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Muni Week Review / Preview 2/15/2016

Thursday, Feb 18, 2016

PUERTO RICO ADVANCES PREPA RESTRUCTURING. CONGRESS ASKS PUERTO RICO GOVERNOR FOR ANSWERS. UNPRECEDENTED MID-YEAR BUDGET CUTS FOR CHICAGO PUBLIC SCHOOLS.

Puerto Rico Advances PREPA Restructuring… The Governor of Puerto Rico has signed the bill needed to finalize a deal to restructure the U.S. territory’s heavily in-debted electric utility. The measure barely passed Monday Feb. 15, with the minimum 26 votes needed from the island’s House of Representatives. Another 22 legislators voted against the bill, which seeks to reduce the utility’s $9 billion debt as well as diversify energy resources and boost public-private partnerships to overhaul aging infrastructure at the largest U.S. public power utility. The Puerto Rico Electric Authority reached the restructuring deal in December with bondholders. The utility warned it would run out of cash by summer without debt restructuring. Setting the stage for PREPA to complete a deal with 70% of its creditors, on Thursday Feb. 11, Puerto Rico’s upper chamber approved the PREPA Revitalization Act in a 16 to 10 vote. The bill passed created a new corpora-tion that will issue new bonds in exchange for legacy bonds, add a surcharge on electric bills, promote revised utility rates approved by the Energy Commission, invest $2.4 billion to modernize infrastructure and overhaul PREPA’s board. Three months of discussions between the island’s lawmakers, PREPA and bondholders reinforced the reality that anything short of a consensual restructuring would be a losing battle for Puerto Rico. If a deal was not reached, bondholders would go to court, request the appointment of a receiver empowered to raise rates and hand over the utility to the bondholders. PREPA’s agreement with creditors, which provides 85% recovery if legacy bonds are exchanged for newly issued credit enhanced bonds and full recovery for bond insurers and bondholders who do not consent to the 15% haircut exchange for credit enhanced bonds. The restructuring has been held as a model for other debt issued by Puerto Rican entities.

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Congress Asks Puerto Rico Governor For Answers… U.S. Senate Finance Committee Chairman Orrin Hatch demanded current and verifiable information on Puerto Rico’s fiscal health in a letter to Puerto Rico's governor, and questioned U.S. Treasury Sec-retary Jack Lew about debt restructuring proposals for the island during a Senate Finance Committee hearing.  Last year, based on limited financial information, Senator Hatch along with Senate Judiciary Chairman Chuck Grassley (R-Iowa) and Energy and Natural Resources Chairman Lisa Murkowski (R-Alaska) co-sponsored legislation that paired tax and other fiscal relief with a federal control board for the island. Pressing on the constitutional obligation to general obligation bondholders, Chairman Hatch in the 4,000 word letter questioned the Governor on cost controls, welfare and labor conditions as well as reform of the underfunded pension system while ruling out a broad restructuring authority. At a recent hearing, Chairman Hatch told Treasury Secretary Jack Lew that “I do not believe the administration has been straightforward about the nature of the debt restructuring authority it is seeking for the territory.” Asked on whether the administration would be satisfied without a Chapter 9 option for Puerto Rico, Lew said “there are multiple ways of drafting it.  It doesn’t have to be drafted as a bankruptcy code amendment.” At the Puerto Rico Investment Summit, AMBAC President noted, “Bankruptcy is a huge mistake. Puerto Rico has a liquidity problem, not a solvency problem. Also, Puerto Rico has a spending problem.” During the last week, key players including the island’s debt advisors and its non-voting representative in Congress have moved towards a strong financial control board with authority to manage budgets and issue debt. A bill to help Puerto Rico is expected by the end of the 1st quarter.

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Congress Working On Puerto Rico Aid Package… Senate Finance Cmte Chair Orrin Hatch says the Puerto Rico bill he is working on could include some sort of debt restructuring. Most market participants expect federal intervention will include a strong fiscal control board, some type of pension assistance, a liquidity solution and a limited bankruptcy regime that could include restructuring Puerto  Rico issuers that would qualify for Chapter 9 restructuring, if such were available. A Republican sponsored bill is expected by the end of March.

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Mid-Year Budget Cuts For Chicago Schools… Chicago Public Schools (CPS) announced un-precedented mid-year budget cuts and pension cuts on the heels of Chicago Teacher Unions’ (CTU) “Big Bargaining Team” rejecting the CPS four-year contract offer on Monday. Along with administrative cuts in January and eliminating the pension pick up, the reductions are expected to save the District $335 million on an annual basis. CPS leadership and budget officials provided adjusted school budgets that reflect $120 million in annualized cuts, $85 million of which will be realized in the current fiscal year. To mitigate budget cuts $41 million in federal funding will be directed towards schools serving low income areas by scaling back centralized programs. “Our hope is that we will be able to reach an agreement with the CTU, which will allow us to roll back these personnel reductions before we have to give notice to employees at the end of this month,” added CPS CEO Forest Claypool noting that the cuts which are necessary to help close a budget gap could be avoided if the teachers unions agree to a new contract by end of February. Separately, the Civic Federation recommended merging the Chicago teachers’ pension funds with other teacher pension funds for more equitable pension funding. CPS’s adopted budget counts on $480 million of state funds caught up in Illinois budget impasse. To wrest control from unions, Illinois Governor has proposed a state takeover of Chicago schools: the Illinois State Board of Education would appoint an oversight board to examine the books, and the state would have the option to file for bankruptcy for the city’s schools, opening the possibility of cuts to pension benefits and the termination of tenured teachers. Believing that collective bargaining rights interfere with reform, eleven states including Michigan, Arkansas, Nevada, and Wisconsin, most of them led by Republican governors, have similarly passed or debated legislation to create state-run school districts in the past year. The goal of state takeovers is often to innovate, increase flexibility over personnel decisions, and gain control over the budget, according to Kenneth Wong, a professor of education policy at Brown University. Because states provide about 50% of the funding to urban schools on average, he noted, legislators feel that districts should be held accountable, Wong said “They want to see results in return for the money.

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U.S. Highway Municipal Bonds Rally… The slide in gas prices is adding fuel to the rally in the muni market niche, where state and local governments have sold $109 billion of debt tied to roads, bridges and tunnels that charge a fee. Tax-exempt toll-road and turnpike securities have gained 1.8% this year, outpacing the 1.6% return for the broad $3.7 trillion market, Bank of America Merrill Lynch data show. That’s extending a five-year run of out-performance for the bonds, the longest streak since the data begin in 2005. With more drivers hitting the road, the finances are looking brighter. Highway Municipal Bonds offer higher relative yields as interest rates in the municipal market hold near the lowest since the 1960s.

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Munis Priced Attractively… With municipal bond prices rising less than Treasuries, 10-year muni yields are about 95% of those on comparable U.S. government debt. That’s the most since December, according to data compiled by Bloomberg. The ratio suggests that munis, which typically yield less than Treasuries because the income is tax exempt, are market attractive based on historical trading patterns. Over $1 billion of inflows poured into the muni bond market representing a 19th straight week of inflows.

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

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