel a half a trillion into the Illinois economy.  Keeping in mind there are no businesses or individuals left in Illinois.  The entire economy is government corruption and theft.

Brought to you by the Union of Community Organizers.

gregga777's picture

Never forget that much of this was set in motion by the Banking Gangsters and CON Street Swindlers stealing $ TRILLIONS before, during and following the Greater Depression that began in 2007 and still continues.  


All public and private pension funds in the United States are grossly underfunded (i.e., INSOLVENT).  You can thank the Goldman Sachs Feral Reserve System's +8 years and counting of ZIRP and near-ZIRP for that, too.


Also, don't forget that almost 102,000,000 (102 MILLION) of your fellow working age Americans are unemployed, notwithstanding the LIES promulgated by the Goldman Sach Feral Reserve System and US Bureau of Lying Statistics.

johnf322's picture

Illinois was in trouble 100 years before "the great depression" as you call it. The unions and politicians have colluded to sodomize the citizens relentlessly.

silvercity's picture

100% of all governments that now or have existed have one singular purpose only. That is to aquire as much money as possible from the citizens with-in their juristiction and pocket it for themselves, their families, and their associates. Government has no other function no matter the illusions.

SmittyinLA's picture

Soo have swap fees been triggered?

vegas's picture

Illinois is a shitbox; run by corrupt Pols and Sheeple keep returning them to office every year; unfucking believable. The only people who live there are "the free shit crowd" & the elderly waiting to die cuz they were too fucking stupid to save enough money and retire to a place like Florida. Did you ever meet a socialist who thought somebody elses money wasn't really his to take? Welcome to Illinois.

Dragon HAwk's picture

Just tell the state police to crank out more speeding tickets for out of state drivers, 

pretty soon they can shut down the border, and rot from the inside out.

gregga777's picture

I avoided Illinois altogether when I drove from Florida to Washington State in 2015.  I didn't even want to give them a nickel in fuel taxes or sales taxes.  

Pumpkin's picture

Who, WHO, gives Illinois credit?  Dumbs asses deserve what they get.  FYI, is is a lying cesspool of liberals.

Singelguy's picture

Who gives Illinois credit? Investors who are 99% certain that they will get a bailout from Washington.....eventually.

squid's picture



No sympathy here.....

You wanna lend money to a state that is run by Democrats and expect to get it back?




Fuck the bond holders. This is what should have happened in 2008.

Let the party begin.


All this crap would be over by now if TARP and QE had not happened. Glass Steigal would have been brought back and baba in the PEN would have a whole team of toy boys for his shower entertainment.


So, they saved the banks.....ok.

But they won't/can't save the bond holder.....and that's a good thing.

Imagine the shit show THAT WILL HAPPEN when coupon rates go to 20% for Illinois? That will be it, they'll have to run on taxes alone because they can't afford to borrow. Watch the state employee unions scream blue murder.


I need more popcorn.



highwaytoserfdom's picture


Rahm Emanuel  Ezekiel  health care     then again Ari was Trump's agent.   Is totaly expected and planned by the Globalist...   

Now we have a chance to see  if this  SOROS  funded collapse can be stopped..    

Oh yea it was Rombama insurance plan...   and  these  vampire squids  were allowed to get away with murder (literally 20m since the Dulles shit show)..

Well MAGA  lets see what kinda Cajonies you have..

Page 37    JPM 26T swaps,  Citi 27T swaps, Goldman 21T swaps, Bank America 11T swaps.  DB not listed any more....   Cohn I'm watching  Donald you talked to bond buyers and you know what to do...  Give the AlanBenFellon a ass kick......   first thing to stop is freeze SOROS stop funding his color revolution in USA and get some help Chi-raq  NOW

Now want to know who bought the bonds...  


itstippy's picture

The gist of the article is that Illinois creditors are turning to the courts to get themselves designated as "core primary payments".  Currently the "core primary payments" (first in line) are interest and principal payments on existing debt (of course).  The butchers, the bakers, the candlestick makers who have provided actual goods and services to the State Of Illinois and are waiting to get paid are only paid after all interest and principal due on existing debt has been paid.  State pensioners and Medicaid providers come after the financiers get theirs in full. 

Illinois can't just stiff their financial creditors and pay the actual goods & services providers out of current revenue streams, because the revenue streams aren't big enough to even do that - they must continue to borrow money (issue bonds) to meet operating expenses.  If they don't make their interest payments they will be unable to issue more bonds. 

