Illinois Seeks To Issue $8.75 Billion Bond To Pay Overdue Bills As Muni Issuance Market On Verge Of Shutdown

While Illinois' desire to finally tackle its unsustainable fiscal situation is admirable, the process is starting to disclose some very stinky rot below the surface. On the heels of the recent hike in the corporate tax rate, today Bloomberg reports that governor Pat Quinn is asking lawmakers to authorize an $8.75 billion bond sale. The use of proceeds? To pay $6 billion in backlogged bills: read invoices that the state has been unable to pay so far due to what technically should be classified as a liquidity crunch, and non-technically as complete lack of cash. Luckily, entities that are owed money by the state at least have a chance to get paid. Earlier, state House of Representatives defeated a borrowing bill that was designed to eliminate the pile of invoices that is at least five months old. The state's payment delinquency also includes pension funds: local underfunded pensions are owed almost $4 billion in payments by the state. In the meantime, Chicago CDS dropped on the news of the tax hike, declining from 28 bps to 300 yesterday, the lowest since December 9. Whether this means that the state will be able to find sufficiently stupid investors whose capital will go to nothing besides funding overdue invoices, is a totally separate matter however. Perhaps a good indication of the ravenous appetite for muni debt (in addition to the fresh 52 week low in virtually every single muni bond fund), is that the New Jersey agency has shrank the size of a proposed $1.2 billion refinancing offering by roughly 40% and hiked yields on the sale as it struggled to market bonds to investors on Thursday. As the secondary muni market is plunging, the primary market for issuance is on the verge of shutting down completely. Cue in QE3.

From Bloomberg:

Illinois Governor Pat Quinn will ask lawmakers next month to authorize an $8.75 billion bond sale to pay $6 billion in backlogged bills.

The state House of Representatives defeated a borrowing bill in the final hours of the legislative session Tuesday that was designed to eliminate the pile of invoices that is at least five months old.

It was part of a package of measures that included a 67 percent increase in the personal income tax aimed at plugging a $13 billion budget hole amid the state’s worst financial crisis. Legislators are to return to Springfield next month.

“We still anticipate getting the debt restructuring completed,” Kelly Kraft, a Quinn spokeswoman, said in a telephone interview today. “Once the revenue comes in, it will begin to bring in more money to address our backlog.”

Illinois and other U.S. states confront deficits totaling $140 billion in the next fiscal year, according to a Dec. 16 report from the Center on Budget and Policy Priorities, a Washington research group.

“You can’t have an economy that will grow if you tax and put a burden on those who will risk their capital that will in turn create the job,” he said in a speech to the Texas Public Policy Foundation’s annual legislative conference in Austin. “It’s just that simple.”

The criticism wasn’t shared by investors, who have looked with concern at the accumulation of bills and almost $4 billion in missed payments to underfunded pensions.

That's the problem. Unfortunately, the anticipated solution is not pretty. From Dow Jones:

A New Jersey agency shrank the size of a $1.2 billion refinancing offering by roughly 40% and hiked yields on the sale as it struggled to market the bonds to institutional investors Thursday.

A term sheet with preliminary pricing for the deal showed the agency--the New Jersey Economic Development Authority--sliced the size of an originally $1.2 billion sale to roughly $712 million Thursday.

Meanwhile, the yield on the longest maturity--a $78 million tranche maturing in 2024 with a 5.25% coupon--offered a 5.37% yield. That's 39 basis points higher than the yield offered on a similar maturity on Tuesday, the first day the bonds were sold to individual investors.

The move comes as the EDA sale appeared to have mediocre demand from individual investors Tuesday and Wednesday.

Andy Pratt, spokesman for state Treasurer Andrew Sidamon-Eristoff, said individuals ordered a total of less than $300 million of the bonds on those two days.

The bonds being refinanced are school construction bonds, backed by anticipated contract payments from the state, which are subject to legislative appropriation. Despite Gov. Chris Christie's recent budget cutting, New Jersey still faces budget challenges, and its pension is still significantly underfunded, with a 62% funded ratio as of June 2009, according to Moody's Investors Service.

Time to roll out Bill Gross for another pep talk?


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