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Muni Week Review / Preview 8/3/2015

Wednesday, Aug 05, 2015

Puerto Rico Makes Aug 1 Debt Service Payments of $515 Million. Defaults On Appropriation Debt. Fed Rate Hike Faces Headwinds.

August PR Debt Service Payments… The Commonwealth made debt service pay-ments of $515 million on August 3.  The payments made: $330 million Sales Tax (COFINA), $169.6 million GDB, $13.9 million General Obligation and $1.5 million Municipal Finance Authority. Puerto Rico paid only $628,000 of a $58 million pay-ment for Public Finance Corp  (PFC) debt service that has no legal dedicated revenue stream. PFC debt is paid by appropriation, in essence it is a Moral Obligation bond. The Commonwealth has stated they do not believe not entirely paying this bond repre-sents a default. Analysts and market participants think otherwise.

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COFINA Payments Protected By Law… $330 million of Sales Tax (COFINA) bond debt service was paid. Government Devel-opment Bank (GDB) President Acosta explained that the funds for COFINA debt service are held by the Trustee Banco Popular which distributes payments to bond-holders. “It is a mechanical process through which the trustee pays COFINA bondholders with the money it already has.” By law COFINA revenues are not available to the Commonwealth for any purpose and are segregated from the Puerto Rico general fund. The Puerto Rico legislature would have to vote to change current law to gain legal access to COFINA revenues. 

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COFINA Bondholders… A group of insti-tutions holding $5 billion face value of Sales Tax backed securities (COFINA) have hired Miller Buckfire, turnaround advisors, to join the law firm Quinn Emanuel Urquhart & Sullivan to represent their interest as creditors prepare for a government plan to restructure debt.

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Puerto Rico Debt With Least Legal Protection Will Be Targeted… By not making a schedule debt service payment on PFC, paid only if the legislature appropriates payment, to many analysts and insiders it appears the Commonwealth will target debt that offers the least legal protection to bondholders.  The bonds with the highest degree of legal protection are General Obligation and Sales Tax (COFINA) bonds. Puerto Rico has set in motion a chain of events intended to force creditors into negotiating debt restructuring within the constraints of debt documents.

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Creditor Report From Former IMF Con-sultants Conflict With Puerto Rico Report From Former IMF Consultants… Puerto Rico can pay what it owes reported former IMF consultants retained by hedge funds holding $5.2 billion Puerto Rico bonds. Among the suggestions, enforcing higher sales tax compliance to the 50-state average of 83% from 56% on the island could add $1.1 billion. Excess costs incurred by government and schools can save more. Recent enacted fiscal reform measures include $3 billion more revenue by 2020 through current higher sales and use tax. Lower energy costs through a reformed PREPA and lower transportation costs by seeking Jones Act exemption could bring positives. As one of the Caribbean’s largest port systems ready for large vessels, Puerto Rico ports carry potential for capitalization by the Commonwealth through a public private partnership.  The report identified these steps as it asked Puerto Rico to make necessary fiscal adjustments with the help of a bridge loan in the interim to fix its deficit problem. The report drew reserved comments from the Governor’s office as the Chief of Staff noted, “However, the simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an  economy already on its knees,” Author Claudio Loser said, “The debt in the medium-term is sustainable. A broad statement saying that the debt requires restructuring, we feel, is absolutely not substantiated. There is no evidence that one can gather that says there is a need for a general restructuring of debt.” Hedge funds are in active dialogue bringing the Commonwealth’s attention to more sophisticated and realistic financial reasoning.

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PR Chapter 9 Not The Way…  “Simply advocating access to bankruptcy law does nothing to address the substantial, structural challenges that have plagued Puerto Rico for decades.”  This was the response from the office of Senate Finance Committee Chair Orrin Hatch to Treasury Secretary Jack Lew’s endorsement for legislation granting the commonwealth access to Chapter 9 bankruptcy. Lew also reiterated that Puerto Rico needs “a long-term comprehensive fiscal plan” that should include input from a range of stakeholders and have credible assumptions for long-run revenue collections, expense outlays, and growth.” Republicans in Congress have been reluctant to move for-ward with Chapter 9 approval without more planning outside of bankruptcy and possibly a Financial Control Board.

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Fitch Comment On Puerto Rico Debt… It’s to soon to say how particular bonds will be affected because there isn’t sufficient information to consider default of any of the specific credits that Fitch rates.

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PR Restructuring Plan… Puerto Rico government will present a debt restructuring plan by the end of August before starting discus-sions with individual creditors, the Governor's Chief of Staff, Victor Suarez, said Monday.  Hopefully the plan will be realistic.

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Fed Rate Hike Faces Head winds… Looking to raise rates this year the Fed flagged nagging con-cerns in its post-meeting statement that inflation remains too low, which is making officials hesitant on the timing for liftoff.  There has been progress in their goal for U.S. job growth, however, wage growth is disappointing and there is little progress in their objective of modestly rising consumer prices. Traders are pricing in a 38 percent probability that the Fed raises rates at the September meeting. The assumption is that the effective fed funds rate will average 0.375 per-cent after liftoff.  Manufacturing cooled in July and order backlogs slumped.

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Value in Airport Bonds… The airport ecosystem is generally delinked from home city finances. Take Detroit Metro Airport: being largely independent, it shares little more than a name with Wayne County.  In similar vein, the world’s busiest airport Chicago O’Hare rated Moody’s “A2” S&P “A-” Fitch “A” is not linked to the Windy City’s general obligation debt.  Airport credits trend around the “A” range and are sensitive to economic cycles. A record 65 million passengers boarded U.S. airlines in March surpassing the previous record set in 2007. $2 billion O’Hare International Air-port bonds slated to be issued shortly.

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Chicago Schools… Board of Ed ratings cut to “BB+” one level below investment grade by Fitch ratings.  Standard & Poor's dropped the Chicago Board of Education's General Obligation bond rating two notches to “BBB” and put it on Credit Watch negative stressing the burden of high pension payments paid from borrowings.  Recently Moody’s cut Chicago Board of Ed rating to “Ba3”.  Amid job cuts the Mayor has appointed a new leadership team to steer the way out. Meanwhile, Illinois Attorney Gen-eral Lisa Madigan signaled a possible appeal to the U.S. Supreme Court for pension relief by asking for more time to review recent pension rulings.

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Atlantic City Looks To Water Utility… By taking charge of its independent water utility Atlantic City could save over $9 million. Higher water rates and job cuts could muster up cash for the City looking to plug a $101 deficit. Water rates in the city are roughly 40% lower than surrounding areas.

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

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