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Muni Week Review / Preview 2/8/2016

Monday, Feb 08, 2016

PUERTO RICO DEBT RESTRUCTURING PROPOSAL. CHICAGO PUBLIC SCHOOLS (CPS) SELLS BONDS. MUNI BONDS CONTINUE TO RALLY ON DEMAND.

Puerto Rico Debt Restructuring Proposal Unrealistic… Even though Puerto Rico’s recent debt restructuring proposal projected bondholder recoveries above current market values, stabilizing prices, creditors labeled the proposal as not a serious starting point for negotiations. Creditor reactions indicate the Commonwealth in all likelihood will not get a counter proposal from bondholders. Assured Guaranty noted “It is extremely disappointing, but not unexpected based on recent behavior, that the Commonwealth did not seek any input from its creditors before releasing its initial restructuring proposal, which appears to ignore bondholder protections provided by its constitution - including protections that have been acknowledged by various Puerto Rican governmental offi-cials” National Public Finance Guaranty CEO stated that the proposal “fails to appropriately recognize the role that the capital markets have played in Puerto Rico's development and will need to play in Puerto Rico's pursuit of economic stability and future growth.” Bond insurers have emphatically slammed the proposal with AMBAC President saying, “It is difficult to engage in discussions since Puerto Rico refuses to share basic information.” It could take Puerto Rico at least until the end of March to release its audited financial statements for fiscal year 2014 per the island’s Treasury Secretary. KPMG, auditor for the Commonwealth, is less optimistic based on the government’s lack of cooperation in providing documents.

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How Will Congress Assist Puerto Rico… Puerto Rico and its creditors have been aggressively lobbying Congress on how to help Puerto Rico. A date to present an aid plan set by House Speaker Paul Ryan is the end of the first quarter, which would mean a bill could be passed into law during the second quarter. It appears that a strong Fiscal Control Board will be an integral part of the plan. The idea that all the island’s debt will be subject to a new restructuring law is misguided. It is unrealistic to believe Congress would jeopardize the integrity of the $3.7 trillion municipal bond market in order to help Puerto Rico fulfill a planned bankruptcy strategy. Along with a strong Control Board, Congress is likely to offer some type of restructuring tool along with assisting the island’s underfunded pension system. Congress is likely to act in a manner that protects the integrity of the muni bond market, which would be positive for municipal bondholders. The pundits will say Congress was pressured by Wall Street, while in reality by respecting bondholder rights and bond indentures Congress will be acting in a manner that is best for Puerto Rico and the entire municipal bond market.

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PREPA Revitalization Act Update… A bill that allows the restructuring of PREPA under a deal struck with 70% of PREPA’s creditors is scheduled to be voted on Wednesday Feb. 10 in the Puerto Rico Senate. Per Caribbean Business several other actions including the filing of rate reviews with the Puerto Rico Energy Commission are expected to be met within the timeline set under the deal with creditors known as the Restructuring Support Agreement. Although material challenges remain at PREPA and additional obstacles to an orderly restructuring could arise, Moody’s noted that resumption of negotiations with bondholders suggests the consensual debt restructuring is likely.

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Chicago Public Schools Sells Muni Bonds… Chicago Public Schools (CPS) sold $725 million in tax exempt municipal bonds last week it says will help get the district through the rest of the school year. Because the district had received a low credit rating, it had to offer an 8.5% yield on the majority of the 7% interest rate ($100,000 denominations) muni bonds sold Wednesday. The district is rated three levels below junk status by all three major rating agencies. Recent financial documents revealed the district, which had barely enough cash to make it through the year needed the money. Illinois Republican Gov. Bruce Rauner criticized the sale, saying the district and Chicago’s mayor have again “kicked the can” down the road. Ron DeNard, the district’s Vice President for Finance, says borrowing money is never done lightly. The district’s CEO said “We are buying time to fix the system.” The district’s ability to access the municipal bond market showed there is optimism CPS will be able to deal with its current fiscal strains.

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Munis Rally From Demand… For 18 straight weeks, individuals poured money into state and local secu-rities, the longest stretch since December 2014. Interest rates on 20-year general obligations are within 0.04% point of the lowest level since 1965. The persistent demand for tax-free municipal bonds is fueling a rally and making it hard for High Net Worth investors to find debt with yields more attractive than tax free municipal bonds. The turmoil in global financial markets has been a boon for municipal bonds.

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Atlantic City Gets 45-day Relief From Casino… A judge granted Atlantic City a 45-day reprieve to keep Borgata casino from seizing city assets to collect $170 million in tax appeals it owes the casino operator while allowing the casino to stop making current tax payments until the case is resolved. The Mayor said, “Although there is no doubt that we owe Borgata money back from prior rulings, the question has always been ‘how’ do we pay them back fair and reasonably given our current fiscal constraints. We appreciate the fact that Judge Mendez ruled that a 45 day extension be given so the City, Borgata, and the State of New Jersey can immediately seek mediation to come to a settlement. However, having Borgata exercise the option not to pay their first quarter taxes would be devastating to Atlantic City.” In February new state legislation is awaited that will empower the State of New Jersey to have more control over the city’s finances for five years.


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No Bets For More Rate Increases This Year... Traders are once again closer to betting the central bank will stand pat this year, let alone hike rates four times as policy makers projected in December when they lifted their benchmark rate from near zero. The market doesn’t fully price in another increase until September 2017, per Bloomberg data. Treasuries rallied pushing yields to the lowest in a year, as slumping global economies and pummeled oil prices drove down inflation outlooks to levels not seen in seven years.

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Pennsylvania Budget Stalemate… Pennsylvania Gov. Tom Wolf on Tuesday will present his next annual budget, even though the state’s gone seven months without one. As a consequence, schools have taken out loans to keep classrooms open, credit rating companies have cut or withdrawn their assessments and investors are demanding higher yields to purchase Pennsylvania bonds instead of other municipal debt. Wolf is expected to repeat his push for more education dollars in the face of Republican resistance. Pennsylvania is the only state besides Illinois operating without a budget, though the government is kept running and debt service is still being paid. Wolf in December relieved some of the strain on school districts by releasing about half a year’s aid through a partial veto of a stop-gap budget passed by the legislature.

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Republicans Favor Less Government Except in Distressed Cities… Republican Governors seizing power over city finances doesn't seem to mesh with the GOP platform, unless state intervention becomes the only option after years of failure by local officials, in most cases liberal Democrats, threaten the quality of life of its citizens. Illinois; Gov. Rauner is pushing for a state takeover of Chicago Public Schools. New Jersey; Gov. Christie has reached a deal with the Democratic legislature which gives the state considerable control over Atlantic City finances. Michigan; Gov. Synder signed a law in 2012 expanding the authority of state appointed emergency managers that oversee distressed city finances, including Flint where the water is contaminated. The bottom line if city officials are incompetent, the state must take control.

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

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