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Muni Week Review / Preview 4/04/2016

Monday, Apr 04, 2016

PUERTO RICO RESCUE BILL UNDER THE MICROSCOPE. COFINA BONDHOLDERS SEE PUERTO RICO DRAFT BILL AS A POSITIVE STEP. CHICAGO PUBLIC SCHOOL BOND ISSUE PURCHASED PREDOMINATELY BY BOND FUNDS.

Puerto Rico Rescue Bill Draft Under The Microscope… “Perfecting this legislation has been and will remain a transparent process with input from all stakeholders,” said Natural Resources Committee chair Rob Bishop. The sponsor of House Committee draft bill “PROMESA” noted that the bill “provides Puerto Rico with tools to impose discipline over its finances, meet its obligations and restore confidence in its institutions.”  Some believe that restructuring and litigation provisions of the bill do not pass muster.  Others find the same provisions noteworthy for motivating consensus amongst Puerto Rico’s seventeen debt issuers and creditors.  At the center is how the oversight will treat various debt classes. A congressional aide told Reuters that the oversight board would take into consideration constitutional protections granted to general obligation bonds.  An updated version of the discussion draft released by The House Natural Resources Committee is very similar to the previous; changes include elimination of a Chief Management Officer.  Under the microscope are aspects related to debt restructuring.  Per the draft bill, debtors could not have the board file a petition for restructuring on their behalf until they have released their most recent audited financial report and engaged in voluntary debt restructuring discussions with creditors. The restructuring language explicitly stays away from Chapter 9 bankruptcy protection, which had initially been sought by the Treasury Department and Democrats. Instead it includes language adapted from the federal bankruptcy code that indicates debt may be repaid in line with Puerto Rico's constitution. The Republican Study Committee, made up of more than 170 members, rejected the draft bill stating that “changing the rules to address Puerto Rico’s fiscal irresponsibility is the wrong approach” and asked that the bill be redrafted “to prevent bankruptcy-style involuntary restructuring.” Several senators, including Senate Finance Committee chair Orrin Hatch, R-Utah, have been critical of territory wide restructuring ideas in the past and the influential Republican “remains committed to working with his colleagues in Congress to create a viable plan that will help bring relief to the people of Puerto Rico and put the territory back on a strong fiscal footing for the long term.”  Puerto Rico's Governor seeks to add a debt payment moratorium, economic development initiatives and reduce federal fiscal control board powers. Fewer oversight board powers are also echoed by Democrats, a minority in Congress.  U.S. Constitution grants Congress full powers over all U.S. territories. Under debate is another highly complex and sensitive component with constitutional implication; a temporary stay on litigation over Puerto Rico debt from December 2015 to 18 months after the bill is enacted.  House Speaker Paul Ryan said, “This draft is thoughtful, comprehensive legislation that gives the U.S. territory the tools it needs to deal with its systemic fiscal and budgeting problems without a taxpayer bailout,” The bill will undergo changes before it is formally introduced, discussed in a hearing, and voted on in the Natural Resources Committee in the week of April 11.

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House Discussion Draft Is A Pos-itive Step, Say Senior COFINA Bondholders… Institutional holders of $17 billion COFINA bonds called the House Discussion Draft of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) a “pragmatic, workable policy solution” and a “positive step on the Common-wealth’s road to recovery”.  Asserting their claim as senior creditors with property rights that are protected under both the U.S. and Puerto Rican constitutions the bondholders noted “It is particularly encouraging to see that they incorporated battle-tested restructuring precedents that balance the needs of the Puerto Rican people, defend against litigious holdouts and provide for the fair and equitable treatment of creditors.” If the bill is seen as a positive step by senior bondholders the same holds true for subordinate COFINA bondholders.

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PREPA Deal Benefits … From the frontline's of negotiation between creditors and Puerto Rican government, National Public Finance Guarantee reported on the nuances of the PREPA debt deal.  The over-riding goals of PREPA’s restructuring deal are to help PREPA achieve a more efficient capital structure and manage its liquidity while lowering energy costs for islanders and providing an enhanced security package for bondholders.  The deal with bond insurers, fuel lenders and uninsured institutional bondholders passed its first significant hurdle when it was signed into law by the Governor.  Next, the Puerto Rico Energy Commission must review a rate increase on customers that is integral to the added security for bondholders electing to exchange legacy bonds.  Creditors agreed to give PREPA until April 7 to file its rate increase petition, that was due March 3rd, with the Energy Commission, a fourth extension this year. PREPA’s restructuring would be a landmark in consensual voluntary debt restructuring sought by bondholders as the Commonwealth seeks debt relief. House bill PROMESA may include language that protects the PREPA deal.

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Biggest Buyers of Chicago Public School Bonds (CPS)… In a vote of confidence for the troubled school district, Chicago asset management firm Nuveen bond funds scooped up $290 million or 40% of Chicago Public School’s recent $725 million bond issue.  Along with Goldman Sachs Asset Management which bought $90 million and Oppen-heimer Funds with $10 million, the three are amongst the biggest buyers of junk rated CPS bonds. Because of controversial headlines, the $100,000 denomination bonds yielded 8.5% tax-exempt three times as much as top rated bench-marks even though state law prohibits bankruptcy.  Since then these CPS bonds, available only to Qualified Intuitional Buyers (QIBS) have rallied as much as 8 points investors have come to realize that CPS bonds are protected by the dual security of pledged state aid and property taxes as taxpayers are  on the hook.  To date, state aid alone has been sufficient for debt service and there has been no need for the nation’s third largest school district to levy property taxes. Tense labor negotiations amid escalating fiscal pressure led teachers to wage a 1-day strike.  The district’s borrowing last month provided needed cash and showed that investment firms anticipate it will find a way to turn around its finances.


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Mayor Looks For Pension Reform Avenue… Chicago will return to the bargaining table with its unions to make a second attempt at reforms aimed at passing state constitutional muster, Mayor Rahm Emanuel said. The latest Supreme Court ruling which reinforced justices' previous  rulings on state pension reforms and state retiree healthcare benefits left the door open for local and state governments. Future reforms could be attained through collective bargaining or a “consideration” model under contract law that allows mutually agreed changes which provide net benefits. The city will outline a strategy in the next several weeks and is evaluating alternative plans. The Mayor said, “They've given us two roads and we are going to take both to find a balanced approach that is consistent and fair to everybody. We will do it in a way that is fair to taxpayers and fair to people that work with the city while also protecting the financial health of the city”. The junk rated City faces credit erosion as Moody’s and S&P have said that the city needs to quickly offer a viable plan for stabilizing its two largest pension funds. The munici-pal market awaits word from the city on its next steps.


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Atlantic City Face-Off… Neither Governor Christie nor Assembly Speaker Prieto conceded in the mounting Atlantic City fiscal  drama. With lawmakers faulting each other and blaming political nuances, the Mayor affirmed that the city plans to meet debt obligations in May although employees may forgo pay-checks temporarily. The city could run out of cash this year unless reform laws are enacted.

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

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