Wednesday, June 16, 2010

This is why we are in big trouble...

Bloomberg/Businessweek is reporting on Illinois latest bond sale, $455 Million in sales-tax bonds. Those are bonds that are backed by sales-tax revnue.

The bonds had the top rating (so likely AAA) from S&P and a AA+ from Fitch. Illinois' general obligation debt is rated A1 by Moody's and A by fitch it's 6th highest rating, remember that, it becomes important.

So these bonds were highly rated bonds....

Now for the first money quote from the story...

"The cost of insuring Illinois bonds for five years using credit default swaps was the second-most for any state at $291,000 per $10 million of debt yesterday, according to data compiled by Bloomberg. The cost has risen $47,000 since the Moody’s ratings cut. The highest was California at $297,000 per $10 million of debt."

Another way to look at (if I am doing the math right) is that the market is pricing in almost a 3% risk of default over the next 5 years.

Actually on the 12th of this month it was more expensive to insure Illinois debt vs. California debt according to FT (registration required).

From the same article.

Bonds with a 5 percent coupon maturing in 2020 yielded 4.02 percent, 82 basis points above top-rated tax-exempts, according to Municipal Market Advisors. Investors paid 108 cents on the dollar for the debt. A basis point is 0.01 percentage point.

So it is now almost costing Illinois almost a full percentage point more for it's debt that other top-rated debt (again these were bonds backed by sales tax revenue). This is senior lien debt, debt with a much higher rating than the general obligation bonds we are going to have to sell at some point to keep the state running. If the market is pricing default risk on our good debt this high (it appears to be more expensive for CDS on Illinois debt than some of the countries in Europe that are rumored to have issues if I am reading the CDS quotes right (a big if)). Imagine what it is going to be on lower quality debt from this state.


“The Illinois name is creating a drag on all the credits coming out of the state,” Kapnick said. “Ten to 15 accounts didn’t play because they said it was priced to tight with the Illinois name, regardless of the senior lien.”

Imagine what is going to happen when we are issuing lower rated debt that is not the senior lien. You think you are going to get more players in that market, you will end up pricing in the risk (the interest rate) as well as the hedge cost (CDS) into those rates the state will be paying on it's debt.

I can imagine what is going to be like as a taxpayer in Illinois, it's going to suck...


No comments: