Essay Sample. Reasons Why Credit Rating Firms Downgrade the Bond Rating of Illinois

Illinois is rapidly identifying itself a case study in the way not to manage finances in a state. Illinois' credit rating has been descending from 2009. Illinois has experienced downgrades in the previous two years from all the three leading credit agencies. S&P and Fitch recently gave Illinois one area above "junk" or "speculate" status whereby Moody's have a firm grasp that the credit rating of the state two spots above junk. Any of these rating agencies also have a negative outlook of Illinois. Some of the rating agencies like the Moody's investors have avowed that Illinois' bond rating at one point above the junk status, being the lowest rated in the state.

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One of the primary reasons why the credit rating agencies downgrade Illinois' bond ratings is the progressing collapse in the finances of the state. Moody's investors have the debt of the country evaluated at Baa2, just two steps above the junk bond standing, whereby the rating of S&P is currently BBB+, only three steps above junk. The two agencies, together with the Fitch evaluations, have given a negative view to their ranks, indicating a downgrade of the Illinois bond rating.

Illinois also has a lengthy history of unbalanced budgets. The credit rating agencies have criticized Illinois' long history of unbalanced budgets as a critical reason for its downgrade. Apart from Illinois running a sizable unpaid bill blockage from 2005, it has not also had a completely balanced budget since the year 2001. It is because of this that Illinois has experienced budget shortfall even during the boom period of the mid-2000s and even during the income tax hike in the 2010-2014, which initiated an extra thirty-two billion dollars into Illinois' coffers. Apart from those incomes, Illinois politicians have been spending beyond the means of the state by involving in poor mismanagement of finances as well as misplaced priorities. Over the years, Illinois has also been gathering more than enough income to pay for its significant expenditures.

Another reason as to why the credit rating agencies downrank Illinois' bond rating is because; Illinois has been unable to ratify spending reforms. The credit rating firms have also criticized the inability of Illinois to stop its spending because of lack of total budget. The credit rating firms such as S$P signaled that, unless Illinois sensibly tackles its continuing fiscal imbalance, more significant burdens, higher borrowing, as well as more downgrades on Illinois' taxpayers, are going to happen.

Another reason for the Illinois downgrade is the growing pension crisis of Illinois that threatens to become even bigger. According to the credit rating agencies, the recent lowering of funds of how much they presume their investments will earn in the market, together with poor investment returns, will probably lead to Illinois' needed annual pension contributions by a lot of billion dollars. Without resolutions, it is assured that the burden of pension on the taxpayers will even grow larger.

The political, economic, and managerial factors that affect Illinois' bond ratings

Major bond ranking firms like Fitch, Moody's as well as S&P; calculate the stability and standing of a company for the aim of giving a bond rating. The following are some of the factors that impact the bond rating in Illinois.

Factors that affect Illinois' bond rating

Several economic factors affect Illinois' bond rating, which include; the economic growth, the yield curve of the firm, inflation, and interest rates. All these factors influence Illinois' bond rating, and they also exert impact on each other. Poor management of Illinois has also contributed to significant influence when it comes to the credit bond rating of the firm. Illinois has weak control, which results in poor management of the state's finances; incomplete budgets which make it hard for the credit rating agencies have a practical assessment of the creditworthiness of the country. There also political factors that affect the credit rating bond of Illinois. These factors include corruption, elections, and stability. These factors make it very hard for the credit rating agencies to evaluate the bond rate of Illinois. The following are also additional factors that affect the credit rating bond of Illinois

Creditworthiness

Credit risk is among the critical factors that influence the bond ranking in Illinois. Credit risk is Illinois' potential to pay its debts back to the creditors. These debts comprise of interest and principal recompenses on dividends, loans as well as insurance recompenses. A bond is a debt element; therefore if investors buy bonds, therefore they turn into creditors of the firm where they purchased the relationship from. Illinois is less possibly to default on its unresolved debit, indicating that it shows a high degree of creditworthiness, has an excellent credit ranking typically. When the solvency of the firm reduces, the bond rating also decreases.

Main corporate events

When a beneficial prominent corporate event takes place, like introducing an inventive product, or an adverse occasion takes place such as a repute of the cooperate, bond rating firms usually put the bond rating of the corporate on review. These factors influence the bond ranking of the firm. The bond rating is downgraded in case of an adverse corporate event.

References

Belasen, A. R., Hafer, R. W., & Jategaonkar, S. P. (2015). Economic freedom and state bond ratings. Contemporary Economic Policy, 33(4), 668-677.

Santos, J. A. (2014). Evidence from the Bond Market on Banks''Too-Big-To-Fail'Subsidy. Economic Policy Review, Forthcoming.

Schuster, A. (2018). Bad Budgeting Basics: How Illinois' Budget Process Hurts Taxpayers. Illinois Policy Institute, Spring.

Schwert, M. (2017). Municipal bond liquidity and default risk. The Journal of Finance, 72(4), 1683-1722.