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Muni Week Review / Preview 7/6/2015

Monday, Jul 06, 2015

Puerto Rico Pays All Debt Due July 1… PREPA Makes Progress… Incited Creditors Will Fight For Bond Rights And Timely Payment… Adequate Capital Among Puerto Rico Bond Insurers…

Puerto Rico Pays All Debt Due July 1… Puerto Rico paid in full general obligation debt service ($645 million) from its taxing power.  All Puerto Rico debt due July 1 was paid.  After Puerto Rico Governor Padilla said in a televised address Monday that the island’s debts were un-payable and called for concessions from bondholders, general obligation bond prices trading at speculative levels for over a year dipped to the lowest in two decades.  Many analysts think that a broad restructuring of Puerto Rico debt could still be avoided if the commonwealth speeds its budget process, creates a five-year plan for growth and improves transparency. Protected by Puerto Rican constitution, general obligation bonds have a first lien claim on all Commonwealth revenues and are allowed to “clawback” tax revenues pledged towards payment of other bonds (except sales tax bonds): effectively a “super lien” that accrues to superior legal protection.

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PREPA Makes Progress And Payment… A set of creditors holding bonds issued by island’s junk rated public electric utility, known as PREPA is working with the commonwealth toward a restructuring support agreement that would help reorga-nize PREPA’s $9 billion of debt by Septem-ber 1.  On July 1, PREPA made a full $415 million debt service payment with about $153 million from its general fund, $134 million from its debt-service reserves and $128 million from short term financing provided by bond insurers.  Houlihan Lokey, a financial adviser to the PREPA creditor group advised “appropriate legal action will be taken if there are unforeseen deteriora-tions in either the negotiations with PREPA or a broader decision made by Puerto Rico as a whole to treat bondholders unnecessar-ily unfairly during this process.”  Creditors extended forbearance until September 15 and must find accord by September 1 to keep matters out of court.  Moody’s recog-nized last week events at PREPA as credit positive developments that raise the possi-bility of a non-litigious consensus.

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Puerto Rico Constitution, It’s The Law of The Land Puerto Rico Must Pay G.O… “We expect Puerto Rico to act within the tenets of the law, including the commonwealth's constitution, and are ready to defend the previously agreed to terms in each and every bond indenture.” Oppenheimer Funds Rochester announced Tuesday its intention to defend promises that came with the bonds. When Puerto Rico introduced a bankruptcy measure for its public corporations in the summer of 2014, Oppenheimer Funds along with Franklin Funds successfully sued to have it overturned.

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COFINA Debt Service Insulated… The legal structure granted by Act 91-2006 protects Dedicated Sales Taxes from becom-ing available for general obligation bond debt service or general fund uses.  The Commonwealth has no access to sales tax revenue until Sales Tax bond debt service is paid.  In light of sales taxes hiked to 11.5% effective July 1, recent legislation (House Bill 2505) proposes to clarify that the first collections of the 6% sales and use tax will be deposited in the Dedicated Sales Tax Fund until such time as the Pledged Sales Tax Base Amount for each year set per Act 91-2006 is reached. This legislation pre-serves the legal separation of COFINA pledged revenues from Common-wealth general funds and general obligation bonds.  GMS believes along with insurers and institu-tional investors that funding for COFINA bonds should withstand challenges.  Budget 2016 sales and use tax revenue is estimated to be $1.74 billion compared to $735,000 in 2015.

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COFINA Creditors Group… A steering committee of five inves-tors holding about $5 billion in face value of COFINA Bonds issued by Puerto Rico Sales Tax Financing Corporation will fight for their investor rights as to the timely payment of interest and principal. Formed in May, this credit group plans to continue its “ongoing dia-logue” with the commonwealth in an effort to “achieve a common goal of enhanced liquidity and economic growth,” and is infor-mally aligned with AMBAC, an insurer of senior sales tax COFINA bonds.  AMBAC derives high con-fidence from the legal structure of COFINA bonds which has been upheld by the Commonwealth and carries supportive opinions from three U.S. attorney generals setting a legal precedent under Puerto Rico law.

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Insurers Work in Good Faith… Continuing to work in good faith, bond insurers provided a six month loan of $128 million to PREPA.  “National Public Finance Guarantee Corp. will continue to work with the appropriate parties toward a solution that addresses Puerto Rico's significant fiscal and operational difficulties while respecting the rights of creditors,” a National spokesperson said. Assured reiterated that it will not hesitate to fully exercise rights and remedies if needed.  AMBAC is diligently focusing its resources on constructive solutions and “will not tolerate any impairment”. Insurers will fight in court if nec-essary to assure bond payments.

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Ratings Changes… Restructuring Puerto Rico’s debt “is likely to be protracted and legally contentious” because of the “complexity” of the commonwealth’s securities and “the uncertainty of the future path of economic growth,” Ted Hamp-ton, lead analyst for the common-wealth at Moody’s Investors Service said as Moody’s cut the ratings of Puerto Rico general obli-gation and senior sales tax bonds to “Caa3” from “Caa2”.  Fitch cut the island’s debt rating to “CC”, a level that indicates the credit grader sees some kind of default or dis-tressed exchange as probable, while S&P cut its ranking two steps to “CCC-”.

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Strong and Stable Bond Insurers… Assured’s strong competi-tive position, proven track record of credit discipline, market leader-ship position and experienced management team earned a S&P “AA” rating. National Public Finance Guaranty earned S&P’s “AA-” rating due to its strong capital adequacy and prospective strong competitive position as it is expected to gain increasing market share with more visibility. Both bond insurers carry a stable S&P outlook affirmed this week. AMBAC said it will not tolerate any actions that could impair our interests.  If it became necessary we are confident in our ability to pay timely interest and principal.

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Wayne Co Michigan Update… To address financial difficulties, MI State Treasurer conceded to Wayne Co Executive’s request for state intervention. A fast-tracked state review recognized important  financial measures taken by the County as well as significant legacy cost issues facing the County.  Gov. Rick Snyder will now appoint a review team to delve deeper into the county's finances. The team will then make a recommendation to Snyder, who will make the final decision. County executives are looking for a consent agreement that will help eliminate the county deficit.

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Battle Lines… 35 hedge funds holding $4.5 billion Puerto Rico COFINA, general obligation and Government Development Bank bonds are focused on ways to pro-tect their investment after Gover-nor Padilla voiced concerns/doubts about debt service payment: a turn-about from the Governor’s earlier statement describing non-payment of debt service a “folly”.  Rattled by the Governor’s volte-face, this credit group is no longer interested in funding $2.9 billion new oil bonds that it had proposed to get the island further along.  Instead, led by Fir Tree Partners and Mon-arch Alternative Capital, they are now ready for a legal fight with New York and Washington law-yers in tow.

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

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