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Muni Week Review / Preview 12/07/2015

Monday, Dec 07, 2015

U.S. SUPREME COURT TO RULE ON PUERTO RICO RECOVERY ACT. LONG TERM HIGHWAY FUNDING SIGNED INTO LAW. LOW INTEREST RATES TO CONTINUE INTO 2016.

Supreme Court to Rule on Puerto Rico Recovery Act… The U.S. Supreme Court accepted Puerto Rico’s appeal to consider legislation that would allow the island to restructure $20 billion of debt issued by certain public agencies. General Obligation and Sales Tax (COFINA) municipal bonds are excluded from the Act. On July 6, 2015 a U.S. appeals court ruled unanimously that federal bankruptcy law bars Puerto Rico’s Recovery Act. Bondholders said the high court was not needed as they have already agreed to a restructuring plan with PREPA pending municipal bond insurers’ approval saying that since 1946, federal law has barred states and Puerto Rico from using their own laws to authorize non-consensual restructurings. A creditor, Blue Mountain Capital,  argued, “For 68 years states, the District of Columbia, and Puerto Rico all observed this prohibition. None attempted to enact their own municipal bankruptcy law until Puerto Rico enacted its Recovery Act in 2014.” The U.S. Supreme Court’s decision to review the Puerto Rico local debt-restructuring law, rejected by two lower courts, risks prolonging negotiations with creditors to reduce the island’s debt obligations. The Commonwealth continues to say it is running out of cash.

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Collaboration and Bond Market Access needed for Puerto Rico to Avoid Future Defaults... Without audited financials since 2013 it is difficult to predict Puerto Rico’s ability to make future debt payments. However, it is obvious that without collaboration among the Puerto Rico government, U.S. Congress and creditors, which is needed to regain access to the municipal bond market, Puerto Rico debt becomes more and more vulnerable to default. Both Moody’s and S&P believe even if Puerto Rico prioritizes G.O. municipal bond payments at the expense of other bonds, G.O. bonds could eventually default if the island does not regain market access. The governors Dec. 1 executive order diverted revenue pledged to pay debt issued by the Highway and Transportation Authority, Convention Center Authority and Infrastructure Authority to the payment of G.O. debt. The debt payments the government faces on Jan 1 are: $331.6 million G.O., $115 million Highway and Transportation, $36 million Infrastructure Finance Authority and $9.5 million Convention Center Authority. Government Development Bank (GDB) president Melba Acosta said despite the decision to ‘clawback’ revenues pledged to these public corporations, they still have enough revenue to meet their scheduled Jan 1 debt service payments. S&P believes Sales Tax (COFINA) debt service has already been delivered to the municipal bond trustee to make payments due in February, May and August. The clock is ticking as the Puerto Rico government, U.S. Congress and bondholders must come together in order to gain market access necessary to avoid defaults sometime in the future.

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Insurers Key to Avoid Litigation on Puerto Rico ‘Clawback’… To Avoid any litigation related to alleged illegal ‘clawbacks’, an offer by at least two bond insurers to provide a bridge loan to get Puerto Rico through January when the island needs to pay close to $1 billion in debt service remains on the table, Reuters reported. Creditors’ frustration is likely to increase in the next few weeks as the island’s constitution requires a payment of $120 million in Christmas bonuses to public sector workers by December 20 Paying them at the expense of bondholders would likely irk creditors, yet skipping them would outrage labor unions. A 1980 law in Puerto Rico dictates that any clawbacks should be used first to pay constitutionally backed debt, and then to fund essential services. Anxious to continue ongoing talks on a consensual debt restructuring, creditors are wary of litigation. AMBAC’s President and CEO said “We implore the governor to get back to the negotiating table toward consensual solutions, which are achievable.” Puerto Rico’s electric utility has already reached a consensual pact with some creditors. A deal with bond insurers, which include Assured Guaranty and MBIA Inc, would be one of the last major steps in overhauling more than $8 billion in Puerto Rico electric utility debt.

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Corruption in Puerto Rico Surfaces Again… Ten Puerto Rico officials and local business people some with ties to the governor were indicted by a U.S. grand jury in connection with bribes made to win contracts from the island’s government. The charges announced Thursday by U.S. Attorney Rosa Emilia Rodríguez-Vélez deal a fresh blow to Garcia Padilla’s administration, which has been struggling to pay debt left from years of borrowing to cover the government’s bills. “This is one more case of graft, greed and corruption that over the last 20 years have contributed to the government of Puerto Rico’s fragile financial condition and put them on the brink of bankruptcy,” said a special agent for the FBI.

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Long Term Highway Funding Signed Into Law… A 5-year $305 billion highway bill to fund road and rail projects and renew the Export-Import Bank was signed by President Obama. Over $200 billion would be devoted to highway projects with an additional $50 billion reserved for mass transit. The new highway funding law spans the longest time frame in 17 years. The new law provides state and local governments with the kind of certainty they need to focus on longer-term road and bridge pro-jects, which a significant departure from years of short-term extensions.

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State and City Credit Outlook… The outlook for state and local government credit ratings is stable as the economic recovery and rising real estate prices boost revenue. Moody’s predicts states’ tax collections will grow 4% to 5% in 2016 and local government property tax receipts should grow between 2% and 3% next year. Fitch stated that despite ongoing challenges its ratings on all U.S. states will carry a stable outlook into next year for the first time since the downturn.

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Toll Roads Positive…  Stronger than expected traffic growth in 2015 extends to 2016 shaping a positive outlook for Toll Road Municipal Bonds. In 2016 traffic will grow 3% and toll road revenues will grow 5% per Moody’s. Low oil prices and an upbeat economy contribute to the uptrend.

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Muni Market… Municipal bond prices rose as yields fell to a weekly average yield of 2.07% for 10 years, the lowest since October. Puerto Rico General Obligation municipal bond prices were actively traded and sharply higher trading at 75 cents on the dollar.  As other Puerto Rico bonds were not active and prices drifted lower.

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Low Long Term Rates… The era of historically low long term rates is likely to continue into 2016 even as near-zero short term rates are coming to an end. Fed Chair Janet Yellen signaled she is ready to raise short term interest rates this month barring a surprise that drastically changes the economic picture. Latest economic data underscore the Fed’s confidence. While an aging population has reduced the pace of growth and weak economies overseas add strength to the dollar, it appears inflation is unlikely to reach the Fed’s target of 2% anytime soon. The European Central Bank cut short term rates further into negative territory in a bid to boost lending and depreciate the euro against the dollar. These reasons are why, even with a rate increase coming, the yield on 10-year Treasuries sits around 2.19% right where it was in January.

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Illinois Lawmakers Approve $3 Billion of Funding... IL lawmakers approved a measure to free up funds for local governments as the state’s budget impasse drags into a sixth month. The Senate Monday gave final legislative approval to a measure that will send about $3 billion to local governments to help cover costs, including the operation of 911 centers and road maintenance during winter weather. Governor Bruce Rauner (R), plans to sign the bill, according to Catherine Kelly, his spokeswoman. The funds will also allow Illinois to dole out lottery prizes and pay for operations at agencies like the state treasurer. “This is a bipartisan negotiated compromise with the governor’s office,” Sen. Thomas Cullerton (D), said before the vote. “This will put local money back into the hands of local government.”

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

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