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Muni Week Review / Preview 8/17/2015

Tuesday, Aug 18, 2015

Puerto Rico Debt Load Exaggerated: Says Bond Insurer. Final Deadline For PREPA Sept. 1. Yuan Devaluation Tightening Without Fed Rate Hike.

Puerto Rico Debt Load Exaggerated… Reports of PR’s un-payable debt load have been greatly exaggerated says bond insurer National Public Finance Guarantee Corp (Nat’l Re “A3/AA-”).  According to The Bond Insurer Puerto Rico residents have a lower debt to income ratio based on population than any state resident, including those of “AAA” rated Maryland and Virginia. The insurer excluded the island’s electric and water/ sewer utility debt, just as Moody’s did not include electric and water/sewer utility debt as a responsibility of a state resident's debt load.  The presentation added the $18 trillion U.S. National debt to state residents’ debt responsibility, which is not relative to Puerto Rico since the vast majority of Puerto Ricans do not pay federal income tax. The analysis was based on each state’s population.  The presentation concluded the actual individual debt burden for Puerto Ricans is not as dire as is often portrayed and is lower than residents of any of the 50 states.  The analysis is in stark contrast with data from Moody’s, which includes the island’s electric and water utility debt as being Puerto Rico residents’ responsibility. Moody’s did not include utility debt in state resident comparisons and curiously omits state residents’ responsibility for $18 trillion of U.S. national debt.

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Creditor Group Warns Sept 1 Is Final Deadline For Puerto Rico Electric Power Auth (PREPA)… After six extensions since July 2014, bondholders delivered a stern warning to PREPA that negotiations for the restructuring of the utility’s outstanding debt are expected to end 9/1.  If there is no agreement by then the creditor group is ready to initiate litigation against PREPA in court.  The frustrated creditors presented a plan that would save PREPA $2.5 to $3 billion over the next ten years.  The creditor plan would have PREPA repay bondholders in two tranches: 70%  of interest bearing bonds and 30% of 19 year capital appreciation bonds.  In simple terms the interest rate and maturity of the secured interest bearing tranche would depend on the securitization of the overall debt.

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Puerto Rico May Reveal Some Of Its’ Restructuring Plan Early… Initial proposals will likely “Demand” a lot of creditors, little of local government. Creditors can expect that initial restructuring proposals may be “Particularly Draconian.” As 2016 elections approach the current government will strive for a populist tone. Based on The Governor’s previous frivolous statements expect the original plan to disregard their constitution, have no respect for law and ignore the sanctity of dedicated revenues.

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Puerto Rico Aqueduct And  Sewer Auth (PRASA) Announces New $750mm Bond Issue… The $750 million issue would be used for projects over four years and pay back bills owed since 2013. “Issuing new debt while planning to restructure pre existing debt and even letting certain bonds default (Aug 3, PFC default), reflects the individual financial circumstances of the various debt issuers across the Common wealth,” Melba Acosta president of the Government Development Bank said. The announcement comes less than a month before a high level government working group is scheduled to reveal debt restructuring plans. The other Puerto Rico utility PREPA is facing a Sept 1 deadline set by creditors for a consensual debt restructuring. To many market participants it seems to be a strange time for Puerto Rico to test market access.

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Scheduled Puerto Rico Deadlines…  As Puerto Rico contem-plates the largest debt restructuring ever in the $3.6 trillion municipal bond market the following dates are noteworthy to know. Week of 8/17: PRASA plans to sell $750 million revenue bonds. Puerto Rico legislature convenes. Sept.1: The PR Governor Padilla appointed working group is scheduled to give governor draft of its debt restructuring plan. Sept.1: Deadline for PREPA consensual debt restructuring agreement with creditors or forbearance agreement will end. Oct.1: Working group scheduled to send governor approved debt restructuring plan to Puerto Rico legislature. Dec.1: $467 million debt service due on Government Development Bank and other securities. Jan.1: $958 million of principal and interest due on G.O. bonds, PREPA bonds and other securities.  A government official has said the island expects to have the money needed to make the January payment due on its G.O. Bonds.

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Washington/Puerto Rico Likely Help Scenarios… U.S. Treasury along with Puerto Rico Govt will assure the island receives all fed financial assistance currently available. As for additional financial assistance. Most likely scenario: Washington does nothing and allows Commonwealth and creditors to negotiate. Somewhat likely: By 2016 Commonwealth does not institute meaningful structural reforms and cannot reach consensual agreements with creditors; U.S. Congress may agree to implement a financial control board along with Chapter 9 protection. Unlikely: Stand alone Chapter 9 bankruptcy protection or a Federal Bailout.

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Yuan Devaluation Helps Attain U.S. Monetary Tightening Without Fed Rate Hikes… A strong currency has created headwinds for the U.S. through a range of chan-nels.  Latest actions of the Chinese central bank will intensify the negative impact by fostering more dollar appreciation. The U.S. already runs a significant trade deficit with China, and 1.9 percent yuan devaluation announced Tues-day will further exacerbate it.  A stronger dollar weighs on U.S. growth through weaker exports, cheaper imports, devaluation of overseas profits and a sharp increase in domestic labor costs in non dollar terms.  It should create a more restrictive economic policy, thereby accomplishing the same goal as higher interest rates.  In short, currency appreciation is doing at least some of the heavy lifting for policy makers and could therefore mitigate the need for rate normalization to occur sooner rather than later. The September liftoff will be jeopardized if dollar strength continues.

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September Fed Rate Rise Seen As Most Economists Shrug Off Yuan… Economists are standing by their projections for a September Federal Reserve interest-rate increase, despite a surprise devaluation in China’s currency that has heightened uncertainty in the inter-national outlook. Seventy seven percent of forecasters in a Bloomberg survey taken Aug. 7-12 said that the Fed will raise its main policy rate next month for the first time since 2006, up from 76 percent in July. All respondents were given the opportunity to revise forecasts following the yuan news. Expected new rate 0.375%.

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Chicago Schools’ $5.7B Budget Relies On State Aid, More Debt… Chicago school officials proposed a 2016 spending plan that’s 1.2 percent smaller than last year, while warning of more borrowing and spending cuts if Illinois lawmakers don’t provide pension relief. The $5.69 billion operating budget for the fiscal year that began July 1 is $68.5 million smaller than last years $5.76 bil-lion plan, district officials said Monday. The plan uses borrowing,$75 million of reserves and about$480 million in state aid appropriations to close a $1.1 billion deficit. Without state help, Board of Ed officials have warned of larger class sizes and teacher layoffs.

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The Wayne County Commission Approves Consent Agreement With Michigan… Wayne County will operate under state oversight and enter into a consent agreement with Michigan, allowing the county to bolster its finances and avoid bankruptcy. The Wayne County Commission voted 14 to 1 Thursday to approve a consent agreement with the state, a county spokesman said. Among various remedies the pact will allow County Executive Warren Evans to impose pay and benefit cuts to mend the county’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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