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Muni Week Review / Preview 5/02/2016

Monday, May 02, 2016

PUERTO RICO GDB PAYS MAY 1st INTEREST AGREES TO FORBEARANCE ON PARTIAL PRINCIPAL PAYMENTS. PUERTO RICO STABILITY ACT (PROMESA) UPDATE. CHICAGO PUBLIC SCHOOLS UNION TALKS PROGRESS.

Puerto Rico GDB Pays All May 1st Interest Forbears Partial Principal Payments… The GDB will pay all interest ($22 million) due May 1st and leave about $270 million of the $400  million principal payments unpaid following Governor Padilla’s executive order declaring a moratorium on GDB debt payments. GDB debt is moral obligation appro-priation debt that has no dedicated revenue source. The GDB debt is among the weakest credits of all Puerto Rico debt. A group of hedge funds that owned a fourth of May 1st debt service or $100 million has entered into a 30-day forbearance agreement. Last week GDB also pushed off $30 million of debt service owed to local credit unions to May 2017. Urging Congress to act, the GDB stated, “without federal action, including the tools to bind non-consenting creditors, the transaction would be highly unlikely to reach the required 100% participation level set by Puerto Rico’s Governor. As there is a 30-day grace period built into the debt payment, creditor groups are expected to continue negotiations with the GDB and reach last minute forbearance deals. The May 1st default will not crash markets as the default was highly expected. The default makes it obvious the Governor does not have a ‘recovery strategy’ and has no plan to get ahead of the crisis as lack of financial data disclosure continues. Puerto Rico liquidity position, based on current revenue data, is improving even as the Governor claims to the contrary. Consensus is building that the July general obligation payment will be paid as will the August COFINA interest and principal payments that are already at the trustee. The well-funded major bond insurers have little liquidity risk related to Puerto Rico debt service payments they insure.

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PROMESA Update… As it touted the merits of the Puerto Rico Oversight, Management & Economic Stability Act or (PROMESA) bill, which seeks to impose a fiscal oversight board over Puerto Rico, the U.S. House Committee on Natural Resources confirmed what many Puerto Ricans have feared: that the legislation seeks to ensure that creditors get paid instead of protecting the welfare of the Puerto Rican people. A revised version of PROMESA is expected right after House members return May 10th from a recess. House Cmte Chair Rob Bishop said the new version won’t be significantly different from the current propos-al, which would set up a federal oversight board to help the island with its finances, and create a process for restructuring its debt where necessary. Details that need to be ironed out include the oversight board’s exact powers and processes, as well as language tied to any court-sanctioned debt restructuring, if it ever comes to that. He said his committee has done ‘a good bill’, and insists that the rewrite is almost finished.  Bishop’s biggest challenge has been to counter fears among his own caucus that the bill amounts to some kind of government ‘bailout’. The Center for Individual Freedom, a group widely believed to be acting on behalf of bondholders opposes any type of a court or board-imposed restructuring. This group has spent millions of dollars on ads calling PROMESA a ‘bailout’, paid by  bondholders. If this legislation does not advance, the probability of future federal tax dollars flowing to the Territory or to bondholders may actually increase. While Republicans hash out their differences, Democrats have concerns on oversight board powers, pensions, minimum wage, overtime regulations and wildlife refuge land transfer.  With no legislation in hand, the focus is on July 1st when $2 billion of bond debt service is due from Puerto Rico. Puerto Rico legislators believe  if the U.S. Congress allows forced haircuts on bondholders it is not a ‘bailout’. The U.S. House Committee issued a statement last Wednesday saying the bill protects creditors while criticizing Puerto Rico for taking abusive actions against creditors’ rights and violating property rights. “The situation in Puerto Rico has already led to astounding, questionable and drastic actions by the territory’s government that abuse creditors’ rights. PROMESA prevents further abuses and, at its core, protects lawful creditor priorities,” the statement read. Under PROMESA, “no one group or class of creditors gains an advantage over any other class in which such advantage did not exist prior to the Oversight Board’s determination,” it went on. The bill would enable the territory “to fulfill its debt obligations responsibly and maximize bondholders recovery.” The committee denied the bill is a bailout and insisted that any restructuring must be “in the best interest of the creditors.” In addition, the bill “sets up a framework to protect valid and legal liens during any potential restructuring process. If Congress fails to deal carefully with the complex financial and economic mess in Puerto Rico, states will seek to avail themselves of their own irresponsible tax and spending practices, the committee added.

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Chicago Public Schools (CPS) Union Contract Talks Progress… Both the Chicago Teachers Union (CTU) and CPS acknowledge that CPS cannot afford to pay for the deal endorsed by an independent fact-finder that was rejected by CTU.  CTU Vice President Sharkey said, “It's a bit of a contradiction, and frankly it's a contradiction in their position too. If you're buying or selling a house, you'd have to evaluate the ability of the person making an offer to pay. We're all basically trying to add political pressure, so that the people who control the purse strings do what's right.”  At this week’s meeting, CTU members pressed the school board to support union-backed legislative measures to generate new money for junk rated CPS including higher taxes on the state’s wealthiest residents. CPS has called for an overhaul of the state’s education funding formula. During a cooling off period that ends May 16th, union leaders are working out specific resolutions that the union’s House of Delegates will vote on shortly.  CPS CEO Claypool repeated his call for the union to enter an additional stage of arbitration, an idea CTU President Karen Lewis rejected while threatening to strike again. The pledge of unlimited property taxes for bond debt service if needed is a valuable assurance for CPS bondholders.

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Atlantic City Makes Debt Payments… Atlantic City made $1.8 million in interest payments due May 1st after threatening to not pay as state lawmakers bicker over proposals on how to assist the troubled gaming hub. Mainly, the proposals differ on how quickly the state would takeover. New Jersey leaders, including Gov. Christie and the Democratic state Senate president, agree on a general fix for Atlantic City: a state takeover of the city’s operations that would give the state ability to sell city assets, restructure debt or renegotiate union contracts. Blocking the state takeover legislation is a plan backed by the state’s Democratic assembly speaker who proposes benchmarks and opposes altering union contracts. Any action would require state assembly ap-proval. Gov. Christie stated, “So I am not bailing them out unless they give me the authority to fix the problem. If they give the authority to fix the problem, I tell the people of New Jersey I will fix the problem, but I cannot do it without the au-thority to do it.”

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Economy Pulls Back… Gross Domestic Product (GDP) grew at a 0.5% annualized pace in the first quarter in its worst performance in two years. A sharp pullback in business investment and weak global demand dragged down an already lackluster U.S. economy in the opening months of 2016, the latest setback in a bumpy expansion entering its seventh year. Consumer spending, which accounts for more than two-thirds of economic output, has been decelerating for three quarters in a row. Economists say that although labor conditions have improved economic growth is likely to remain sluggish given continuing woes in emerging economies, sizeable inventories, a strong dollar and weak capital investment. The Fed left rates unchanged and remained ambiguous about the near future as mixed global economic signals and low inflation weighed on policy-makers struggling to spark growth seven years after the recession ended. Futures markets assign only a 20% chance of a hike in June.

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