Illinois is Greeced.  The banks will get paid, and the citizens will suffer.  Illinois citizens will continue to pay more and more taxes and receive fewer and fewer services as the money is siphoned off to pay the bondholders.

I am damned glad my home and business is in Wisconsin.  Illinois is truly fucked.

SDShack's picture

I agree the banks will get paid, no matter what... even if it has to be a bailout because of TBTF, ala TARP 2008. But don't think ALL bond holders will be bailed out. That didn't work for GM bondholders, and I suspect it won't work for any non-TBTF bond holders either. TBTF bankers will be fine, but the pensioners will be treated like GM Union Workers and will probably take a hair cut, but you can bet the average taxpayer will bear the brunt of the inevitalbe bailout. No way legislators are going to piss off millions of pensioners that could vote them out of office, so they will raise taxes on everyone as a compromise to force pensioners to take a hair cut, but nothing more. Just more can kicking. There is no way TPTB can let this ponzi fail because that means people starving in the streets and riots, and that is the only way things really change, so it can never happen. It's why the weaponized security state was created as the ultimate safe zone for TPTB against the sheeple, just in case it does all start to fall apart. Plan accordingly.

Bloodstock's picture

Downstate Illinos cities such as Peoria, Champaign-Urbanna, Springfield, Bloomington-Normal with demoncrat mayors are focused on stupid liberal control shit such as zoning changes to benefit crony developers running out and/or burdening small independent business owners. Putting bike lanes an main arterial roads. Constructing bike lanes along old Route 66 paths for the occassional bicyclist. It's so bad, even State Farm is moving to Phoenix, Dallas, and Atlanta to escape higher tax burdens. There's really no hope here, it's out of control and will take years to get back on track. The liberal transfer of wealth and crony capitalist shit is out of control. Unless you like kissing ass to get ahead, leave and/or don't move here.

lasvegaspersona's picture

But still OK to fly into RFD right?

I refuse to go into Ohare...

Bloodstock's picture

I imagine it's ok to fly in, but like I said, I wouldn't recommend staying here unless you like kissing ass. Lived here all my life, by years end I'll be moving out. The libturds have seized too much control and it will take years for any normalacy to reappear. The state is broke and the bigger cities are continuing to spend money foolishly. Many of them running high deficits and are too far behind to fulfill pension obligations etc. These fuckers have NO sensibility of living within their means. Just tax the people,,,tax,,,tax,,,tax. Cronyism is very alive in all of Illinois. Be forewarned.

Tapeworm's picture

RFD sucks too. I flew down there pn my Cessna 140 and the winds were so high that I took the first exit after a 300 ft approach. It was a pain in the ass dealing with RFD cintrol.for not going to their garbled insstuctions. No other traffic.

mark3383's picture

Bike lanes in Chicago are hillarious in a way only a person with functioning independent brain cells would appreciate. Five months out of the year theyre completely empty and they reduced normal good roads to small little one lanes in either direction that made it worse for 99% of the people using them. But hey theyre green (???)

Pvt Joker's picture

Illinois just renegotiated some credit default swaps to avoid having to pay an extra $39 million in fees if or when the credit rating is downgraded to junk.  No details yet,but we will probably find out Illinois will have to pay $78 million over several years in order to avoid the up front penalty next month.

SmittyinLA's picture

Imagine if Illinois taxed swap fees, a whole new source of income.

Who would stand up for the "swap fees guys" tax free status?

I think 92% municipal income tax on swap feees is a nice starting point on a sliding scale up to 99.7%

Thomas Jacobs's picture

Think you want BBB- not BB+ for lowest investment grade rating.

As to hairball48, you make it sound like the typical IL citizen can really do something about this.  I have been here since '99 and other than leaving for IN, have no idea what more a responsible person can do.  I mean, I voted for Rauner as well.  This just seems to be a very advanced case of what most of us will face irrespective of the state we reside in when all the promises come due.

CHoward's picture

3 years without a budget yet it's required by their state constitution.  Obviously anything in their constitution can be avoided then, right?  Fuck Illinois.

foodstampbarry's picture

Who gives a fuck about Illinois, Obama Democrat shithole.... His name was Seth Rich.








