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Muni Week Review / Preview 9/14/2015

Wednesday, Sep 16, 2015

PUERTO RICO FISCAL AND ECONOMIC  PLAN LACKS SUPPORT. PUERTO RICO RESTRUCTURING PLAN COMING. MARKET SEES FED DELAYING RATE HIKE.

Puerto Rico  Fiscal & Economic Plan… Last Wednesday Puerto Rico made public its long awaited Fiscal and Economic Plan. The plan proposes new accounting systems, consolidating schools and decreasing tax evasion; curbing corruption was not ad-dressed. There will be no layoffs of government workers which represent 24% of the workforce. The crux of the plan is to have bondholders voluntarily take haircuts and bailout the island, an optimistic and relatively painless solutions for politicians and island residents. The plan clearly demonstrates current leadership is not willing to burn political capital and make the tough decisions necessary to return the island to financial health. Washington officials and Congress have yet to comment on the plan, which is beginning to look like a Padilla reelection plan. Padilla’s popularity rating is 19% among Puerto Rico voters. He obviously believes a one sided plan that takes little political risk and places the burden of success on bondholders consensually taking haircuts is his only chance for reelection. The plan is bizarre, nothing remotely like it has ever been proposed in the history of American Public Finance. The plan lacks legislature support.

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Puerto Rico Debt Restructuring Plan… The restructuring plan is expected in two weeks. The Puerto Rico government will ask all municipal bondholders including constitutionally protected General Obligation municipal bondholders and legally protected by law and dedicated revenue COFINA municipal bondholders to consensually agree to unnecessary haircuts. The Fiscal and Economic Plan clearly points out a $13 billion deficit over the next 5 years. The created deficit is mainly arrived at by the spending of $11 billion of cash on infrastructure. The Fiscal Economic Plan verified Treasury Secretary Juan Zaragoza’s comment that Puerto  Rico “has the money to pay its debt but believes the money should be used for other things.” Details of plans presented by this government  are  always sketchy, ambiguous and intentionally confusing. There is nothing in Puerto Rico’s recent history that suggest investors should rely on anything the government puts forth. It’s all about politics not math. The creditability of the governor and legislature is zero. Without audited financials, which the government refuses or can’t provide, any attempt to negotiate with creditors would be disingenuous. The upcoming restructuring plan will be another Padilla re-election ploy.

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Ineffective Puerto Rico Leadership… It is highly unlikely the incoherent government politically playing the populace and misleading investors can make real progress. On April 30th Governor Padilla told the legislature Puerto Rico must pay its debt, talk of default is “folly”. He raised taxes, created new revenue, made cuts and presented a balanced 2016 budget. Bondholders were impressed, the Puerto Rican people were not. Padilla, realizing content municipal bondholders will not get him re-elected, reversed his position. On June 28th he announced via a New York Times article Puerto Rico is unable to pay its debt. He shocked the market and Puerto Rico municipal bond prices crashed. The Puerto Rico legislature is becoming a circus and Padilla is the ringmaster. In the mid 1970’s and in 1995 Congress vested power in a ‘Control Board’ for New York City and Washington D.C. respectively. A federally appointed Control Board would have the power to create budgets, manage job appointments and make difficult political changes. Decisions that will put Puerto Rico back on track to achieve economic progress, pay their debt and regain access to financial markets. A federally appointed Financial Control Board is needed in Puerto Rico.

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Puerto Rico Bondholders Will Look to Enforce Rights… A wide range of creditors with deep pockets are likely to legally challenge any plan that suggest losses on their bonds. Puerto Rico municipal bondholders are formidable adversaries; U.S. mutual funds, hedge funds and municipal bond insurers have now put their trust in the Puerto Rico Constitution and U.S. and Puerto Rico law which protects specific municipal bonds. The island’s advisors plan to present a debt exchange offer in a few weeks along with seeking a moratorium on principal payments. They are hopeful creditors will consensually agree to an exchange and a moratorium. The Puerto Rico Constitution, Puerto Rico laws, legal opinions and revenues dedicated to General Obligation and Sales Tax (COFINA) municipal bonds are more than adequate to obtain court orders for  relief from any action from Puerto Rico officials that would cause a loss of principal or interest on these two issuers. They are hoping to reach a consensual agreement with municipal bondholders that follows the path of the agreement made by holders of $3.5 billion of the $9 billion outstanding Puerto Rico Electric Power Auth (PREPA) municipal bonds for 85 cents on the dollar. The insurers did not accept the PREPA exchange as they hold out for 100 cents (par).

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PREPA Seeks Privatization… Puerto Rico electric power utility PREPA on Thursday asked for expressions of interest from private sector companies to help modernize facilities and build new generation capacity. The island monopoly electric provider has received offers (GE, NRG) in excess of $2 billion to build new power facilities in exchange for power contracts. Last month PREPA entered into two new fuel supply contracts, it said would lead to substantial an-nual savings of $55 million. Better operations are an integral part of PREPA’s restructuring plan. PREPA has entered into an agreement to exchange legacy bonds into new bonds at 85% of par.

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Market Sees Fed Delaying Rate Hike… While economists are almost equally divided on whether Federal Reserve chair Janet Yellen will raise U.S. interest rates this week, the market suggests policy makers will wait. “The probability of a move at the Fed’s Sept 16-17 meeting is about 49%”, says Mohamed El-Erian Chief Economic Adviser at Allianz SE. Futures contracts show the odds of an increase this month have dropped to 30% from 40% a month ago. This week “is too early for a rate hike,” Goldman Sachs economists wrote in a note September 11th. “Although the growth data have been quite good and the labor market has improved further, both wage and price inflation have fallen short of expectations.” Goldman forecasts the Fed will lift interest rates in December.

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Wayne Co Building Authority Examined by IRS… The Internal Revenue Service (IRS) informed the Wayne County Building Au-thority they have been selected for examination. The IRS has concern the $200,000,000 jail bond issue may fail one or more provisions of the IRS code. A finding that the bonds do not qualify under IRS code could result in a loss of approximately $7 million dollars a year in tax credits and/or a return of over $36 million they have received since 2010. The county is unable to determine at this time whether the examination will result in a loss of tax credits or when the examination will conclude.

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Scranton Plans to Lease Parking System… Scranton, PA plans to finalize a deal next month to lease its parking system for 40 years to help reduce the burden of guaranteeing its debt. The prospective leaseholder, National Development Council, a New York based community development organization, will sell municipal bonds to finance a payment to the city, which would go toward retiring the system’s $50 million in debt, said William Conaboy, a lawyer at Buchanan Ingersoll and Rooney, on a conference call organized by the city. Citigroup Inc will underwrite the sale, and New York based ABM Parking Services will run the city’s meters and five garages. The city will sell general obligation municipal bond debt to cover the redemption of the rest of the parking securities.

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Affordable Healthcare on a Positive Streak… A positive credit trend is noted by all three ratings agencies for the hospital sector. The Affordable Care Act boosted inpatient volumes, flat or declining for years. S&P noted that that new federal healthcare law did not fully take effect until a few months into 2014, and so is expected to have an even stronger impact in 2015.

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

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