July 2, 2019 – In a “flash” note issued late Monday, Citi’s municipal analysts Vikram Rai and Jack Muller cast aspersions on the plaintiffs (a hedge fund and Illinois Policy, a think-tank) of a lawsuit seeking to invalidate over $14 billion of Illinois General Obligation (GO) debt.

According to the note, Citi was “inundated with calls from clients who are concerned about the impact of this lawsuit.”

Given the recent, controversial First Circuit court decision involving special revenues at a Puerto Rico (which adversely impacted bond insurers and certain existing investors), there are questions as to whether the Illinois lawsuit is being backed by investors or related parties seeking to purchase Illinois debt cheaply.

On the merits, Citi believes that the issuance of pension bonds in 2003 and GO bonds in 2017 did not contravene Illinois’ state constitution, which prohibits deficit financing or borrowing to pay operating expenses. Further, Citi is of the view that any adverse court decision would be neutered by the State making bondholders hold.

On trading, Citi was of the view that Illinois credit spreads were already tight relative to fundamentals, thus going forward, spreads may have more downside even without the noise surrounding the lawsuit.

Thus, “bonds could cheapen marginally in light trading activity as the market absorbs this deadline”.

Contact Lisa Lopez at LL@BuyMuni.com.