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Muni Week Review / Preview 1/11/2016

Monday, Jan 11, 2016

AMBAC FILES SUIT TO HALT PUERTO RICO REVENUE DIVERSION. S&P BELIEVES PUERTO RICO DEFAULT A DELIBERATE CHOICE. HOUSE PUERTO RICO TO INCLUDE CONTROL BOARD. MUNICIPAL BOND BILL YIELDS PLUNGE TO 11 MONTH LOW.

Bond Insurers File Suit to Halt Puerto Rico Revenue Diversion… Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the constitutionality of the Commonwealth’s decision to divert revenue designated for some bonds to pay other creditors. AMBAC and Assured Guaranty said the clawback of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt holders’ contractual rights. The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation, according to a statement. “The Commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws, the pattern of activity is unacceptable,” said Nader Tavakoli, chief executive of AMBAC. The targeted clawback revenues include those of the Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority and the Puerto Rico Infrastructure Financing Authority (PRIFA). AMBAC paid $10.3 million in interest that was due Jan. 1 for the PRIFA bonds. The PRIFA default was the second by a Puerto Rico agency. The Public Finance Corp (PFC) in August began missing monthly debt service payments because lawmakers failed to allocate the funds. The PFC also missed a Jan. 1 payment. In a Dec. 29 letter to the governor and his admin-istration, bond insurers said the Common-wealth should return rum tax revenue to PRI-FA and end the clawback. The insurers calculate as much as $94 million was redirected before Dec. 1. That’s when Governor Padilla signed an executive order to begin the claw-back. The Highways and Transportation Authority and the Convention Center District Authority said last month that they would use reserve cash to repay investors after Puerto Rico redirected their revenue, according to regulatory filings.

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Puerto Rico Default a Deliberate Choice… The Commonwealth of Puerto Rico made payments for General Obligation (GO) and other tax-backed debt service due Jan 1, except for certain debt issued by PRIFA, and for municipal bonds already in default issued by the PFC. S&P believes Puerto Rico’s decision at this time to only default on what they view as a relatively small $36 million PRIFA interest payment reflects a deliberate choice by the current administration. The Common-wealth’s most recent quarterly report indicates federal rum excise taxes pledged to the PRIFA bonds totaled $189.2 million on a preliminary basis in fiscal 2015, which they calculate would provide 1.67x coverage of fiscal 2016 PRIFA full annual debt service. S&P believes the decision to default on the PRIFA debt, and preserve current payments on GO debt is an indication of the  Common-wealth’s very weak cash position and was not done lightly, as it opens up the Common-wealth to litigation. However, it shows Puerto Rico’s reluctance to default on GO debt where bondholders hold a particularly strong legal claim and could represent a shot across the bow to bondholders in ongoing restructuring talks, as well as serve as a signal to Congress that help is needed. The lack of current audited financial statements and detailed cash flow information creates great uncertainty as to Puerto Rico’s true financial position and the extent of the need to divert revenue bond money to payment of GO debt service. Puerto Rico’s Nov. 2015 disclosure report projected on a summary basis a consolidated negative cash position deficit of $277 million at the end of December, a magnitude that the Commonwealth would still not have been able to overcome solely by the announced bondholder revenue diversions. S&P believes this supports their view that cash predictions can-not be certain at this point.

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House Puerto Rico Bill to Include Control Board… House Natural Resources Committee to hold a hearing on Puerto Rico Jan. 12, Beacon Policy Advisors say in a note. “Seven members of the ultra-conservative Freedom Caucus are on the Subcommittee on Energy and Mineral Resources that will be hosting the hearing, included among them is Rep. Jeff Duncan (R-SC), who first authored a “Dear Col-league” letter in the middle of last year broaching the subject of a Fi-nancial Control Board for Puerto Rico.” Any bill drafted and voted on by the House “will not contain Chapter 9 bankruptcy protection and will contain a control board at least as powerful as the one contemplated in the Senate bill already introduced by Committee Chairs Orrin Hatch (R-UT), Chuck Grass-ley (R-IA) and Lisa Murkowski (R-AK).” Beacon Analysts say.

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Muni Yields Plunge to 11-Month Low… Muni bond yields plunged to the lowest level since February after investors plowed the most money into the tax-exempt market in almost a year. The yield on an index of 10-year ‘AAA’ municipal bonds has declined 0.09% this week to 1.91%, the lowest since Feb 5, according to data compiled by Bloomberg. Yields on ‘AAA’ bench-mark munis due in 30 years have dropped 0.07% since the end of 2015 to 2.83%, the lowest since  Feb. 11. The drop has been fueled by a flood of money into the $3.7 trillion mar-ket. Individuals added $1.3 billion in the week of Dec. 30, the most in almost a year, Lipper US Flow data show. It marked the 13th consecutive week that the muni market gained money, the longest streak since the end of 2014. “We’re performing well because of a lack of supply in our market, which is typical for early January,” said muni trading manager at BNY Mellon Capital Markets. “We’re also seeing a lot of customer cash being put to work and a lot of reinvestment money being put to work.”

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New Jersey State Senate Approves Atlantic City Rescue Bill… New Jersey’s Senate approved Governor Chris Christie’s changes to legisla-tion that Atlantic City needs to remain solvent, which now heads to the governor for his signature. Chris-tie in November returned to legisla-tors bills that would diverted some gambling funds that the struggling resort city was counting on to help close a $101 million deficit in 2015. Without the infusion, the city risks cash flow going negative by April or sooner, Moody’s said in a report last month. The legislative package also includes a measure that would establish fixed payments from casinos instead of levies based on real estate values, which would prevent tax appeals that strain the city’s finances. The centerpiece would allow the eight casinos to make payments in lieu of taxes for 15 years. It also includes measures redirecting casino investment taxes to help pay down Atlantic City’s municipal debt. The changes requested by Christie include having the state’s local finance board collect the revenue from the casinos and make its release dependent on the city’s fiscal progress. The state Assembly agreed to the terms last month.

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Chicago School Bonds Drop to 14-Week Low as Governor Denies Help… Chicago Board of Education bonds tumbled to the lowest since September as IL Governor Bruce Rauner said he wouldn’t just bail out the cash-strapped school system. The public school system known as  CPS has said it needs $480 million  from the state to close a budget gap and will face cuts and “unsustainable” borrowing without the funds. Chicago Mayor Emanuel and CPS Chief Executive Officer Claypool have called for the help, saying the system receives less state money than other Illinois districts. CPS is the only state district that pays for its teachers pensions. Rauner has said he’ll help out only if Emanuel supports structural changes that he has proposed such as limits on collective bargaining. “Let’s be clear Chicago Public Schools are in dramatic trouble,” Rauner told reporters.

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Illinois Ending Exile From Bond Market Amid Record Budget Fight… As Illinois prepares its first bond sale in almost two years, investors say the worst-rated state in America will pay for leaving its fiscal house in a shambles. Since it last sold GO bonds in April 2014, the Illinois Supreme Court threw out the state’s effort to cut workers’ benefits to help close a $111 billion pension fund deficit. Its credit ratings has been cut. And temporary tax increases have expired, leaving Republican Governor Rauner and Democratic lawmakers locked in a  record long impasse that’s left the state without a budget for more than six months.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.

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