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Muni Week Review / Preview 1/18/2016

Monday, Jan 18, 2016

PUERTO RICO REVISES PAYMENT GAPS AHEAD OF TALKS WITH INVESTORS. BOND INSURER SPEAKS OUT. MUNI BOND PRICES MOVE HIGHER.

Puerto Rico Revises Payment Gaps Before Talks… According to an updated fiscal plan released by the U.S. commonwealth that hasn’t supplied audited financial for two years, Puerto Rico is running out of money faster than expected, leaving an increasing hole in the amount needed to operate and pay investors over the next decade.  Puerto Rico’s new estimates show the common-wealth about $16 billion short of the money it needs to cover debt payments over the next five years, a figure 15% larger than in the plan released by the island in September. The gap over 10 years is almost $24 billion, even with planned fiscal adjustments. Melba Acosta, president of the Government Development Bank for Puerto Rico, said those changes would be reflected in a comprehensive restructuring proposal for creditors being prepared by the commonwealth, which will include both government cuts and losses for investors holding a variety of municipal bonds from the island.  Puerto Rico will cut spending this fiscal year by $250 million and lower the commonwealth’s fiscal 2016 budget to $9.27 billion from $9.8 billion, as the island collects less revenue than anticipated.  U.S. Treasury Secretary Jacob Lew urged Congress to pass legislation by March to help ease Puerto Rico's economic crisis.

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Puerto Rico Creditors Seek Plan… Monarch Alternative Capital, Whitebox Advisors and other hedge funds that hold Puerto Rico General Obligation, development bank and sales tax bonds could release a reorganization plan publicly later this month if they’re able to formulate one with a broad swath of creditors. Creditors have also begun reaching out to some bond insurers to shape the proposal. A final plan could probably involve investors swapping existing bonds for new ones whose seniority is determined according to their existing securities’ rank.  Although Puerto Rico officials met with bondholders’ advisors in October, they haven’t yet unveiled a plan. Bondholders want to resolve Puerto Rico’s debt crisis before the commonwealth possibly defaults on its direct debt. Government Development Bank president indicated July 1, General Obligation payment is in question, the COFINA payment is safe.

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Insurer Speaks Out… Meanwhile, Assured Guaranty criticized Puerto Rico Governor  Padilla for “feigning concern about the absence of a legal framework” while at the same time taking an ‘illegal action’ to claw-back the pledged revenues of municipal bonds to pay general obligation bonds an action that “violates the constitutional rights of the holders and insurers of bonds issued by three authorities.  Assured Guaranty said, “Unlike Gov. Garcia Padilla, we believe the U.S. District Court for the District of Puerto Rico is the appropriate forum to resolve the clawback litigation; instead of doing everything within their power to legally manage their debt, reform their government and rebuild their economy, the government of Puerto Rico has instead adopted a strategy to deliberately promote a ‘crisis narrative' intended to gain retroactive access to bankruptcy from the U.S. Congress.  This strategy has worsened Puerto Rico's situation, eroded its credit and delayed prospects for recovery” and Assured “will take all steps necessary to ensure that existing law is correctly applied to the debt it insures” and that “this will help protect the public's confidence in the municipal bond market, which is threatened by Puerto Rico's reversal of its willingness to acknowledge its obligations.”

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Credit Positive For Insurers… Moody's said that PREPA restructuring agreement is ‘credit positive’ for Assured Guaranty and National Public Finance Guarantee Corp., PREPA's two biggest bond insurers, “since it does not result in an impairment of insured PREPA bonds and provides for a much im-proved credit profile of their PREPA exposures going forward due to the planned securitization of PREPA's cash flows to debt service.”

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Hearing on PREPA… A commit-tee of U.S. lawmakers examined the electric system of Puerto Rico, whose government defaulted on $37 million of bond payments this month. It didn’t delve into the broader fiscal crisis gripping the Caribbean Island that’s struggling to repay $70 billion of debt left from years of borrowing to pay bills. Puerto Rico’s main electric provider cannot pay $1.13 billion due to creditors between now and July 1 without approval of an unprecedented debt restructuring deal struck with insurance companies and bondholders last month. Puerto Rico lawmakers must approve legislation this month.  In another venue, a Federal Court will likely rule in 1Q on allegations of a 13-year conspiracy to pass on fraudulently high electric prices to the Island’s rate payers.

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Munis Valued Higher… Average yields on 10-year munis fell to 1.82 percent, the lowest since February 2015, as bonds matured and were called away faster than issuers could sell new debt in the market.  Net issuance for 2015 is negative $15 million as nearly two-thirds of almost $400 billion new municipal bonds refinanced higher cost debt.  For an unprecedented fifth straight year investors saw more muni bonds being paid off than sold by states and locals. As states and local governments gained fiscal strength, fewer short term notes are being issued echoing the broader trend of low supply.  Analysts say the trend is set to continue as the muni market is expected to contract by $219 million in the next 30 days amid high demand. In the 15th consecutive week of inflows, close to $1 billion came to muni bonds last week.

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Atlantic City Update… Atlantic City needs to cut the expense of its police and fire departments, which make up 69% of salary budget said Emergency Manager Kevin Lavin as he called out his recommendations to turn around the distressed seaside resort under state appointed emergency management for over a year.  The City should also look to outsource other services, such as its health department, tax assessor, and sanitation and seek more collaboration from casinos. After state lawmakers passed bills to shore up the City’s near term fiscal stability that diverted some gambling funds and established fixed payments from casinos in place of real estate value based levies, the Emergency Manager announced recommendations noting, “I still believe we have the pieces to effectuate a turnaround for Atlantic City outside of a chapter 9 bankruptcy.”

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Partial PA Budget Credit Positive For Schools, Moody’s… A partial budget appropriating more than $23 billion for Pennsylvania schools eases reliance on bank loans and ensures enough liquidity to meet daily expenses including debt service.  The partial budget is a short term solution (cash infusion) to a short term problem (cash depletion from lack of state funds) and PA schools must address long term challenges including competition from charter schools and pensions. Credit Positive: Keystone State schools, community colleges and certain colleges which operated without any state aid for half a fiscal year are now set to receive funding on par with 2015 levels.

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New York Bonds… $6 billion of New York bonds to be sold in fiscal 2017, of which more than half will finance education and transportation projects. With 66% more bonds to be issued Empire-State related debt will grow to $55 billion.  Governor Cuomo has called for capital spending of $12 billion in fiscal 2017, multi-year commitments of $22 billion to upgrade bridges and roads along with $20 billion for affordable housing.  More than $1 billion will finance the Tappan Zee Bridge and freeze or cut tolls on the New York State Thruway.

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Pension Funding… “Most states made budgetary contributions at or close to their actuarially determined contribution levels,” per Moody’s. Thirty-six gave more than 90%. Only two fell below 60% New Jersey 18% and California at 48%. Driven by strong investment returns, adjusted net pension liabilities declined in 2014 for 27 states, although 50-state aggregate liabilities increased to $1.3 trillion.  On average, actuarially determined contributions are 2% of state revenue. As state revenues grew, pensions became slightly more affordable for most states.

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

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