Illinois GOs mount secondary market comeback after lawsuit tossed


Illinois bonds rallied after a judge ruled against litigation that sought to void repayment of $14.3 billion in state general obligation bonds.

Yields fell after the judge’s order came out late Thursday, narrowing spreads to levels at or near where they were before the lawsuit’s July 1 filing.

An appeal by the plaintiffs could still complicate the state’s near-term debt issuance plans, said Moody’s analyst Ted Hampton

A 2028 maturity with a 5% coupon traded post-ruling at a 150 basis point spread to the Municipal Market Data’s AAA benchmark compared to a previous spread of 178 bps, said IHS Markit strategist Edward Lee. A 2029 maturity with a 5% coupon traded at the same 150 bp spread compared to a prior level of 173 bps.

Illinois GOs in the 2026 to 2029 range were generally trading at a 150 bp spread to the AAA compared to 170 before the ruling, said Daniel Berger, senior market strategist at MMD-Refinitiv.

State GOs 10 years and out had jumped to a high of a 175 bp spread to the AAA benchmark over the last month compared to a 140 bp spread before the lawsuit’s July 1 filing.

“Bonds that were potentially affected if the lawsuit had been success had been trading at a discount to other like Illinois issues, as much 35 bps, quickly recouped that differential” after the ruling, ICE Data Services said in a Friday market comment. “The actively traded pension system bond due in 2033 moved up from $106 to $109 yesterday, representing a 30 bp decline in yield.”

Whether the rally will hold remains to be seen since the petitioner plans to appeal the judge’s decision to deny him permission to bring a taxpayer action challenging the validity of the debt.

“The court finds reasonable grounds do not exist for filing the proposed complaint,” said the order denying John Tillman’s petition.

“I strongly disagree with the court’s decision, will appeal and am confident that I will prevail,” Tillman said.

The petitioner — who is head of the Illinois Policy Institute, a frequent critic of state fiscal policies — had argued that the state’s $10 billion 2003 pension bond issue and $6 billion 2017 deal to pay down the state’s bill backlog failed to meet state debt guidelines because of what they were used for and the lack of information as to the “specific purpose” for their issuance. About $14.3 billion is still outstanding.

Sangamon County Circuit Court Judge Jack D. Davis II found the bond issues did offer specific enough language to pass constitutional muster and said that to allow the case to proceed would result in the improper interference with the application of public funds.

“The judge’s ruling today denying a lawsuit that sought to invalidate some of Illinois’ general obligation debt is positive for the state and in line with our view that the plaintiffs’ argument lacked merit,” Moody’s Investors Service lead Illinois Ted Hampton said in a statement Thursday. “However an appeal by the plaintiffs could still complicate the state’s near-term debt issuance plans.”

The state’s next planned deal is a $1.2 billion GO issue to cut the bill backlog and budget officials have said a decision on the final details and timing will be made in the fall.

Moody’s rates the state’s GOs Baa3 with a stable outlook.

— Chip Barnett contributed to this story.

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