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Muni Week Review / Preview 11/23/2015

Wednesday, Dec 02, 2015

INVESTOR SEARCH FOR YIELD WILL INTENSIFY. SENATE REPUBLICANS WORK ON BILL TO AID PUERTO RICO. PUERTO RICO TO OFFER DEBT EXCHANGE TO CREDITORS.

The Search For Yield… Investor concerns over Fed actions in 2016 will become less important as investors realize rate increases will be slow and insignificant. Investors who bought short term maturities to take advantage of predicted higher rates in 2016 will be disappointed as their bonds mature and rates remain low. It may be difficult to find yield in the coming year without adjusting to a research based higher risk tolerance or extending maturities.

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Senate Republicans Work on Bill to Aid Puerto Rico… Top Senate Republicans with jurisdiction over Puerto Rico are working on a proposal to help the Commonwealth counter a very unrealistic bankruptcy proposal offered by the Obama Administration. Re-publicans would prefer that Puerto Rico solve the crisis on their own, but if they can’t, lawmakers will seek to impose “something like” a Federal Control Board, said Sen. Fin. Cmte Chairman Orrin Hatch. Moody’s expects Puerto Rico to default on a portion of $354 million payment due Dec. 1, while the Puerto Rico Government Development Bank (GDB) says a default on Dec. 1 is unlikely as the government is doing everything possible to make the Dec. 1 payment. Sen. Charles Grassley has said the island needs a Federal Control Board to resist local pressure and implement necessary reforms such as trimming government jobs. The judiciary panel that Grassley leads will hold a hearing on Puerto Rico on Dec. 1. Obama’s plan, supported by Democrats and the Puerto Rican government, focuses on granting the island broad bankruptcy powers. Prior attempts to extend Puerto Rico’s access to bankruptcy procedures failed or stalled amid opposition from Congress and municipal bondholders.

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Puerto Rico to Offer Debt Exchange to Creditors… Puerto Rico plans to present bondholders with a universal debt exchange proposal that would allow bondholders owning securities with various repayment priorities to consensually swap their debt for a single new bond. Government officials outlined the proposal in a meeting Friday in New York with advisers of the Common-wealth and major municipal bondholders. There will probably be a consolidation of repayment sources to payoff the new debt. The GDB and its advisers are seeking to present an acceptable transaction proposal to creditors who hold general obligations and sales-tax municipal bonds. The meeting wasn’t open to the public. Attendees signed nondisclosure agreements. Investors are watching to see if Puerto Rico will pay $467 million due Dec. 1, its biggest obligation since August and then $958 million owed on Jan. 1.

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Distressed Debt Investors Continue to Buy Puerto Rico Debt… Distressed debt investors including Double Line Capital and Avenue Capital are betting that Puerto Rico bond prices have fallen too far and expect higher recoveries on legally protected bond debt. Conflicting remarks on upcoming debt service payments have driven prices on Puerto Rico bonds to recent lows. Declines have lured hedge funds and distressed debt buyers, who already own a third of Puerto Rico’s bonds as current bond prices relative to recovery potential reflect upside. New distressed bond funds have been started to meet investor demand for the distressed securities. The New York City $53 billion pension fund has assets in eight hedge funds that own Puerto Rico bonds. A long list of municipal bond funds, hedge funds and Puerto Rico cooperatives own the bulk of Puerto Rico debt.

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Potential Congressional Solutions to Solve the Puerto Rico Financial Crisis…  Republican led congressional com-mittees are considering the follow-ing options to solve the Puerto Rico financial crisis: Federal Fi-nancial Control Board, change to minimum wage law in Puerto Rico, lifting the Jones Act which imposes restrictions on maritime shipping, medicare/medicaid changes, earned income tax credits. U.S. Democrats and Puerto Rico government will push back on a Federal Control Board, Democrats will fight lowering  the minimum wage which would make the island more competitive with other Caribbean destinations. Bankruptcy legislation that would conflict with existing municipal bond documents, such as Chapter 9 or a Super Chapter 9 which would cover the island’s entire debt are currently viewed as unacceptable by the U.S. Rep. Congress.

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Municipal Bond Sales Poised to Decelerate… Muni bond sales in the U.S. are set to decrease in the next month while the amount of redemptions and maturing debt falls. States and localities plan to issue $10 billion of municipal bonds over the next 30 days, according to data compiled by Bloomberg. A week ago, the calendar showed $16.2 billion planned for the coming month. Municipalities have announced $13 billion of redemptions and an additional $16.3 billion of debt matures in the next 30 days compared with the $32.5 billion total that was scheduled a week ago. The $3.7 trillion municipal bond market shrank by 4% in 2014. This year, maturities are poised to drop 38% to $176 billion from the 2014 levels. High quality state and local debt maturing in 10 years now yield around 2.20%, 30-year munis yield around 3.90% in the previous week.

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NJ Lawmaker to Propose 25 Cent Increase in Gasoline… A democratic New Jersey lawmaker said he is proposing a 25-cent increase in the gasoline tax to help replenish the state’s transportation trust fund. John Wisniewski, chairman of the Assembly's Transporta-tion committee, said the increase would raise $1.24 billion a year, enough to cover debt service and the cost of transportation projects.

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More Reform in Chicago… More public and city council scrutiny of future asset privatizations adopted by Chicago City Council to bring about more value for taxpayers. Future proposals to privatize city owned assets or government service contracts valued at more than $3 billion will be subject to a detailed public review of cost effectiveness, impact and value. The new law seeks to address concerns sparked by a spree of past privatizations undertaken by former administrations.

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Cities, States Increase Debt Sales as Yields Rise… Issuance in the municipal bond market surged to $10.7 billion in the week ended Nov 18. The increase in issuance boosted year to-date supply to $345 billion. There was increased demand from individual investors. Investors moved down in credit quality to pick up yield. The weekly 10-year average muni yield rose to 2.20%, the highest since September. As 2015 comes to a close major market participants become less active, values in the municipal bond market may appear prior to year end.

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Municipalities Pushing Out Payments Spur Balloon Debt… U.S. Cities and school districts struggling to keep up with expenditures are increasing sales of debt that delays interest (zero coupon bonds) until the municipal bonds mature, often resulting in ballooning final payments. Issuance of capital appreciation bonds or zero’s, known for their balloon payments due at maturity, is on pace to increase 54% this year to $2 billion, the largest amount since 2012, according to data compiled by Bloomberg. The surge has come as states including Texas and California, which have the highest volumes of the securities, have passed laws restricting its use because of the mushrooming amount of debt and interest that must be paid when the municipal bonds mature.

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

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