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Muni Week Review / Preview 2/29/2016

Monday, Feb 29, 2016

CONGRESS PUERTO RICO FIX GETTING CLOSER. REPUBLICAN COMMITTEE (RSC) TAKES OFFICIAL POSI-TION ON PUERTO RICO. ILLINOIS FEUD WITH CHICAGO PUBLIC SCHOOLS ESCALATES.

Puerto Rico Fix Getting Closer… After at least eight information gathering Congressional Committee hearings a Puerto Rico rescue package must now be drafted by the Republican Congress. It appears Chapter 9 is no longer on the table. A strong financial control/oversight board will be part of any plan. The board may use the territorial clause of the U.S. Constitution to create some type of negotiated debt restructuring mechanism rather than  amend Chapter 9 of the bankruptcy code which could impact the entire municipal bond market. The rescue bill will address pensions and economic growth and include an energy component. Medicare and Medicaid reimbursement rates will most likely increase and the mainland minimum wage may be adjusted for territories. There will likely be tax and economic growth incentives. The draft bill can be expected within weeks and may reach the floor of the House and Senate by the end of March, unfortunately passage of a bill prior to Puerto Rico debt payments due May 1, June 1 and July 1 may be unrealistic. It will take months to create and implement a Federal Control Board and additional time for the board to understand the problems and powers at its disposal. As of right now the only unquestioned debt payments are COFINA Sales Tax Municipal bond payments.

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Republican Study Cmte (RSC) Takes Position on the Puerto Rico Financial Crisis… The RSC took an official position last week supporting pro-growth reforms to alleviate Puerto Rico’s debt, but opposing any congressional action forcibly restructur-ing debt or granting access to Chapter 9 to the U.S. territory or its municipalities. “Puerto Rico’s mounting fiscal problems are the result of poor management and unsustainable policies enacted by local government and compounded by ill-conceived federal policies that hamstring the island’s economy,” RSC Chairman Bill Flores (R-TX) said in a statement. “A direct taxpayer-funded bailout would not only cost Americans tens of bil-lions of dollars, it would fail to address the root drivers of Puerto Rico’s debt. Additionally, while some have proposed settling the $73 billion government debt by granting the island access to Chapter 9 bankruptcy or forcing the debt to be restructured, Congress must not do so. Changing the rules mid-game would be unfair to Puerto Rico’s creditors who entered into these arrangements with agreed upon terms and would delegitimize future transactions. Instead, Congress should consider pro-growth reforms that will spur economic development and investment in Puerto Rico.” The RSC adopted the following position: “The RSC opposes granting access to  Chapter 9 bankruptcy for Puerto Rico or access to similar forced restructuring of debt. The RSC does support enacting pro-growth reforms that would alleviate the burden that current federal policies place on the territory.”

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PREPA’S Restructuring Faces a Bumpy Road… The enactment of the PREPA Revitalization Act was just the beginning of the restructuring of the utility’s $9 billion debt since the “fragile” process still has to comply with several important steps before becoming reality. Before any future issuance of the restructuring bonds or incurrence of any other debt, the corporation must provide confirmation to the PREPA Trustee that the securitization is in place and each rating agency that maintains a rating on the outstanding restructuring bonds has confirmed any future action will not result in a suspension, reduction or withdrawal of the then-current rating by such rating agency or agencies. The initial issuance of restructuring bonds must receive an investment grade rating from any rating agency that rates the restructuring bonds. Puerto Rico Electric Power Authority (PREPA)  must diligently pursue ratings from Moody’s and Standard & Poor’s, according to the Restructuring Support Agreement (RSA) enable by the new law. The securitization process is somewhat modeled after the current COFINA model. The problem is the Commonwealth is looking to restructure COFINA debt which should eliminate any rating agency from rating the PREPA securitization debt.

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Puerto Rico Finance and Budget Committee Chairman Asks Governor to Stop His Restructuring Message… The Chairman of the House and Budget Finance Committee has asked Governor Padilla to immediately suspend any talk of restructuring COFINA Sales Tax debt. The government is saying the securitization of the electric authority’s special instrument offered to current PREPA bondholders which is similar to the COFINA structure offers safety to bondholders. It is contradictory to say the new PREPA debt instrument is safe and cannot be restructured, but the  COFINA structure can be restructured 10 years after its so-called bulletproof pledge to bondholders was established by law. COFINA has doubled its revenue to over $2 billion annually and the COFINA debt service is under $700 million. The chairman pointed out there is between $300 to $400 million annually to pledge in order to go to the market to obtain liquidity. The chairman said “you can not bring a general restructuring message to the market that every bondholder is given the same treatment as if it were the same debt. That is wrong. COFINA is protected by law and must be respected.”

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Illinois Fight With Chicago Public Schools Escalates Over Bond Sales… Illinois’s quest to take over Chicago’s schools intensified as Governor Bruce Rauner said the state can block the district from borrowing in the municipal bond market, a claim the nation’s third-largest school system rejects. The Illinois State Board of Education is investigating the finances of the district, which is facing projected deficits of $1 billion a year through 2020 and the Republican governor is pushing for legislation to strip the city of its control. The system has routinely relied on bond sales to help cover operating costs and push debt payments further off into the future.  The Chicago Board of Education is struggling to avert insolvency after years of borrowing, drawing on its reserves and shortchanging the workers’ pension fund, which is causing its annual retirement payment to soar. The district said the state doesn't have the power to keep it from borrowing, as Rauner claimed. In the days leading up to this months’s bond sale, Rauner called for changes to Illinois law to put the state in charge of the district and authorize bankruptcy. That plan has been rejected by Democrats who control the legislature. Chicago Public School debt service through March 2017 has been deposited with the Trustee.  Provisions in the state’s school code make it clear that the Illinois education board’s authority to block debt sales doesn’t apply to Chicago’s schools, the district said. Rauner’s administration said the statute that the district cited, which established a school finance authority, was dissolved in 2010 and no longer applies. “That applied only when the reform board existed, which it no longer does,” said Catherine Kelly, a spokeswoman for Rauner. “CPS can be required to develop a financial plan and would be prohibited from issuing bonds during that period.”

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Atlantic City Has Cash Through April… Atlantic City, New Jersey’s distressed gaming hub, has enough cash to pay its bills until April, said Michael Stinson, the city’s revenue and finance director. Borgata’s decision to withhold a payment during court dispute over taxes raised the chance of insolvency coming earlier. March payments on debt sold through New Jersey program will come directly from the state. City to pay around $600,000 for bonds in April, Stinson said. “It’s always been our intention to make those payments,” the said. City has $247 million in debt outstanding, filing shows. State legislators want New Jersey to assume control of the city’s finances.

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

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