PUERTO RICO EXPECTED TO MAKE ALL DEC 1 BOND PAYMENTS. IT’S OFFICIAL “HISTORIC TAX HIKE IN CHICAGO”. GLOBAL GROWTH EXPECTED TO REMAIN TEPID FOR YEARS.
Puerto Rico GDB Expected to Make All Dec 1 Bond Payments… The Government Development Bank (GDB) which oversees the island’s borrowing announced on 10/29 is expected to make a $354 million bond payment on Dec 1. The Puerto Rico Treasury Secretary said the island is no longer contemplating a partial government shut-down. GDB liquidity stood at $875 million as of Sept 30.
Puerto Rico Fails to Provide Audited Financials… The island failed to submit audited financials for 2014 by a self imposed Oct 31 deadline. The Commonwealth is 181 days late and cannot provide an estimate when it will be able to file audited financials. Sen. Orrin Hatch and Sen. Lisa Murkowski, who chair U.S. Congressional committees, have told island officials during recent hearings concerning Puerto Rico’s fiscal troubles the Commonwealth must improve its financial disclosures before the federal government can determine what type of aid the island may need.
Puerto Rico Electric Nearing Agreement with Creditors… The Puerto Rico Electric Power Authority (PREPA) said 35% of its bondholders have agreed to accept 85% of par value for a more secure municipal bond, credit line banks have agreed to a lower rate and extended maturities for a 100% recovery, municipal bond insurers also expect a 100% recovery with various terms, conditions and maturity extensions yet to be announced. The three groups of municipal bondholders are expected to sign an agreement sometime this month. The restructuring agreement will depend on the approval of the legislation that would over-haul PREPA operations.
The Rush to Allow Puerto Rico to Default is About Votes Not Economics… (Wall Street Journal 11/1/15 condensed) Debt service will consume less than 17% of Puerto Rico’s consolidated budget this fiscal year. In the general-fund budget, which does not include government owned corporations and agencies, debt service is below 16%. Neither number sounds like grounds for declaring bankruptcy. Factor in all the fat in government spending that could be cut and the case for walking away from obligations to creditors is even weaker. The U.S. is entering a presidential election year and pollsters say voters tend to choose the candidate who “cares about people like me.” Puerto Ricans living on the island don’t vote, but those on the mainland do. What could say “caring” to these Hispanic voters in places like New York, Florida, Ohio and Pennsylvania more than federal permission to write down Puerto Rico’s $73 billion in debt? Right on cue, the U.S. Treasury wants Congress to approve legislation that would allow Puerto Rico to declare bankruptcy. In an analysis posted on its website, the U.S. Treasury some how finds debt service as a percentage of the general-fund budget is 38%, which is to say that it believes the way Puerto Rico has been calculating its debt service burden for the last 40 years is wrong. It would be interesting to know how that 38% number got by all the credit rating firms, lawyers and bond underwriters. In a July 28 letter to Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Jacob Lew wrote, “I am deeply concerned that a protracted and disorderly restructuring process will cause long term damage to the health, safety and financial well-being of thenew ones. families living and working in Puerto Rico. Exaggerated statements of an escalating fiscal crisis are designed to rush Congress into approving a bankruptcy bailout for the Commonwealth. Yet there is little evidence that Puerto Rico faces a humanitarian crisis any more than any heavily indebted state on the mainland. And as to the deteriorating fiscal environment, it seems to be largely the work of Governor Padilla, who has been signaling markets that default is a policy goal. As Carlos Colón de Armas, a professor of finance at the Graduate School of Business at the University of Puerto Rico, said last week, “If, instead of doing everything it can do in order not to pay, the government of Puerto Rico were doing everything it could do in order to pay, things would be very different.” The trouble is that since Gov. Padilla has spooked lenders, the island has all but lost access to financial markets. The professor maintains that if Puerto Rico would announce tomorrow that it will pay all its debts, as it always has paid them, it would be able to manage its cash flow using short-term borrowing. Ricardo Rosselló, who is running in the opposition New Progressive Party primary for governor in 2016, said in an interview last week that “the debt is only unsustainable if we continue on the same path we have been on.” Writing in Forbes magazine on Oct 22, Mr. Rosselló noted that the debt is merely a symptom of overspending, “a habit which produces $6 billion deficits per year,” and big government leading to “stunted growth.” The answer, as Mr Colón de Armas says, is that “politicians are trying to avoid the hard work” that they should have been paying attention to as this problem built up over the last decade. But “bondholders don’t vote,” he notes. “People that lose government jobs and people who receive benefits from the govern-ment do vote.” Unfortunately, Puerto Rico’s financial emergency is about votes.
Chicago’s Historical 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.
Chicago Lowers Risk… Steadfast political will brings a historic tax hike adding over $700 million to Chicago’s revenues. Phased in over four years, $588 million higher property taxes will fund $543 million to public safety and fire pensions and $45 million for school capital. Additional $125 million new revenue from other taxes and fee hikes along with $170 million in cost savings tackle a $233 million operating deficit and fund other spending proposals. Now the Mayor’s focus is on soft-ening the blow to lower income families by seeking to double a homestead exemption for lower valued properties. The City is try-ing to convince state leaders to finalize a proposed reamortization of public safety pension payments to avert $220 million higher pension contributions next year. It could take multiple years for the city to achieve structural budget balance. The $7.8 billion approved budget assumes certain actions from the State of Illinois and Illinois Supreme Court related to pension contributions. Fiscal 2016 budget and property tax hikes were termed as a positive step by Moody’s and “important first steps” by Standard & Poor’s as they represent notable progress recognizing that long term fiscal pressures must be addressed.
Global Growth Expected to Remain Tepid For Years… Ask any municipal bond expert in Tokyo, London or New York what their view on the global economy is and you’re likely to get a similar, decidedly down-beat answer. Government debt markets suggest that investors are pricing in the likelihood that growth and inflation around the world will remain tepid for years to come. In the U.S., the bright spot in the global economy, 10-year Treasury yields are pinned near 2%, 30-year yields are under 3%, both well below what most on Wall Street expected by now. What in-vestors see in the bond market is a “lack of confidence in the future.” With the risk of deflation lingering in Europe, China slashing interest rates to combat flagging growth and a raft of indicators fueling concern the U.S. economy is losing steam, it’s not hard to understand why many investors are pessimis-tic. In the developed world, experts see inflation averaging 1.01% in future years, based on data compiled by Bank of America. Many economists agree “Growth is not strong enough to generate inflation,” and if the Fed lifts rates, “it’s going to stall global growth.”
Politics Puts Two States Ratings At Risk… The gap between yields on bonds issued by Illinois and Pennsylvania issuers and the gen-eral market continue to widen. The only two states without an operating budget for the current year, IL and PA have new Governors seeking accord with state lawmakers. The political standoff is creating rating downgrades to some issuers that receive funding from PA and IL. Rating downgrades will cause issuers to pay higher interest rates on new municipal bond issues. However, the commitment to pay bond debt service will remain unquestioned.
Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.
Get More Information on this Featured Bond
To learn more about this featured bond, please fill out the form below.
The GMS GROUP Headquarters
Galleria Financial Center
Newport Financial Center