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Muni Week Review / Preview 7/20/2015

Tuesday, Jul 21, 2015

Chapter 9 For Puerto Rico Unlikely… Puerto Rico Debt Re-payment “It’s Politics, Not Math”… Fed Says Rate Increases Would Be Gradual…

Congress Not In Favor Of Chapter 9… No Republican sponsors for legislation allowing Puerto Rico to file for Chapter 9 bankruptcy.  U.S. House Judiciary Commit-tee Chairman, Bob Goodlatte, R-VA., said recently that House Republicans are not interested in moving the bill. In the Senate, Democrats Chuck Schumer and Richard Blumenthal are seeking a Senate Republi-can co-sponsor for their Puerto Rico bank-ruptcy measure, a companion to the House measure introduced in February.  Still, Republicans hold the majority in both chambers in Congress and see no reason to move the bill anywhere as changing the rules on existing bondholders would be unfair. Goodlatte rejected Chapter 9 expressing “a general concern that to provide Puerto Rico’s municipalities access to Chapter 9 of the Bankruptcy Code would not, by itself, solve Puerto Rico’s difficul-ties, which are associated with underlying, structural economic problems” instead calling for an “austerity plan”. The bill carries a very low likelihood for passage.

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“It’s Politics, Not Math” Puerto Rico’s Debt Is Payable… Oppenheimer Funds predicts that the Commonwealth's securities will rebound from record lows reached in the past two weeks. “We believe Puerto Rico bonds will contribute to very strong total returns going forward and that, at current prices, there is far more upside than downside,” according to Oppenheimer the  largest mutual fund holder of  Puerto Rico bonds. Disagreeing with the Governor’s view, Puerto Rico Treasury Secretary told a radio audience that Commonwealth has the money to pay its debt.  Oppenheimer Rochester Funds, a large bondholder of Puerto Rican bonds echoed asserting “It’s Politics, Not Math” overturning the Governor’s argument against Puerto Rico paying its debt service. Government Development Bank Head, Melba Acosta told Reuters, “We are not talking about cutting principal or anything like it.”  Acosta said that the government wants to pay its obligations but that it needs, if creditors allow it, to renegotiate terms and maturities so it has breathing space to make fiscal adjustments, expand the economy and repay debt in its entirety,” Reuters reported. Oppenheimer Funds Inc., the largest U.S. mutual-fund investor of Puerto Rico securi-ties disagrees. Sales-tax collections, unem-ployment and income growth show the economy is strong enough for the govern-ment to repay, its money managers said on a recent conference call.  Long legal battles can be expected.

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Value in Puerto Rico Insured Bonds… Insured Puerto Rico Bonds are more resil-ient than uninsured counterparts.  Assured Guaranty and National Public Finance Guarantee could both withstand defaults on Puerto Rico debt with no change to their capital adequacy.  “Analysis indicates that if there were a default by multiple issuers in Puerto Rico over a one, two, or three year time period that, without accounting for any other factors, there would be no change in capital adequacy score.  Although the reported exposure to issuers within Puerto Rico may be large relative to statutory cap-ital, claim payments are made over time based on the payment schedule of the insured issuer,” affirmed S&P on Jun 29. S&P rates Assured Guaranty “AA” National  Public Finance Guarantee Corpo-ration “AA-” both have a stable outlook.

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Puerto Rico Issuer Finances and Legal Protections Dominant… Any future modification or restruc-turing will be based on the finances of the issuing entity, said Puerto Rico’s advisor to bondholders Monday afternoon illustrating ade-quate financial ability of Puerto Rico’s water utility as an example of an issuer not expected to need debt modifications as Puerto Rico seeks debt relief, fiscal balance and economic growth.  Puerto Rico’s electric utility is currently in nego-tiations with forbearing bondhold-ers. COFINA is considered by many as Puerto Rico’s most cred-itworthy bond issuer due to strong revenue stream and legal protec-tion.  General obligation bond debt service is guaranteed by Puerto Rico Constitution. The Puerto Rico bond market remains distressed as government credibility is ques-tioned and inconsistent messages sent by various island government officials confuse market partici-pants, which continues to depress Puerto Rico bond prices.

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A Win For PR Bondholders - Recovery Act Fails Appeal… U.S. Court of Appeals in Boston affirmed an earlier decision that Puerto Rico cannot make its own rules on debt restructuring.  Struck down twice by federal courts, the failed Recovery Act urges Puerto Rico public agencies to find con-sensus with bondholders and pay future debts.The ruling is positive for bondholders including Com-monwealth residents who own about $20 billion of Puerto Rican debt.

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Bonds Backed By Puerto Rico Appropriation… Puerto Rico Leg-islature did not specifically appro-priate $94 million for August 1 debt service of the Public Financ-ing Corporation, an arm of the GDB. Last month, lawmakers included about $300 million in the current budget to repay GDB debt. The bank may be able to use the money to pay bondholders next month, though it would need legis-lative approval to do so. The legis-lature is out of session until mid-August. “Should resources be required from this fund, the GDB only needs to inform, request and justify the need for these funds to the legislature,” Senator Jose Nadal Power, who chairs the Senate Finance Committee, said in a state-ment Thursday.  Another confusing statement from a government offi-cial.

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Mutual Funds Are Front And Center In Puerto Rico Talks… Oppenheimer Funds Inc. and Franklin Advisers Inc. together owned about $10.8 billion face amount of bonds, representing 15% of Puerto Rico’s debt as of March 31, according to The Wall Street Journal’s analysis of data from Morningstar Inc. Franklin has experience pushing aggressively to pare losses in restructuring and the two firms’ large stakes will give them added clout with Puerto Rico. Their largest investments are in bonds known by their Spanish acronym, COFINA, which are backed by sales tax revenues.  The firms together owned $4.1 billion, or 27% of outstanding COFINA bonds as of March, according to Morningstar data.   Hedge funds have dominated trading of Puerto Rico bonds since the jitters of summer 2013 led many individual investors and mutual funds to sell out.  Firms with expertise trading distressed debt, like Brigade Capi-tal Management, Perry Capital and Stone Lion Capital, were among the largest buyers of the bonds. Further complicating matters, Oppenheimer and Franklin paid much more for their bonds, which traded close to 100 cents on the dollar before 2013, than the hedge funds meaning they will be less likely to accept a lower recovery. “They’re going to play an enor-mous role,” said Robert Donahue managing director at Municipal Market Analytics, a research firm in Concord, Mass.  “To show any retreat now would be very surpris-ing.”  Institutional investors in different buckets are splitting into separate committees in anticipation of a legal fight.  Hedge fund holders of COFINA bonds have hired lawyers to represent them as reported in the Wall Street Journal 7/20/15.

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Inflation Dim…. Inflation eked out small gains amid Fed’s inclination to raise rates based on economic growth this year.  Consumer-price index climbed 0.3 percent after rising 0.4  percent in May.  Infla-tion, up 1.8 percent from June 2014, falls short of the Fed’s target. Inclined to raise rates this year, Fed Chair Yellen explained that the first rate increase isn’t what really mat-ters.  Rather, it is the path of rates thereafter.  The Fed expects increases will be gradual.

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Low U.S. Growth… The White House dialed back U.S. growth this year to 2% down from 3% Febru-ary forecast. 

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

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