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Muni Week Review / Preview 10/05/2015

Wednesday, Oct 07, 2015

CHICAGO RATINGS DISPARITY CREATES VALUE. FED RATE LIFTOFF FACES HEADWINDS. LAWMAKERS PUSH FOR FEDERAL ADVISORY BOARD FOR PUERTO RICO.

Ratings Disparity Creates Value… No U.S. city has credit ratings that carry a larger divergence of opinion among munic-ipal bond market participants than Chicago. The city’s sales-tax, motor-fuel-tax, water, sewer and park bonds all have at least a six-level gap between the lowest and high-est ratings. The discrepancy has created pockets of value for investors. Chicago sales-tax bonds rated by Moody’s “Ba1”, S&P “AAA”, Fitch “BBB+” yield 4.7%; Park District bonds rated by Moody’s “Ba1”, S&P “AA+”, Fitch “AA-” yield 3.86% compared with 2.1% for top rated benchmarks. The yield gap has narrowed since Mayor Emanuel announced a big property tax hike to deal with skyrocketing pensions. The movement in yields is the result of investor “belief that we are starting to make the hard choices to right the city’s financial ship” said a city official. By the end of the year the city plans to come to the primary market with $500 million general obligation bonds, $400 million wastewater bonds and $2 billion O’Hare airport bonds. If the proposed budget passes City Council, city officials expect to see positive responses from investors and rating agencies, although rating upgrades and interest savings could take longer.

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Headwinds To Fed Rate Lift-off… Investors pushed off expectations for the first Federal Reserve rate hike in almost a decade until March or later. Weaker than expected 142,000 jobs added in September following steep downward revisions in Au-gust data took 10-year Treasury bonds yield below 2%. Inflation has stayed stubbornly below the central bank’s 2% target since 2012, which makes it harder for the Fed to justify tighter policy. Earlier this month central bankers decided to keep their benchmark interest rate unchanged. A global economic slowdown must also be considered

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Push For Federal Advisory Board For Puerto Rico… Chairman of House Judiciary Committee on Regulatory Reform, Com-mercial and Antitrust Law, Representative Tom Marino is pushing for the creation of a federal board appointed by Congress and the Obama Administration to advise Puerto Rico on its finances instead of direct control. Senator Charles Grassley, an Iowa Rep. who chairs the Senate Judiciary Committee, suggested a similar move during a hearing on the island’s fiscal crisis Tuesday. Garcia Padilla has proposed his own version of a Control Board for the island, with members that would be selected by the governor. U.S. Treasury Secretary Jacob Lew said in July that no federal bailout is being considered, though the administration supports the bank-ruptcy bill. Echoing Republican sentiment, Marino said that a bankruptcy bill, if considered at all, would have to be part of a broader program to help Puerto Rico deal with its long building financial strains. He said an advisory board of experts could help provide a path forward, and even offer some proposed actions for Congress to take. The details about how such a board would operate have not been decided.

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PREPA Gets Extension… Puerto Rico’s electric power provider won a two-week extension from its municipal bondholders to negotiate how to restructure $8.3 billion of debt. Investors holding about 35 percent of the utility’s debt and its fuel lenders agreed to extend forbearance for the ninth time until October 15.  Forbearing municipal bondholders reached a tentative 85% of par value agreement on September 1. Puerto Rico Energy Commission declined National Public Finance Guarantee’s petition for a rate increase. Municipal Bond insurers Assured Guaranty, Syncora Guarantee and National declined to continue forbearance as they demand a 100% settlement.

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Puerto Rico Seeks To Replace Excise Taxes… Seven of the world’s 10 top-selling drugs are made in Puerto Rico.  The Island is in discussions with its U.S. based and multinational manufacturers to replace the excise tax businesses pay with a permanent corporate tax that would be a credit against the companies’ federal taxes. To give the commonwealth sufficient time to craft the new levy, officials are looking to extend the 4 percent excise tax for five years to 2022. The IRS has indicated it would continue to allow a federal credit during the extended period. The excise tax of $1.9 billion in 2015 makes up about 20% of the  Government’s general fund budget.

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Complications in Puerto Rico Government… A new front open-ed in Puerto Rico's debt battle as the island's Government Develop-ment Bank (GDB) went to court, seeking $400 million in local property tax revenue it said was being illegally held by a local gov-ernment collection agency. The agency that collects property taxes on the island, the Municipal Revenue Collections Center, or CRIM, appears to have $400 million on hand that the GDB has claims on to pay upcoming debt service. In a sign of the complicated relationships in the island's government, the president of the GDB, Melba Acosta, and another official, José V. Pagán Beauchamp, were listed as members of both the collection agency's board and the GDB.

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Puerto Rico 4% Business Tax Effective Oct 1… A new 4% tax on professional services provided to businesses on the island. The tax is expected to apply to engineering companies, lawyers, accountants and others previously exempt. Earlier this year general  sales taxes on the island were increased to 11.5% from 7% boosting the revenues. The Puerto Rican constitution says general obligation municipal bonds have priority over all other government payments including: payments to all classes of bondholders with the exception of the dedicated sales tax pledged to COFINA municipal bondholders.

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Scranton Pension Settlement… Scranton's non-uniform pension board will save the city more than $600,000 by eliminating enhanced payments. Scranton has cut excess funds to double-pension recipients starting January while forgiving repayment of about $500,000 in excess benefits received since 2002 to improve its pensions funded between 17% and 29%. Pennsylvania Auditor Gen. DePasquale noted “While this settlement is a start, Scranton is still facing a huge pension challenge. Scranton city officials must continue to do ev-erything in their power to avoid bankruptcy and protect the economic interests of all the people in the region.”

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U.S. Cities’ Finances Strengthen… Across the U.S. 82% of cities are better able to meet their fiscal needs this year than 2014, the most in three decades. Two in five finance officials said they raised fees, while about 20% elevated the property-tax rate in 2015 per a National League of Cities survey of 363 cities. Reserves are projected to reach a record 25.2% of bud-geted expenses in 2015 after cities drew on the funds after the Great Recession.  Two largest positive factors driving cities’ fiscal positions are the local tax base values and economy. The biggest factors weighing on city finances are infrastructure needs and the cost of pension payments and retiree health benefits.

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Property Tax Hike in Port St. Lucie… A credit positive One-millor 22.7% higher property tax approved by Port St. Lucie will bring $6.8 million more revenue to the city that faced hurdles with private enterprises involved in economic development projects. The city also sold a building it took over; sale proceeds will call prior debt sup-ported by the city. The rate hike eases the general fund which supported failed economic development projects. After seeing deficits in 2014 and 2015, the 2016 general fund budget is structurally balanced.

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Upcoming Airport Bonds… Greater Orlando Aviation Airport muncipal bonds rated “Aa3/AA-” and $2 billion Chicago O’Hare airport bonds rated “A” are coming to the primary market. Several layers of protection shield airport revenues from the finances of city, county and local government.

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

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