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Muni Week Review / Preview 12/21/2015

Monday, Dec 28, 2015

PAUL RYAN WANTS A “RESPONSIBLE SOLUTION” ON PUERTO RICO. PREPA HAS TENTATIVE AGREEMENT WITH INSURERS. INVESTORS OVERCOME RATE INCREASE FEARS.

Ryan Wants “Responsible Solution” on Puerto Rico by End of First Quarter… House Speaker Paul Ryan says the U.S. House will work with Puerto Rico to come up with a “responsible solution” for the territory’s debt problems. Democrats have been pushing Ryan and other Republicans to help the island restructure its debt and declare bankruptcy. They were hoping language would be added to a year-end spending bill, but it was left out as Republicans said they want to address the root causes of the crisis and see more data on the island’s finances. Ryan did not detail what he would support, but said he would like to see a congressional solution by the end of March. He said the problem is “not going away anytime soon.” Republican senators have introduced legisla-tion to give the island $3 billion and tax relief along with financial oversight. Democrats and the governor of Puerto Rico want Chap-ter 9 bankruptcy available to the island.

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PREPA Reaches Tentative Agreement With Insurers… Puerto Rico’s electric utility reached a tentative agreement with insurance companies MBIA and Assured Guaranty, along with some municipal bondholders, to restructure the utility’s $8.2 billion of debt. The accord potentially averts a default on $196 million of interest due Jan. 1. Under the pact the insurers will provide $450 million in the event of a default through what’s known as a surety bond. PREPA may execute a debt exchange with consensual municipal bondholders willing to take a 15% haircut in exchange for a more secure municipal bond sometime in the second quarter of 2016. An investor group holding about $3.5 billion of municipal bonds has agreed to the exchange. “This suggests it is possible to restructure without Chapter 9,” said Lord Abbett & Co., who oversees $17 billion including Commonwealth securities. “It suggests there is the possibility of negotiating with bondholders.” Among market participants there is a severe lack of credibility in any statement made by Puerto Rico politicians. Therefore, the market has no assurance of a deal until it is signed. In Puerto Rico a good headline today can become a bad headline tomorrow as the island’s politicians continue to jockey for a better bargaining environment.

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Christmas Bonuses Announced for Puerto Rico Public Employees… While fanning concerns Puerto Rico may default on $900 million of January bond payments Governor Padilla, who continues to insist the island is heading toward a “humanitarian crisis”, says the Commonwealth is broke, the municipal bond debt is not payable and the government may not be able to provide essential services to citizens, announced Puerto Rico will pay public employees $120 million in Christmas bonuses.

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Muni Investors Overcome Rate Increase Fears… As prices rose yields on benchmark 30-year municipal bonds plunged to the lowest level since April after the Federal Reserve raised interest rates while promising future increases will be gradual and based on the strength of the U.S. economy. The difference in yield between benchmark munis due in two years and those maturing in three decades is close to the lowest since February. Long term municipal bonds are viewed as best positioned to remain stable or gain because of subdued inflation expectations over the next year. The movement of yields in the bond markets is largely dictated by bond buying and selling by investors. Despite the Fed increasing its overnight target rate a quarter point for lending between banks, yields on Treasury’s from 1-month bills to 10-year notes fell as demand from investors drove prices higher. Amid soft global growth, regulatory changes have pushed up demand for municipal bonds from banks and money market funds. In the muni market, 10-year yields fell to 2.06% as money poured into the market for the 11th straight week amid low bond supply $2.8 billion issued this week.

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Chicago Schools Borrow… Chicago Public Schools will add $120 million to its $1 billion bond sale anticipated in January and dip into a new credit line for another $130 million. The new municipal bonds will fund $536 million capital projects, push off $229 million in debt principal and $275 million would convert floating-rate municipal bonds to fixed and terminate interest-rate swaps now. The school system is seeking $480 million from Illinois to help close its budget shortfall. Chicago Public School municipal bonds carry a general obligation pledge and most are further secured by an alternate revenue pledge of state aid.

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Property Values Boosted in Chicago Area...An uptrend in property values in Chicago and its suburbs: Full market value grew 14.4% in Chicago and 11% in Cook County in 2013 from a year ago reversing six years of declines. Although values are still below pre-recession peaks, the area boasts a strong residential and commercial tax base: Cook County values at $460 billion and Chicago property values at $236 billion per the Civic Federation. Higher property values are positive for counties, cities and local governments.

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Lawmakers Approve Atlantic City Bills… New Jersey assembly approved Governor Chris Christie’s changes to legislation that Atlantic City needs to remain solvent this year. The changes requested by Governor Christie include having the state’s local finance board collect the revenue from the casinos and make its release dependent on the city’s fiscal progress. Also in-cluded is a measure that would establish fixed payments from casinos instead of levies based on real estate values preventing tax appeals that strain the city’s finances. An Assemblyman said, “These bills are geared to stabilize the property taxes. It will help invigorate and get investment into Atlantic City,” as the bills now head for a state senate vote.

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NYC Expects $963 Million Sur-plus… New York City’s income and property tax revenue has been so strong that a surplus of $963 million in the fiscal year ending June 30 is expected, seven times more than anticipated in the 2016 budget, the Independent Budget Office said. The office, a nonpartisan city agency that monitors municipal finances, said the largest U.S. city created an unprecedented average 95,000 annual jobs since 2009. While gains will be slower in the next few years in education, healthcare and business, profession-als services, the city still will probably have a surplus of about $320 million next year, it said.

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Good Old Municipal Bonds… Both state and local governments share a stable outlook for 2016, Moody’s said in two reports recently released. Most localities expect property taxes to “grow modestly,” between 2% and 3%, while states might see tax revenue grow by 4% to 5% in 2016. “Local governments are built to last,” wrote analyst David Strungis. “They can take decisive action to adjust tax revenues and user fees in response to economic or financial pressures. Also, unlike commercial and enterprise entities, local governments do not need to spend money to make money.” Most states will “keep their financial positions in balance,” wrote Kenneth Kurtz in the state outlook. The exceptions: those states that have been unable to make progress toward funding large pension liabilities, like IL, NJ & PA.

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New Infrastructure Construction... Stability at both the state and local level may mean that public officials can turn to spending on infrastruc-ture and transportation, Fitch said in reports recently published. “Transportation needs will continue to be a pressure point for states in 2016,” and they can be expected to turn to public-private partnerships to augment funding sources, wrote analysts led by Laura Porter. At the Local level, “government managers are able to turn their attention to longer term issues with a more stable environment for near term operations,” wrote analysts led by Amy Laskey, who said the growing focus on infrastructure could lead to more municipal bond borrowing to address capital needs.

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Fewer Muni Bonds… Annual municipal bond issuance will sink to between $355 to $370 billion, analysts at Barclays wrote in their 2016 outlook. Total refundings will amount to $215 billion. The first half of 2016 will be busy, as issuers rush to market, either to lock in low rates or “get in front of the future Fed rate hikes.” Barclays “does not envision widespread municipal credit trouble in 2016.”

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

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