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Muni Week Review / Preview 9/21/2015

Tuesday, Sep 22, 2015

PUERTO RICO DEBT  PLAN IN QUESTION. PREPA DEAL STALLS. U.S. WANTS RESTRUCTURING REGIME IN PUERTO RICO. FED DELAYS RATE HIKE.

Puerto Rico Plan in Question… Puerto Rico officials have overestimated the U.S. territory’s anticipated budget deficit over the next five years by about 60 percent, according to an analysis by Morgan Stanley’s debttrading team. Puerto Rico may be confronted with a $5.57 billion financing gap through its fiscal year in 2020, according to a report distributed Sept. 11 by an analyst on Morgan Stanley’s municipal bond debt trading desk in New York. A number of errors and new unexpected infrastructure spending projects are behind the $14 billion shortfall the Puerto Rico government estimated in its restructuring and economic plan. Sales tax revenues were understated by approx. $5.3 billion over the next five years and mistakes were uncovered in other taxes, healthcare transfers and subsidies. The governor’s plan to persuade bondholders to voluntarily help the island restructure debt and take losses on their investments is a long shot. The misleading actions of the island’s politicians have caused investors to lose confidence and trust in the Puerto Rico governor and legislature.

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PREPA Deal Stalls… The Puerto Rico Electric Power Authority (PREPA) has asked creditors for 2 more weeks to negotiate with municipal bond insurers. On Sept. 1, the utility reached a tentative agreement with Oppenheimer Funds, Franklin Advisors, Blue Mountain Capital and Goldman Sachs who agreed to accept 85% of par value. Municipal bond insurers did not accept the haircut and offered a proposal that would pay them 100%. The extension would be the eighth since negotiations began in June 2014. The utility is the largest U.S. public power provider with 1.47 million customer accounts and $4.68 billion in revenue in 2013 according to American Power Association. Municipal bond insurers by electing not to accept 85% of face are sending a strong message to PREPA that it is time to make tough decisions and raise rates.

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U.S. Treasury Wants a Restructuring Regime in Puerto Rico… The Obama admin-istration urged the U.S. Congress last Thursday to provide Puerto Rico with access to a restructuring regime to help the Common-wealth deal with its fiscal challenges, the U.S. Treasury Department said, “Without Federal legislation, a resolution to address Puerto Rico’s financial liabilities would likely be difficult, protracted and costly.” Treasury Secretary Jack Lew and National Economic Council Director Jeffrey Zients met last Thursday with Puerto Rico Governor Padilla. Padilla recently released a fiscal and economic reform plan to help Puerto Rico deal with its $72 billion debt burden. The plan “Is an important step toward finding a sustainable path forward for the people of Puerto Rico,” the Treasury statement said. The plan is not expected to get enough votes in the Puerto Rico legislature. Governor Padilla has proposed granting businesses lower tax rates and allowing companies to be treated as domestic corporations for U.S. tax purposes

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Legal Protections and Solid Revenues Arm “COFINA” Bondholders… With strong pledged revenues covering COFINA debt service, it is unlikely that legally pro-tected bondholders could concede to any changes in contractual terms not specified so far. Sales and Use Tax revenues totaled $190.7 million in August, $22.2 million or 13% above estimates, the first month a new, higher sales tax was in effect. In May, Governor Alejandro Garcia Padilla signed into law a sales tax hike, boosting the rate to 10.5% from 7%. Of the $190.7 million in sales and use taxes collected by the treasury, $108.6 million went to the Puerto Rico sales tax financing corporation to cover debt service and $82.1 million went to the general fund, according to the office. Part of the island's plans for greater fiscal stability include increas-ing revenue by $6.4 billion through sales and value added taxes in fis-cal years 2016 through 2020. It is very doubtful institutional bond-holders will entertain any restructuring proposal on any dedicated revenue COFINA bonds.

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Fed Delays Rate Hike… One of the largest economic expansions in American history remains so fragile and the global economy is so uncertain the Fed decided to post-pone any retreat from its stimulus campaign. The Fed has kept its benchmark rate close to zero since late 2008. Most economists believe liftoff will be sometime in 2016.

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Wayne County Passes Budget… The County Commission on Thurs-day approved a $1.6 billion 2016 balanced budget. The general fund budget totals $1.15 billion, down from $1.38 billion in fiscal 2015 and $1.46 billion fiscal 2014 budget. The projected 2017 general fund budget totals $1.16 billion. County Executive Warren Evans said the spending plan eliminates a $52 million structural deficit that has plagued the county for years. “It is a realistic and balanced budget that aligns with my administrations’ recovery plan,” Evans who took office in January, said in a statement after the board vote. “Today marks another positive step toward improving the financial health of our county.” The board approved the budget 14-0, with one member absent. The county’s fiscal year begins Oct 1. The new spending plan features cuts across nearly all county departments. Commissioner Diane Web, DLivonia, called it an “honest budget”. “This budget, as brutal as it is, is the real deal,” she said during the board meeting, according to local reports

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Illinois Towns Either Face Higher Costs or Avoid Market… The state of Illinois budget stalemate is leading investors to demand higher yields to lend to its towns and villages, causing bond sales to tumble while borrowers outside the state rush to capture the lowest interest rates in a generation. The drop in issuance this year stands in contrast to the rest of the $3.6 trillion U.S. muni market, where bond offerings are on pace to reach the highest level since at least 2002, according to Bloomberg. Illinois is one of only five states where issuance has fallen. Illinois issuers have sold $8.4 billion of debt through September 11 down from $9.9 billion a year earlier, the largest decline nationwide.

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Pennsylvania Bond Penalty Grows as Budget Impasse Deepens… Pennsylvania is facing rising penalties from investors as Democratic Governor Tom Wolf plans to veto a temporary budget being advanced by Republican legislators, promising to prolong a political impasse that has left the state without a spending plan for more than two months. Pennsylvania has been operating without a spending plan for the year that began in July because the Republicanled legislature and first-term governor have remained at loggerheads over proposed tax increases and overhauls to the public employee pension system. Uncertainty led Moody’s to downgrade schools that issue debt through a state program that diverts aid to investors when needed. “We’re going to continue to have the credit downgrades we’ve had because we’re not doing anything else differently than we've done,” Governor Wolf said. “It’s status quo.”  The state’s $53 billion unfunded pension liability has weighed on its bonds. The Keystone State is paying more to borrow than any other state except Illinois and New Jersey, according to data on 20 major states compiled by Bloomberg.

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Muni Bond Sales Poised to Accelerate as Redemptions Rise… Municipal bond sales in the U.S. are set to increase in the next month while the amount of redemptions and maturing debt rises. States and localities plan to issue $12.7 billion of bonds over the next 30 days, according to Bloomberg. Over a week ago, the calendar showed $11.7 billion planned for the coming month. Supply figures exclude derivatives and variable rate debt. Some municipalities set their deals less than a month before borrowing. New York City Transportation Finance Authority plans to sell $750 million of bonds, Texas Transportation Commission has scheduled $750 million, Illinois State Finance Authority will offer $368 million and Los Angeles Department of Water and Power will bring $271 million to market.

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

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