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Muni Week Review / Preview 10/26/2015

Friday, Oct 30, 2015

OBAMA PUERTO RICO RESCUE PLAN RAISES EYEBROWS. SENATE JUDICIARY COMMITTEE RESPONDS. CHICAGO TAX HIKE CLOSER.

Obama Puerto Rico Rescue Plan Raises Eyebrows… An Obama administration pro-posal aimed at stemming Puerto Rico’s spiraling fiscal crisis received a lukewarm reception before a Senate panel. Some Republicans asked for better financial data and some Democrats called on the administration to show more ingenuity and urgency to solve it. “In the very near future, Puerto Rico will face impossible choices among providing essential public service, deliver-ing promised pension benefits and paying its debt,” said Antonio Weiss, counselor to U.S. Treasury Secretary. Weiss outlined a series of actions that the administration wanted Congress to consider to help Puerto Rico. He said lawmakers should create a new class of bankruptcy only available to U.S. territories that would allow Puerto Rico to restructure all of its debt. The plan would also broaden the availability of federal tax breaks for island residents, including the earned-income tax credit, widen access to Medicaid and create a mechanism for congressional oversight of the island’s troubled finances. Sen. Lisa Murkowski (R-AK), the committee’s chairman, said that she was sympathetic to Puerto Rico’s plight but needs verifiable numbers about the island’s finances before she can help craft a solution. Puerto Rico has not produced an audited financial statement in two years, and she said, other financial reports have come up with widely varying numbers for the island’s debt service costs. Nonetheless, Murkowski said, “Puerto Rico’s short-term liquidity crunch is real, and action is required.” The island has been effectively shut out of the municipal bond market for two years and even bonds that are nominally guaranteed under the commonwealth’s constitution are trading no more than 70% of their original value.

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Senate Judiciary Committee Responds to Obama’s Puerto Rico Plan… House Judiciary Committee Chairman Sen. Goodlatte (R-VA) and Regulatory Reform, Subcommittee Chairman Sen. Marino (R-VA) is-sued the following statement on the Obama Administration’s recent proposal to address the economic situation in Puerto Rico: We appreciate the Administration taking a hard look at the issues surrounding the economic situation in Puerto Rico and proposing ideas regarding congressional action. The Administration’s acknowledgement that Congress is the appropriate branch to exer-cise legislative authority on the matter is welcomed. Furthermore, some provisions in the proposal such as the need for Puerto Rico to take strong austerity measures and the need for effective oversight of the im-plementation of those measures in order to correct its economic downturn, are positive steps toward addressing this problem. However, some of the recommendations raise serious concerns, such as the proposal to allow the entire territory of Puerto Rico to exercise bankruptcy powers similar to Chapter 9. We will take all the Administra-tion’s proposals under advisement and will continue our ongoing and productive dia-logue with the government of Puerto Rico, creditors, investors, other interested parties, our Members and the Administration as we further evaluate the best steps forward for Puerto Rico’s economic recovery. Sen. Grassley, (R-IA) said, “Puerto Rico hasn’t demonstrated it’s willing to make the hard and sometimes unpopular decisions to match government spending to revenues to avoid a debt crisis. The White House plan to aid Puerto Rico seems to take a leap of faith that the island will suddenly implement meaningful reform and strong fiscal discipline”.

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PREPA Gets 11th Extension… PREPA won another eight days extension of forbearance from investors that hold 35% of its debt and fuel lenders keeping matters out of court. National, Assured Guaranty and Syncora Guarantee are working out details that would ease near-term debt payments. Monolines, which insure about $2.5 billion of PREPA debt and are seeking a 100% settlement, are considering an instrument that provides liquidity to the potential debt exchange. The Administration expects to file the Restructuring Act for PREPA this week. The Act would grant a 3 cent per kilowatt hour rate increase, allow third-party management and cap municipal subsidies. PREPA has logged in close to $200 million recurring and one-time savings per the Restructuring Officer. PREPA and bond insurers may reach a broad consensual settlement soon. A sticking point in the discussion with insur-ers is a question about the oversight of PR’s broader finances.

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GDB Bondholder Talks End… All seven members of a Govern-ment Development Bank (GDB) bondholders group exited talks for a potential GDB debt exchange. Seeking to restructure some of the GDB’s $5.1 billion debt, the U.S. territory had offered to exchange $850 million of existing GDB notes and sell $750 million of new tax-exempt debt issued by the Infrastructure Financing Authority and backed by taxes on petroleum products and guaranteed by the commonwealth. The proposed transaction would have exchanged existing debt at prices equal to 130% of market value and eased GDB’s near term liquidity. The new cash notes would have been priced with an 8.5% coupon at a 10% yield. The GDB said it would continue to focus on broader restructuring that would allow municipal bondholders to voluntarily exchange their securities for new ones.

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Chicago Closer to Record Tax Hike… The city council’s finance committee voted 17 to 10 on Tuesday to raise real-estate levies by $543 million over the next four years, the biggest increase in Chicago’s history. If adopted by full council next week the property tax hike would mark one of the biggest steps yet by Emanuel, who took office in 2011, to bolster the finances of Chicago. Municipal bond investors have welcomed the prospect of higher taxes, fueling demand for the Windy City’s municipal bonds.

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Chicago Lowers Risk… This year Chicago has converted over $1.2 billion of variable rate municipal bonds to fixed rate. The move to eliminate all exposures to debt acceleration provisions is credit positive for the City general obligation, sales tax and wastewater revenue securities. Now Chicago’s variable rate portfolio is limited to $450 million second lien water municipal bonds and $500 million airport revenue municipal bonds. The moves are part of debt reforms led by Mayor Emanuel.

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Illinois Downgrade… Moody’s cut the rating to “Baa1” from “A3”, saying the downgrade reflects a weakening of the state’s financial position and expectations that the budget stalemate will lead to fur-ther deterioration. Fitch Ratings downgraded the state to “BBB+”. Illinois is the worst-rated state with a Moody’s ranking three steps above junk, and an “A-”, one level higher, from Standard & Poor’s.

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California Municipal Bonds… Amongst issuers paying off higher cost debt is California $961 million new bonds rated “AA-” trading close to “AAA” benchmarks. Boosted by higher taxes in a very strong economy, California’s first quarter revenues came in $744 million more than estimated. California won multiple upgrades from ratings agencies after the current adminis-tration addressed fiscal problems.

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Muni Issuers Save On Interest… A dearth of new debt amid a refi-nancing wave has eased fiscal pressures on states and local governments. Their annual interest payments slipped to about $188 billion in 2014 compared to $204 billion in 2013 per U.S. Commerce Department figures. Governments scaled back on funding infrastructure after 2010 after the sunset of the federally subsidized Build America Bond program. Driven by low interest rates a record pace of borrowing with $320 billion new municipal bonds issued this year should cause the $3.7 trillion muni market to grow for the first time in five years. Demand has been fueled by an influx of money by individuals into the municipal bond 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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