Illinois is in deep trouble: What investors need to know

From Fox Business: Illinois is locked in a political stalemate, and in danger of becoming the first U.S. state to have its debt downgraded to junk status. S&P Global Inc. threatened to take that action if Gov. Bruce Rauner and Democratic Speaker of the House Michael Madigan can’t agree on a package of spending and taxes by the start of the next fiscal year on Saturday. Below is a breakdown of what this unprecedented event would mean for everyone from individual investors to large Wall Street money managers.

Who owns Illinois’s debt?

Much of Illinois’s $25 billion in outstanding general obligation debt is held by individual investors seeking a stable source of income, according to analysts’ estimates. But Wall Street is also exposed via mutual funds, hedge funds and insurers that purchased the state’s bonds. Money management giant Vanguard Group has $1.2 billion spread across seven mutual funds. It is the biggest holder among all mutual-fund firms that had a total of $4.5 billion in Illinois bonds as of the first quarter of 2017, according to research firm Morningstar.

What would a downgrade do to those investments?

Not much, say analysts. They predict prices would drop only a few cents in the event of a junk downgrade. Currently the state’s general obligation bonds are trading at nearly 100 cents on the dollar. Junk bonds don’t usually trade at par, but state general obligation debt is considered safer because states have broad power to tax and lack the legal ability to declare bankruptcy.

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