Sam Spayed's picture

Why would anyone buy Ill. bonds???

mary mary's picture

Just a reminder: the South has rattlesnakes, moccasins and coral snakes, 100 species of mosquitoes, black widow spiders, hurricanes, 4 months of sweltering heat and humidity every year, tons of retirees who drive 30 miles an hour and forget where they're going, lots of folks who still sport Confederate Battle Flags, chew tobacco, and carry guns in their vehicles, and, of course, lots of black people, Cubans, Mexicans, etc.

Mike Rotsch's picture

Yeah. . . of the two, I think the South would be more appealing.  At least you're free.

mark3383's picture

well you had me until that last part 

Drop-Hammer's picture

The corrupt jews and negroes did a number on Illinois.

Jethro's picture

You omitted the white, liberal enablers that left to go create liberal, bankrupt cesspools elsewhere.'s picture

2017 triple witching: State of Illinois, County of Cook, City of Chicago


I've manage to remove myself from two of the three.  Getting out of Illinois will take some additional effort.

isthatall's picture

Some folks bin cheated. Kind of like the fools that think the warriors will win tonight. 

The best team ever put together, has been sidelined by a lousy 11 million in revenue.


Are you fuckin kidding me?

isthatall's picture

Some folks bin cheated. Kind of like the fools that think the warriors will win tonight. 

The best team ever put together, has been sidelined by a lousy 11 million in revenue.


Are you fuckin kidding me?

lasvegaspersona's picture

glad to be FROM there....

just the tip's picture

reviewing that backlog chart over time, i get the impression that those policies do not have an overnight effect, but do accumulate as time goes by.  it appears that the illinois legislature was anticipating a third term for the HNIC.  and may still get it.

BoxHead1's picture

Time for the feds to work out a plan to help Illinois recover from its fiscal mistakes.

We are all in this together.  Pony up.

MrSteve's picture

Pony up? We gonna need a harness full of Clydesdales to pull this mess out of the ditch!

VW Nerd's picture

I wonder what the Illinois bonds are yielding??  At BB+,  I'm guessing 10%+.  If so, vulture capital could profit handsomely from their misery as long as the courts don't subordinate the bonds.

mark3383's picture

Chicago is hard core communist. You cant have conservative / libertarian opinions here and all the brain dead zombies here not consider you a member of the KKK/Hitler. This is where they successfully - and proudly! - shut down a Trump rally last year. Also the most lawsuit happy counties in the country - great for small businessmen like me. I was dragged in front of the EEOC last year for a made up charge by a black female former employee and the question wasnt if I was guilty it was only how guilty I was. Got off light at 10K. Never move here unless youre part of a large corporation that can purchase protection and favors. 

Fox-Scully's picture

But I thought it was Puerto Rico and not Puerto Illinois.

Muppet's picture

Puerto Rico at least has bought a signigicant politician in its pockets: Speaker Paul Ryan.   Illinois has notta.

SmittyinLA's picture

Be funny to see creditors force Illinois out of medicaid

Muppet's picture

? "corporate income tax - underperformed, with collections of $81mn coming in $72mn, or 47.1% less than a year ago"

Government math.

IridiumRebel's picture

My best friend moved to Cali 5 years ago. His cunty leftist wife, and the cult proglodytes that surround him, have turned what used to be a good ol' country Kansan into a faggy Cali true believer. It sucks cuz I love the guy.

Anyway, I can't wait until California shits the bed. I hope it assfucks that fuckin shitty cult state.

"Even those sums understated the problem. As a backlash grew to the larger bills that it was sending to municipalities and the state, CalPERS used a series of fiscal gimmicks to limit the immediate impact on balance sheets. Typically, to protect governments from violent swings in contributions every year, pension funds like CalPERS average their investment returns over three years, hoping that good years offset bad years. In 2005, CalPERS extended the performance average to 15 years, an extraordinarily long period that blended the fund’s losses in the 2000s with its gains way back in the 1990s—thus reducing state and local governments’ immediate costs, which remained overwhelming nevertheless. Then, in 2009, CalPERS told governments that they could pay off the higher bills from the previous year’s scary market drop over the next three decades, pushing the bill for the financial meltdown to the next generation. The pension fund made a similar move in 2011: after revising downward its absurdly optimistic predictions of future investment gains, it gave governments 20 years to finance the higher resulting costs."