The spread on Illinois’ 2003 and 2017 general obligation bonds rose by 36% to 182 basis points from 134 basis points, and the trading price dropped relative to the broad market after the Warlander suit was filed, according to Nuveen and AllianceBernstein. Benchmark Illinois bonds are trading with a 3.03% yield, the highest among 20 states tracked by Bloomberg, and about 172 basis points more than top-rated debt, according to Bloomberg data.
Holders of the bonds had a paper loss of $574 million, the funds said. Illinois postponed until the fall a general-obligation bond sale to pay more bills.
Warlander’s suit is based on an incorrect reading of the Illinois constitution, Nuveen and AllianceBernstein said. Article nine, section nine of the constitution says the state may issue long-term debt only to finance “specific purposes” if approved by three-fifths of the legislature or by popular referendum.
A “specific purpose” refers to a description, not a limitation on the power to incur debt, the funds said. The three-fifths vote requirements acts as a limitation on the ability to borrow.
This story provided by Bloomberg News.