We Want To Be Your Municipal Bond Authority

Muni Week Review / Preview 1/30/2017

Monday, Jan 30, 2017

PUERTO RICO GDB PAYS MAY 1st INTEREST AGREES TO FORBEARANCE ON PARTIAL PRINCIPAL PAYMENTS. PUERTO RICO STABILITY ACT (PROMESA) UPDATE. CHICAGO PUBLIC SCHOOLS UNION TALKS PROGRESS.

Puerto Rico Enacts Law to Pay its Debts… Governor Rossello signed a law that  will give the Island’s government more ability to make bond payments when it has money available. The law replaces a moratorium law passed under the previous administration, which allowed Puerto Rico to skip debt payments on certain bonds. The new law states that the government will cover its debts if possible after payments for essential services are made. It’s unclear whether the shift will have any immediate impact, given the severe cash shortfalls facing the Island’s government. Puerto Rico is projected to have only about $252 million on hand at the end of February even if it doesn’t pay any of the $656 million of new bond payments due next month, according to projections disclosed to the U.S. Oversight Board. Rossello, who took office this month, said he is willing to work with creditors as talks to restructure the Island’s $70 billion of debt begin. The Oversight Board agreed to give Rossello until Feb. 28 to submit his fiscal plan, which will serve as a road map for negotiations.

Back to Top

Oversight Board Grants Puerto Rico Needed Extensions… PROMESA’s fiscal control board approved an extension of the delivery date of the Puerto Rico government’s fiscal plan to February 28 and the stay on litigations provided under the PROMESA federal statute to May 1. The Bd also established delivery dates for six public entities that must present individual fiscal plans. The fiscal plan must be certified by March 15. “The Board understood that it was prudent and reasonable to extend both deadlines, subject to certain conditions we had discussed with the Governor with which he agreed. Those conditions included the commitment to look for a “once and done” solution to achieve fiscal balance without additional borrowing, the implementation of a liquidity plan including a protocol for priority of payments, a regular cash flow forecasting report and the establishment of a joint working arrangement, information sharing protocol and work plan, among others,” said Oversight Board Chairman Carrion. However, once the stay expires in May, and absent consensual agreements with its creditors, Puerto Rico could again be facing a $1.3 billion cash shortfall. The Rossello Administration’s initial estimate of government fund balances shows an increase of $355 million from 2014 to 2017 baseline projections due to increased sales and use tax, higher petroleum tax offset by lower income tax while expenses are relatively constant.

Back to Top

Bondholders Bid For Early Consensus… To gain consensus, separate emergency financing offers have been made by COFINA senior bondholders, the Ad Hoc group of GO bondholders and mutual funds Franklin Advisers and Oppenheimer Fund. As the price for providing needed liquidity to Puerto Rico, creditors are pushing to lock in debt restructuring terms. COFINA creditors propose to give PR access to $400 million in sales-tax revenue that has already been collected and are willing to purchase another $400 million in long-term sales tax bonds at market terms. Previously, GO bondholders offered to buy $750 million new bonds as part of a restructuring offer to the prior administration. Puerto Rico owes $17 billion in sales-tax bonds and $13 billion in general obligation bonds. COFINA bondholders and others stressed that respecting the sanctity of securitizations preserves future access to capital markets and lowers cost of capital for islanders. COFINA bonds are considered the most widely held PR issuance amongst onisland retail investors and mainland retirees. With a stay on litigation extended to May bondholder groups are vying to distinguish the varying securities in front of decision makers to protect their interests. Pressing for a strong fiscal plan, PROMESA’s Federal Board has warned Governor Rossello to not accept any “short-term liquidity loans or near term financing that could restrict fiscal options” and stick to negotiations required under Title VI of PROMESA.

Back to Top

PREPA Agreement Extended… Puerto Rico’s government run electric utility and its creditors agreed to extend a restructuring agreement to February 28, giving the authority more time to comply with the only deal the island has reached to cut some of its $70 billion debt. Pre-dating PROMESA, bondholders previously agreed to accept losses of 15% in the Dec. 2015 pact. PREPA bondholders stated, “This type of negotiated agreement is in the best interests of Puerto Rico in order to address its urgent economic issues, and we look forward to continuing to be part of this constructive process.”  The Governor hinted he would like to modify the terms of the current restructuring agreement, in all likelihood any modifications will be minor tweaks to the current plan.

Back to Top

Illinois Budget Update… A 13-bill “grand bargain” legislative package that seeks to end the state’s 18 month budget stalemate could be put to vote in February. Seeing positive discussions and movement towards compromise, an architect of the plan Republican Senate Leader Christine Radogno, is optimistic about Senate’s ability to move forward. Lawmakers say the bill has directly applied recommendations from the working groups that have been meeting since the budget impasse in 2015. “This is a very big bill and colleagues have good suggestions in terms of revenues that deserve to be considered,” Republican Senator Sue Rezin said. Senate President John Cullerton said he expects a vote on the legislation during the second week of February. Efforts to resolve the impasse have been welcomed by bond investors, who are demanding less additional yield to compensate for the risk of holding the securities.

Back to Top

Chicago Public Schools To Revise 2017 Budget “Again”…To get a foothold for a balanced budget amid uncertainty from Illinois budget delays, Chicago Public Schools (CPS) will present a third revision to its fiscal 2017 budget in early February. The district says it is “exploring multiple options” to fill a gap if anticipated state funding of $215 million for teacher pensions does not come about in the Illinois budget. CPS could cut back extra school days as its school year extends beyond state requirements. CPS already has forced all of its employees to take four unpaid furlough days for the rest of the school year, a move that should save the district $35 million. The CPS ended fiscal 2016 with a deficit of $487 million relative to $710 million in 2015. The junk-rated school district will need to find new revenue or make major spending cuts in order to sus-tain operations over the long term.

Back to Top

Virgin Islands; Another Fiscal Cri-sis Brewing… Another fiscal crisis is building in the Caribbean. After the U.S. Virgin Island delayed a planned bond offering for the second time in as many months, Moody’s and S&P this week dropped the U.S. Territory’s bond rating deeper into junk, citing its apparently limited ability to keep raising money in the capital markets to cover the budget short-falls. That’s pushing the yields on Virgin Islands bonds close to some issued by nearby Puerto Rico, which has been defaulting on debt since August 2015.

Back to Top

Trumps’s $1 Trillion Infrastructure Plan May Have a Very Big Impact… If President Trump successfully injects up to $1 trillion into U.S. infrastructure projects over the next 10 years, it would be a major departure from the prior administration. States have been picking up most of the tab for roads, bridges and highways during the last 10 years, according to a new report by Moody’s. Since 2012, Federal spending on transportation has increased just 6% while state spending is up about 25%, according to data provided by Moody’s.  The Federal gas tax, a key funding mechanism for highway repairs, hasn’t been raised since 1993. During the same period, 40 states hiked their gas taxes, the report said. Democrats and Republicans have expressed support for fixing America’s so-called crumbling infrastruc-ture. President Trump’s administra-tion has proposed using tax credits to attract private investment in projects. Senate Democrats released a plan on Tuesday outlining areas, such as public transit, where Federal funds could be spent directly. “An increase in Federal spending on infrastructure would be a positive for states’ credits,” Moody’s said.

Back to Top

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