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Muni Week Review / Preview 9/28/2015

Wednesday, Sep 30, 2015

SENATE HEARING: NO EASY SOLUTIONS FOR PUERTO RICO. PUERTO RICO DEBT  PLAN TO RESPECT PRIORITY OF DEBT. CHICAGO PROPOSES $700 MILLION IN NEW TAXES.

Senate Hearing… Senate Finance Committee members stressed a lack of reliable data from Puerto Rico as they brought into focus the need for policies to restore economic growth and sought core budgetary solutions. The Committee Chairman Orrin Hatch stated the purpose of the hearing is to gather information. The chairman said, “Puerto Rico’s problems and any proposed solutions are multidimensional and extremely complicated.” Based on the committee’s remarks, Chapter 9 bankruptcy bills will remain stagnant. Sen. Judiciary Committee Chair, Sen. Charles Grassley, supported a Federal Control Board as well as exempting PR from the Federal minimum wage and maritime shipping restrictions. Grassley added “Congressional help without meaningful reform by the Puerto Rican government won’t work.” Puerto Rico’s representative in Congress Pedro Pierluisi, who plans to run for governor, criticized Gov. Padilla’s approach to debt restructuring. The criticism illus-trates the divided message being sent to Washington as the island seeks help. Puerto Rico Development Bank President Melba Acosta said “Federal action is essential.” As Puerto Rico officials pushed to boost Federal funding, Sen. Hatch expressed skepticism more funding would be sufficient unless PR first shows meaningful reforms. Remarks from top committee Republicans seem to suggest a new focus may come soon, a comprehensive approach that may include a federally assisted Financial Control Board. Overall Congress has shown little urgency in aiding PR and the White House has made it clear “No Bailout.” The PR governor and legislature should heed Rep. Pierluisi’s statement; “The government’s recent actions have badly tarnished Puerto Rico’s credibility and standing among investors, it must take great care not to pursue a strategy that will make permanent adversaries of those whose capital it will one day require.”

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Puerto Rico Debt Restructuring to Re-spect Priority of Debt and Bondholders Protection… Puerto Rico released its Restructuring Process and Principles, which can be viewed on the Government Develop-ment Bank (GDB) website. The document outlines a plan of engagement with creditors and the goals of structuring a voluntary exchange offer to provide the Commonwealth with near-term debt relief. The release states: through consensual negotia-tions, the Commonwealth will structure a voluntary exchange offer to avoid a default on Commonwealth debt. To avoid a piece-meal approach, the transaction will be structured to involve the creditors of many entities as part of a single comprehensive exchange transaction. Seeking to respect Constitutional priorities for payment of Puerto Rico’s public debt, the exchange transaction is to be structured taking into account the priorities that debt creditors hold. The restructuring principles that will guide the Working Group’s efforts include the following:(i) Reflect and seek to respect the Constitutional priorities for payment of the Commonwealth’s public debt; (ii) Create a long-term financing solution to the patch-work complex of issuers and indebtedness; (iii) Design a structure that is attractive to existing creditors; (iv) Restore market access on sustainable terms. Puerto Rico plans to present a debt restructuring offer on most of its debt in early October. The island’s debt official said it will pursue a moratorium on principal payments for several years.

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Puerto Rico Agency Reaches Pact With Fuel Lenders… Puerto Rico’s main power utility reached a tentative agreement with lenders on fuel purchases that would reduce interest rates on $700 million of matured debt. Repayment of principal would be extended. The Puerto Rico Electric Power Authority and lenders including a unit of Bank of Nova Scotia and Solus Alternative Asset Management agreed to convert debt into six-year term loans with a 5.75% interest rate or exchange all or part of the principal due under existing agreements for new securitized bonds with a 15% principal reduction.

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Chicago Proposes $700 Million in New Taxes… Chicago Mayor Rahm Emanuel proposed a $9.3 billion 2016 budget featuring a half-dozen new tax and fee initiatives designed to annually scoop approximately $700 million into city coffers when fully implemented. A property tax hike is the centerpiece of the 2016 budget proposal along with new taxes: garbage collection tax estimated to bring in $63 million, Uber tax $49 million and $14 million of other new revenue measures. The property tax hike could bring in up to $600 million phased in retroactively over 2015  through 2018 to pay police and fire pensions and ease school funding. New taxes and fees aggregating to $125 million help the City close a $233 million operating budget gap. Without the new revenue, the city would need to layoff 2,500 police officers, close 48 fire stations, cut 2,000 firefighting jobs and reduce city services. The city has sought state approval to trim 2016 public safety pension contributions by $220 million and faces a lawsuit challenging 2014 reform of municipal and laborer pensions. Tax exempt bonds issued by the third-largest U.S. city rallied after Mayor Emanuel took a big step in moving Chicago towards a structural budget balance. S&P recognized that the budget lays out a path to address structural imbalance; when factoring in pensions it could take multiple years to rectify. Fitch called the proposed budget and its tax increases credit positive.

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Hospital Bond Concerns Abated… Nonprofit hospital bonds are being issued at the fastest pace after two years of pull-backs as earlier concerns over the Affordable Care Act’s implementation have largely abated. Nonprofit hospitals have issued $18 billion of municipal bonds this year, already surpassing issuance volume of $15 billion in 2014 and $16 billion in 2013. Most new bonds refinance prior debt, a theme consistent with the rest of the muni market. All three ratings agencies have cited positive impacts from healthcare reform as the share of uninsured Americans dropped to 33 million or 10.4% in 2014 from 42 million in 2013, by far the largest single year reduction in three decades. Moody’s stated that last year’s nonprofit healthcare sector medians point to bolstered profitability and growth in the industry. “U.S. not-for-profit and public healthcare medians reveal improved profitability in 2014 while balance sheet measures continued their favorable trajectory.”

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Atlantic City Budget Approved... Atlantic City, whose finances are being overseen by a New Jersey local finance board, is closing a $101 million budget deficit this year. Escaping a tax hike, the city resorted to firing workers, tapping state aid, putting off employee health care and pension benefits and drawing on casino money. The $262 million budget approved by the state legislature is currently awaiting Governor Christie’s approval. The budget continues to pay debt service on bonds. A Moody’s analyst said the budget plan resolves the city's budget crisis for this fiscal year, but cautions that challenges remain as the city faces a $90 million deficit next year assuming no additional payment deferrals and the one-time revenues it received this year do not recur. It marks an initial step by state appointed emergency manager Kevin Lavin to ease a fiscal crisis in the 39,000 person sea-side city.

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International Buyers Drawn to Muni Bonds… Low global interest rates entice buyers in the U.S. muni market. International buyers are one of the fastest growing types of investor in municipal bonds, data from the U.S. Federal Reserve show. “Rest of the world” holdings of state and local debt are at their highest ever, both in absolute and relative terms, according to a Fed report. International investors hold $85.7 billion representing 2.3% of the $3.715 trillion market, as of the Q2 of 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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