(Bloomberg Opinion) -- Illinois doesn’t get as much attention as some other Midwestern states around Election Day. It’s no secret why: Unlike Iowa, Michigan, Minnesota, Ohio and Wisconsin, it’s not even remotely close to being a toss-up for the presidency.What it lacks in White House intrigue, however, it more than makes up for in its own drama.Illinois has long held the unenviable distinction of being the lowest-rated U.S. state. Its retirement systems are so underfunded, and have been for such a long time, that the phrase “Illinois pensions” is practically used as shorthand among Republicans in Washington as a reason the federal government shouldn’t send a huge aid package to state and local governments to help them get through the pandemic. One of the lesser-known reasons for Illinois’s struggles is its own constitution. As it stands, any state personal income tax must be a single-rate structure — that is to say, flat. That’s relatively rare across America: Of the 41 states that tax wage and salary income, just nine had a single-rate structure as of 2019, according to the Tax Foundation. At 4.95%, Illinois’s current rate keeps it competitive with Indiana and Michigan, which also have a flat-tax structure, and makes it more favorable for top earners than Iowa, Minnesota or Wisconsin. But, of course, that comes at the expense of getting less revenue from its wealthiest residents than states like Connecticut and New Jersey, which also have underfunded pensions but are still seen as better off than Illinois.Illinois has the lowest investment-grade ratings (BBB-/Baa3) and negative outlooks from the three biggest bond-rating firms. One more downgrade and the state’s debt would become the first in at least the last half-century to be rated junk.Governor J.B. Pritzker, unsurprisingly, wants to avoid that outcome. He’s been championing a “Fair Tax for Illinois” since his gubernatorial race in 2018, a constitutional amendment that would allow for a graduated income tax as long as voters approve the ballot measure next week. This is how the constitution’s language would change:(a) A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State. In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.In anticipation of voters ratifying this amendment, the Illinois General Assembly passed, and Pritzker signed, a measure more than a year ago that lays out the new tax brackets that would take effect at the start of 2021. For individuals who make $100,000 or less, the income tax would be slightly lower than the current 4.95%. The marginal rate would jump to 7.75% for income above $250,000, 7.85% for income above $350,000, and for those making more than $750,000, Illinois would impose a 7.95% rate on all taxable income rather than just the amount that exceeds that threshold. It would bring in about $1.2 billion for the fiscal year that began July 1 and $3.1 billion for a full 12 months, according to state estimates.Considering Illinois is facing a $4.1 billion budget shortfall in fiscal 2021, it’s not hyperbole to suggest that the passage of this amendment is a make-or-break moment for the state’s finances. Illinois’s credit rating is on the ballot this year: A failure to win over voters on the “Fair Tax” will most likely push the state into junk territory.But don’t just take my word for it. Citigroup Inc. municipal-bond strategists led by Vikram Rai wrote in a report this month that “a downgrade is almost guaranteed” for Illinois if the tax measure isn’t approved. A rating cut would increase the state’s borrowing costs by 50 basis points, they wrote, to roughly 4% for 10-year bonds from 3.5% now. Yet, by their logic, even passing the amendment isn’t necessarily an all-clear. Rather, voters throughout the country will also have a say in whether Illinois can maintain its investment grade:If the progressive tax ballot measure passes but Republicans retain control of the White House and Senate, the outlook for downgrade is nebulous, essentially a toss-up. Finally, if the progressive ballot measure passes and Democrats take over the White House and the Senate, Illinois may be able to avoid a downgrade after all since more generous fiscal aid can be expected from the Federal government, which will go a long way towards reversing the deterioration in the state’s credit.Put plainly, Illinois could use a “blue wave” to help get a handle on its budget, which was already in precarious shape before the Covid-19 pandemic. Remember that Senate Majority Leader Mitch McConnell, a Kentucky Republican, said in April that he “would certainly be in favor of allowing states to use the bankruptcy route,” rather than what he saw as a move to “bail out state pensions.” Illinois isn’t in such a dire position yet, but it doesn’t take much imagination to see how draconian cuts at the state level could harm its cities and counties. On Monday, Chicago Chief Financial Officer Jennie Huang Bennett said she’s “not sure” the city will “get through the budget season without a downgrade.” Moody’s Investors Service has considered the city junk since 2015.There’s a risk, of course, that higher taxes on top earners could accelerate outmigration from the state. Ken Griffin, the billionaire founder and chief executive officer of Chicago-based Citadel, has donated $20 million to the “Coalition to Stop the Proposed Tax Hike Amendment.” Griffin is the richest person in the state, and the coalition also includes Sam Zell, the second wealthiest. Pritzker, himself a billionaire and one of the state’s 10 wealthiest residents, has donated more than $50 million to the “Vote Yes for Fairness” committee.For all the millions sloshing around over a policy question, there’s been relatively little in the way of robust polling on the topic. One survey released in March, just before the Covid-19 pandemic roiled the economy, showed that 65% of Illinois voters supported the amendment. That’s a larger share than Joe Biden, the Democratic presidential nominee, is expected to receive, according to FiveThirtyEight. But even that margin doesn’t make it a certainty. The Illinois constitution’s threshold is approval from “either three-fifths of those voting on the question or a majority of those voting in the election.” If you assume that the amendment’s opponents are more motivated voters, and enough of those who would say “yes” leave the response blank, it’s possible to come up with scenarios in which the graduated income tax falls short.I’m not sure if more people would vote on the amendment if they were told Illinois’s credit rating would be cut to junk if it fails. But that’s precisely what’s on the line. In non-bond market terms, that would mean more of the budget is eaten up by debt payments, which would further erode the state’s pension funding and public services. In a “periodic review” of Illinois’s credit rating published on Oct. 23, Moody’s noted that “the state's pension liabilities are worsening while its financial capacity is suffering from reduced revenue,” adding that “while the rating reflects the dramatic economic downturn caused by the current coronavirus epidemic, the situation for some states remains fluid.” It’s not hard to read between the lines.No politician wants to raise taxes if it can be avoided. But Pritzker and lawmakers are out of moves and need the ability to pull in more revenue in the coming years to make ends meet. Whether that happens is in the voters’ hands now. