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Muni Week Review / Preview 2/1/2016

Monday, Feb 01, 2016

FEDERAL OVERSIGHT COMING TO PUERTO RICO. PUERTO RICO DEBT RESTRUCTURING PLAN D.O.A. NJ GETS READY TO TAKEOVER CONTROL OF A.C. ILLINOIS PREPARING FOR A CPS TAKEOVER. MUNI BOND YIELDS APPROACH ‘50’ YEAR LOW.

Federal Control Board Recommended For Puerto Rico… At a U.S. House committee hearing on Tuesday they discussed the potential establishment of a federal fiscal control board for Puerto Rico. Puerto Rico Resident Commissioner Pedro Pierluisi said any congressional legislation would have to follow similar measures applied to Washington D.C. two decades ago as he asked for an independent board to approve fiscal plans on a long term basis while preserving the democracy of islanders.  Puerto Rico could benefit from federal oversight noted former Washington D.C. Mayor who was Washington D.C.’s chief financial officer when Congress established a fiscal control board in D.C. during the late 1990s.  A non-voting member of Congress, Mr. Pierluisi called for some type of debt restructuring as did an academic and an Illinois democrat.  A push by Democrats to extend Chapter 9 bankruptcy protection to the commonwealth has not gained traction.  A lawyer for the largest holders of Puerto Rican bonds, Franklin Advisors and Oppenheimer Funds argued that the only way Puerto Rico will regain investor confidence is with the establishment of “a strong, independent and federally appointed Authority” akin to that used in D.C. and that Chapter 9 would hinder, not help the situation. Mr. Pierluisi said he will work across political lines to try to find a solution while House Natural Resources Chair Rob Bishop noted that the House can meet a March 31 deadline set by Speaker Paul Ryan to provide a responsible legislative package to ease Puerto Rico’s troubled finances. Former Puerto Rico Government Development Bank President who has chaired a local fiscal control board set up in 2009 saw the drawbacks of local control and suggested that Congress provide a framework for over-sight while allowing Puerto Ricans to manage affairs and report progress.

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Puerto Rico Restructuring Plan D.O.A… Puerto Rico’s debt restructuring plan unveiled Monday proposed a 46% debt reduction. It is unlikely to get much traction from bondholder groups and is probably D.O.A. (Dead On Arrival) because it would require bondholders to accept big losses on holdings.  The problem with the proposal is that key groups of bondholders, notably those holding GO debt and sales-tax revenue bonds (COFINA), believe they have strong constitutional and legal protections and probably aren’t going to accept hits of the magnitude that the commonwealth is proposing. As one muni portfolio manager told Barron’s, Puerto Rico will need to gain access to municipal bankruptcy protection through Chapter 9, which currently seems unlikely, in order to have any chance of cramming down a plan on creditors. Bondholders and even a bankruptcy judge are unlikely to agree to any plan along the lines of the one proposed today. Puerto Rico now doesn’t have access to Chapter 9 – Congress has refused so far to grant it such authority – and is seeking a consensual agreement with creditors.  Another manager says that this amounts to an opening hardball proposal from Puerto Rico that likely will have to be modified significantly to have any chance of getting serious consideration by bondholders. All this suggests is that the Puerto Rican debt restructuring plan, which creditors say is not a serious offer, will not go anywhere.

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Puerto Rico Bondholders Launch Campaign… Calling on Congress to defend the laws that protect America’s retirees, the 60 Plus Association, a bondholder coalition, launched a campaign asking Congress to reject attempts to violate Puerto Rico’s Constitution and the law and pay the bonds that are protected.

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PREPA Renews Agreement… Long running talks to restructure $9 billion Puerto Rico electric utility debt, a deal regarded as a model for the U.S. Commonwealth’s other indebted agencies seeking to reorganize debt, are back on. Holders of 70% of Puerto Rico electric utility debt extended the deadline for the passage of the PREPA Revitalization Act until February 16 after hashing out terms for additional financing. Creditors will provide $111 million financing through the purchase of new bonds: half will be bought after Puerto Rico passes the PREPA Revitalization Act and the remainder when the securitization structure is submitted to the Energy Commission for approval. Bondholders’ financial advisor said that encouraging public statements by Puerto Rican leaders including the governor, House and Senate leaders make it unequivocally clear that they want to get the deal done and that the additional 25 days is sufficient for the legislation to be passed. PREPA’s chief restructuring officer said, “We have a long way to go and there remain many uncertainties, but if implemented PREPA's transformation will have a positive, lasting impact on its finances, operations and culture.”

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Governor Proposes 5-Year State Takeover For Atlantic City… New Jersey Governor Christie called for a complete state takeover of Atlantic City for five years, winning the backing of the city’s mayor who termed the plan as a “partnership”. “We looked at the options: Do nothing, have a state takeover, file bankruptcy or form a partnership,” Mayor Guardian recognized that although city officials were against a takeover they “need the force that the state brings with it” to redo contracts with civil service unions and renegotiate debts. The agreement falls short of an outright takeover by the state of the city’s government, but it would leave state officials to make all of the important decisions about how to reduce its crushing debt of $240 million and slash the size and cost of its civil services.  Additional layers of state oversight and new revenue sources proposed by the governor combine elements of previous proposals to keep Atlantic City out of bankruptcy. This includes allowing the state to restructure city debt, terminate municipal contracts including with unions, dissolve city departments, consolidate or privatize municipal services and sell city assets. Some form of legislation that the Governor previously vetoed, which was aimed at boosting cash flow and stabilizing tax base with fixed payments in lieu of property taxes from casinos could be reintroduced.  Governor Christie wants to get the plan cleared by Feb-end. State Senate President Sweeney said, “We have to do some things that are very, very dramatic.” Recent developments led S&P to cut Atlantic City’s debt rating to “CCC-” and its public schools’ general obligation rating to “BB-”.  Moody’s, which rates the city at “Caa1”, expects state legislature to develop a plan that will empower the New Jersey Local Finance Board to implement budget improvements and restructure municipal debt while the Mayor would like state aid for the distressed city. The mayor said, “We’re not dead, we’re just wounded.”

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Illinois Preparing A Chicago Public Schools Takeover… As budget problems continue to bear down on Chicago Public Schools, Governor Bruce Rauner announced Tuesday that the state is preparing to take over the city’s beleaguered  school district. The announcement comes a day after Chicago Teachers Union leaders unanimously rejected CPS’s union contract proposal. Rauner said that he has already told the state Board of Education to search for a new CPS superintendent. “The state’s going to be ready to step in and take action,” Rauner said. “I asked our administration. I believe it’s coming. I believe a state take-over is appropriate.” Rauner said the union’s rejection of the school district’s contract should be a “wake up call” for both Mayor Emanuel and Chicago’s taxpayers. He also called CPS’s contract “unaffordable.” Rauner says the union is partially responsible for the district’s budget woes and the contract rejection shows lawmakers a state takeover is needed.

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Muni Bond Yields Approach ‘50’ Year Low… Benchmark municipal bond yields are nearing the lowest in five decades, on concerns weakening global  growth will spur a U.S. Slowdown. The yield on an index of 10-year “AAA” rated munis dropped to 1.70% the lowest since January 2013. A Bond Buyer index of 20-year general obligations yielded 3.38%  within a 0.12% point of the lowest since 1965.

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