Anyone who has ever invested in distressed securities is intimately familiar with the many games that companies play to avoid a bankruptcy filing. The easiest game, and the most obvious red flag for investors to spot, involves stretching out payables and managing down receivable days to build cash so you can live to fight another day. While this may provide a temporary cash boost, it's typically the beginning of the end as vendors simply move payment terms to COD and the game quickly comes to an end.
Well, this is exactly the game that the state of Illinois seems to be playing right now to cover its budget shortfalls. As we just pointed out a couple of days ago (see "Illinois Pension Funding Ratio Sinks To 37.6% As Unfunded Liabilities Surge To $130 Billion"), with a $130BN pension underfunding and minimum annual contributions of $10BN, it's no surprise that Illinois needs every dollar they can squeeze out of vendors.
So, in response to their budget crisis, Illinois has done what every responsible, insolvent debtor does, namely raise more debt. Under the program, Illinois vendors are able to sell their receivables to a consortium of lenders who have decided to provide seemingly perpetual loans to the state at a cost 1% per month. As Reuters points out, the balance of the program is currently around $13.5BN right now but is expected to surge to $47BN by 2022, or nearly double the amount of GO bonds the state has outstanding.
Political feuding between Republican Governor Bruce Rauner and Democrats who control the legislature has kept Illinois without a full operating budget since July 2015, contributing to a doubling of the unpaid bills backlog. The amount of overdue bills could reach $13.5 billion, or 40 percent of available operating revenue, when the current fiscal year ends June 30, the Rauner administration has projected.
Come fiscal 2022, the backlog is projected to balloon to $47 billion. No other U.S. state defers payments to the extent Illinois does to manage cash flow, credit-rating analysts said.
The one-of-its-kind, bill-payment program seeks to avert the nightmare scenario for a state in the worst financial shape in the country: a shutdown of essential services such as employee health insurance, a disruption of prison food supplies or mothballing of state trooper cars in need of fuel and maintenance.
“I don’t think there is any other alternative for us,” Illinois Central Management Services Director Michael Hoffman told a legislative panel in May.
The state's negative credit outlook means its $26 billion of outstanding GO bonds could lurch closer to the junk level if the growing unpaid bill pile impairs its ability to provide essential services, affects debt payments and inflates its already huge $130 billion unfunded pension liability.
And, of course, interest payments on the ballooning debt balance is skyrocketing.
And, like any good Illinois public project, this one comes with a healthy dose of corruption and favors to political insiders.
The firms include financial institutions such as Citibank N.A. (C.N) and Bank of America Corp (BAC.N), a distressed debt investor tied to a Rauner campaign donor, and political insiders, including Hillary Clinton's 2008 campaign manager and a former two-term Republican Illinois governor.
Lindsay Trittipoe, majority investor of the second-largest consortium, Illinois Financing Partners LLP, told Reuters his group was performing a vital function rather than exploiting the state’s financial miseries.
"Our money is flowing into the market, helping the wheels of commerce to keep working," he said.
We're rusty on our 7 step plan, how long does the "denial" phase typically last?