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Citigroup Inc. plans to deepen its corporate banking presence in developing countries from Russia to South Africa even as some rivals decamp to focus on their home markets.The lender has overhauled its business in eastern Europe, the Middle East and Africa to focus on emerging economies. The third-largest U.S. bank is betting unprecedented deal opportunities will follow the economic slump caused by the coronavirus pandemic, weak oil prices and political uncertainty.As part of the revamp, Citigroup in September shifted 29 of its operations across these three regions and another 30 units in countries where it doesn’t have a presence, creating a single emerging markets cluster.“We’re going to look at increasing the canvas for the bank compared to where we are now,” Naveed Kamal, chairman of EMEA EM corporate banking, said in an interview.The expansion contrasts with some of its European rivals. Deutsche Bank AG and Barclays Plc have scaled back or retreated from Africa to focus on their home markets. Standard Chartered Plc is cutting staff and reducing its presence in Dubai, along with Nomura Holdings Inc. and Credit Suisse Group AG.“We’re already hiring new resources and will hire more people as the opportunity grows,” Kamal said. “It will be a combination of either hiring more or reallocating resources.”Bigger BucketsDemand for emerging-market assets will increase substantially as global asset managers and pension funds look to generate higher returns in the low interest-rate environment, Rizwan Shaikh, co-head of Citigroup’s EMEA EM corporate-banking division, said on the same call.“Even a slight change to that mandate will mean substantial funds coming into emerging markets,” he said. “We want to be ready for that change.”Direct lending platforms set up by sovereign wealth funds like Mubadala and Qatar Investment Authority are further opportunities for the New York-based bank and its competitors.The lender’s emerging-markets business could get a further boost when Jane Fraser takes over as chief executive officer in February given her experience in some developing regions.“We’re excited about the entire region especially in light of the last seven to eight months,” said Aziz Rahman, co-head of EMEA EM corporate banking. “We see a common thread in EM from companies and sovereigns who are either looking to raise capital, do refinancing, and/or do more acquisitions and grow.”The bank expects sovereigns to keep tapping markets for their capital needs, with bond and sukuk sales from the Middle East and North Africa hitting a record $115 billion so far this year.Fiscal Space“These countries have significant sovereign wealth and fiscal space to borrow for investing in their economies for growth and to fund deficits,” Kamal said.The bank is the third top arranger of debt and sukuk sales from the Middle East and North Africa, behind HSBC Holdings Plc and Standard Chartered, according to data compiled by Bloomberg. It ranks third for Eastern European bonds after JPMorgan and BNP Paribas SA, and fourth in Africa.To complement the bond-sale spree, state-owned firms are also turning to asset sales to support their economies.Citigroup Sees Asset Sales Boosting $47 Billion Gulf Debt BingeWhile Citigroup isn’t expecting a big rush for liquidity from regional clients any time soon -- mainly because of quarterly earnings that either met or beat expectations -- this is poised to change.“There will be need for capital as things normalize and our clients look to reinvest for growth,” Shaikh said. “Most have held back spending in the past months and we expect pent up demand to drive a lot of capital raising in debt and equity.”(Updates with comment from co-head for EMEA EM in second paragraph after ‘Bigger Buckets’ subheadline)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- Krafton Inc., the company behind the hit mobile game PlayerUnknown’s Battlegrounds, said it hired Mirae Asset Daewoo to lead an initial public offering planned for next year, in what could be South Korea’s largest ever debut.The company plans to accelerate its stock offering plans and has also hired Credit Suisse Group AG, Citigroup Inc. and JPMorgan Chase & Co., the company said. The country’s Kakao Games Corp. went public last month and more than tripled in its first two days of trading.Krafton could be valued at about $26 billion, based on the multiples for fellow Korean game makers Netmarble Corp. and NCSoft Corp., according to local media reports. That would make Krafton one of South Korea’s largest companies.About $9 billion in stock may be sold in the sale, Maeil Business Newspaper reported. The country’s largest IPO to date was the $6 billion debut of KT Corp. in 1998, followed by Samsung Life Insurance Co.’s $4.3 billion share sale in 2010.Krafton is backed by China gaming giant Tencent Holdings Ltd., which became the second-largest holder in 2018, when the company was known as Bluehole. Tencent held a 13.2% stake as of June 30, according to a regulatory filing. Co-founder Chang Byung-gyu owns the largest stake, controlling 41% when including shares held by his wife and other executives.PUBG, as the studio’s biggest hit is known, is one of the pioneers of the “battle royale” format of online multiplayer games, popularized in recent years by titles such as Epic Games Inc.’s Fortnite.Story Link: PUBG Maker Krafton Hires Mirae Asset Daewoo for IPO Next YearFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.