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Muni Week Review / Preview 8/31/2015

Thursday, Sep 03, 2015

PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA) REACHES DEAL WITH BONDHOLDERS. PUERTO RICO DELAYS RESTRUCTURING PLAN. FED RATE HIKE BECOMING A NON-EVENT.

PREPA Reaches Deal With Bondholders... Puerto Rico agreed on terms for restructur-ing up to $5.7 billion of municipal bonds late Tuesday. The new restructuring plan covers only the uninsured bonds of Puerto Rico’s public electric utility, an island-wide monopoly known as PREPA. Its outstanding municipal bonds have a total face value of about $8.1 billion, but of that, about $2.4 billion are insured and not part of the agreement. Melba Acosta, president of Puerto Rico’s Government Development Bank, called  the deal “an example of the promising result that can be achieved when the Commonwealth and its creditors work together.” The agreement calls for an exchange of debt. Bondholders would accept new bonds with a par value 15 percent less than the bonds they now hold, an individual who holds $100m bonds would exchange them and receive $85m bonds. At the same time, the new municipal bonds will be backed by a securitized stream of revenue that is intended to make them much safer. With less risk, the new bonds are also intended to cost PREPA less in interest. The new municipal bonds have not yet been rated, but the securitization is supposed to make them so much stronger that they could have a coupon rate somewhere between 4 and 5 percent. Specific details of the exchange expected to be announced by September 18.

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Puerto Rico Postpones Restructuring Plan… Citing time lost to Tropical Storm Erika, the government of Puerto Rico on Saturday postponed for at least one week a plan for a “negotiated moratorium” on $72 billion of debt. Officials have been working on the plan since the end of June, when Governor Padilla said that without profound structural changes, the island would never be able to pay back its debt. On April 28th he stated the opposite when he said: “talk of not paying the island’s debt is ‘folly’ ”. He recently spoke in general terms about slowing Puerto Rico’s scheduled debt payments while sweeping economic changes took place.  Since Chapter 9 bankruptcy is not available any debt restructuring must be negotiated with bondholders and be consensual.  A detailed plan was to be completed by Sunday, but on Saturday evening the governor’s chief of staff, Victor Suárez, said it was not ready. “The government’s efforts in the past few days have been focused on preparing for the possible impact of Tropical Storm Erika,” he said in a statement.  The new scheduled due date for the plan is September 8, strategically after the PREPA restructuring deadline.

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Financial Control Board for Puerto Rico Gaining Traction… Confusion within the Commonwealth’s legislature is becoming apparent.  The island’s main opposition party dropped out of the Governor’s working group that is trying to put together a debt restructuring plan.  Odds the partisan plan will survive the legislative process as proposed are low. Many stakeholders and Republicans in Congress think that an inde-pendent Financial Control Board, successful when New York and Washington D.C. faced fiscal distress, could be the answer. A Finan-cial Control Board was noted in a recent Congressional Research Service report on Puerto Rico.

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Puerto Rico Bond Sale Delayed Due to Lack of Orders… Not surprisingly a $750 million municipal bond sale for the Puerto Rico Water and Sewer Authority was delayed due to lack of investors to buy the bonds.

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Fed Rate Hike Becoming a Non Event… Fed guidance has need-lessly created too much intense interest and undue anxiety by market participants over an 1/8 or 1/4 of a percentage point Fed funds rate increase. For the past year market sentiment often seemed to hinge on when the Federal Reserve would raise rates. Since the end of quantitative easing the Fed has often affected markets by indicating it will eventually raise short term interest rates.  The caveat was any increase would be “data driven”. To date few have benefited from the Fed’s “forward guidance”. Overall markets have suffered from uncertainty. The markets should not be worried about a 0.25% rate increase. The trajectory of rate hikes will have more impact on the economy than the time of liftoff. World markets have been tested over the last few months especially from events taking place in China. Right now inflation is muted, the concern should be vola-tile domestic and global financial markets, not an insignificant rise in the Fed funds rate.

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New Jersey Municipal Bonds Rally as Yield Wins Over Investors… New Jersey Economic Development Authority bonds that were sold last week are rallying. The average yield on the taxex-empt municipal bonds due in June 2037 dropped to 4.75 percent. The agency’s debt was the most traded last week, according to Bloomberg. The $2.2 billion issue is  the largest from the state since 2013. “The tightening of spreads is evidence that there was a large demand for our municipal bonds, showing improved market confidence in NJ that will result in lower long term interest costs for the state and in turn taxpayers,” said a spokesman for the Department of Treasury.

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Chicago Board Of Education Budget Is Credit Negative, Moody’s Says… The $5.7 billion budget unanimously approved last week by the Chicago Board of Education includes $480 million of widely expected aid from the state. The aid has yet to be approved causing market concern, which is affecting bond prices. Illinois is entangled in its own financial crisis as the Democrat led legislature and Republican governor have yet to agree on a spending plan for the year that started July 1. The district, the nation’s third largest school system, will have a “substantial” budget gap without state help, Moody’s said. The debt is rated “Ba3”, three steps below investment grade. Without state help, officials have warned of larger class sizes and more layoffs. A portion of $25 million outstanding 5% taxable general obligation bonds previously sold by the school board traded Monday at an average of 99.8 cents on the dollar, the taxable bonds mature in December 2020.

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Chicago Parks Boosts Bond Issue 60% As High Yields Lure Buyers… The Park District boosted the deal size to $141.5 million from a planned $88 million. A portion of the securities due 2040, which have the longest maturity, were priced to yield 4.49%. Some investors expressed concern before the sale that the exposure to junk rated Chicago  could weigh on demand. The district, which holds 8,325 acres of parkland, taxes the same area as the city and its schools, which are grappling with financial challenges including mounting pension costs and cratering credit ratings. Moody’s rates the district’s credit as “Ba1” speculative status. S&P and Fitch rated the district’s issue “AA+” and “AA-”.

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Detroit, Michigan Sewer Ratings Upgraded… Moody’s upgrades City of Detroit’s Sewer Enterprise ratings to “Baa3” and “Ba1”, citing improved operations. The management team has implemented strate-gies to increase efficiency, improve billing collections, provide better services, track financial performance and update capital planning

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Guam Lures Investors… Guam up-sized its recent $405 million bond issue by $8 million as inves-tors lined up for the triple tax exempt “A” rated special tax bond  paying a top yield of 4.18%. U.S. military operations and tourism from East Asia drive the economy of the 212 sq. mile island.  Having erased a $303 million general fund deficit with two years of surpluses, recent fiscal year expenses exceeded revenues by $60 mm.  Governor Calvo said “What we've done most importantly is brought stability” Guam paid less than NJ to borrow over $413 million.

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

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