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Muni Week Review / Preview 5/10/2017

Wednesday, May 10, 2017

PUERTO RICO OVERSIGHT BOARD FILES REQUEST FOR COURT TO RESTRUCTURE G.O. AND COFINA DEBT… FEDERAL JUDGE APPOINTED TO OVERSEE PUERTO RICO RECORD SETTING  RESTRUCTURING UNDER PROMESA…MARKET REACTION RELATED TO PR RESTRUCTURING…

Puerto Rico Oversight Board Files Request For Court to Restructure G.O. and COFINA Debt... On March 13 the Federal Oversight Board appointed by Congress under the Puerto Rico rescue law PROMESA certified the Commonwealth’s Recovery Plan. The Plan was supposed to respect constitutional and contractual rights of bondholders. The challenge the Oversight Board faced was to decide how much revenue the  government of Puerto Rico really needed to maintain essential government operations. They had to agree on what the people of Puerto Rico needed to live and what they could afford to live without. These decisions had to be made while respecting lawful priorities and dedicated liens of the Island’s debt obligations. In creating the Plan the Board could not transfer pledged revenues while providing adequate funds for pension obligations and essential public services, a very difficult and challenging task. The Board disregarded the rules of PROMESA. The certified Plan they approved funnels all revenues, including pledged COFINA Sales Tax and other dedicated funds into the General Fund. Without first designating an amount to secured debt obligations, the Board allotted the protected revenues to pay government services. After allotting approximately 95% of all revenues to what they called essential services the remaining 5% of revenue was allotted to bondholders. In effect their Fiscal Plan subordinated all debt obligations, redirected pledged revenues and completely ignored laws, contracts and bondholder rights. All major bondholder groups and bond insurers have filed lawsuits demanding the Fiscal Plan be revised to respect and comply with PROMESA. In each case the plaintiff strongly stated the current Certified Plan completely dismisses the lawful priorities and liens of the various debt obligations and directs all pledged revenues to the Commonwealth’s General Fund, without bondholder or court approval. Last week the Oversight Board, which made feeble attempts to reach a consensual agreement with bondholders filed a request to place the restructuring of Puerto Rico GO bonds and secured COFINA bonds in the hands of a Federal judge. When Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) last summer, it created a roadmap to address the Island’s $70 billion debt load and revitalize its economy. The impact of the law, which was intensely debated among policymakers inside the Beltway and the financial community on Wall Street, now bears watching for millions of Americans living in debt-ridden municipalities and states across the country. Title III of PROMESA, which is modeled after Chapter 9 of the Bankruptcy Code and nearly a century of legal precedent, provides a framework for protecting Puerto Rico’s citizens while also respecting the legitimate rights and priorities of creditors. For example, the recent Chapter 9 restructuring in Detroit sought reasonable accommodations for vulnerable pensioners and respected secured creditors’ rights. Preserving the sanctity of secured debt is established and sound public policy. It remains the best vehicle for efficient underwriting and low-cost muni borrowing. Most importantly, securitizations are particularly beneficial for stressed municipalities that need to rely on statutory liens and debt issuances secured by collateral to provide bondholder with confidence of repayment. The success of PROMESA and the prioritization of the $17 billion COFINA structure bears close watching for citizens, government officials and investors across the U.S. Since the outcome for Puerto Rico is likely to establish precedents and processes that will guide future municipal restructurings, adjudication of PR’s restructuring may ultimately be decided by the U.S. Supreme Court.

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Federal Judge Appointed to Over-see PR Record Setting Restructuring Under PROMESA... Laura Taylor Swain, a federal court judge in NY with previous bankruptcy experience, will oversee Puerto Rico’s record-setting restructuring process under PROMESA after Supreme Court Chief Justice John Roberts selected her for the role on May 5. Swain currently sits on the U.S. District Court for the Southern District of New York and has been in that position since she was appointed by President Bill Clinton in 2000. She was a federal bankruptcy judge for the Eastern District of New York from 1996 until 2000 and had been in private practice with Debevoise & Plimpton from 1983 until 1996, according to a release when she was nominated to the southern district post. While at Debevoise, her work primarily involved the Employee Retirement Income Security Act, employee ben-efits, executive compensation, and employee law, according to the release. She also chaired the Advisory Committee of the Judicial Conference of the United States on the Federal Rules of Bankruptcy Procedure from 2007 to 2010 and is a graduate of Harvard University and Harvard Law School. There is no doubt Judge Swain’s credentials and experience make her extremely qualified to impartially handle Puerto Rico’s restructuring proceedings. Judge Swain was a Federal Bankruptcy judge for four years and pre-sided over high profile cases includ-ing criminal trials of several Madoff former employees. After creditors and other interested parties weigh in and state their cases, Judge Swain will have to approve proposals she believes balance the demands of politicians, public workers and private citizens against the legal rights of bondholders. A court spokesperson stated Judge Swain would hold the Title III restructuring proceedings in San Juan, Puerto Rico.

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Market Reaction Related to PR Restructuring… This week was dominated by armchair legal experts, as the market attempted to project the effects of Puerto Rico’s Title III filing, under PROMESA. While seeking bankruptcy-like pro-tection will create a more orderly framework to address the concerns of all creditors, the process will be lengthy and contentious. Due to a lack of applicable case law and the sheer size of liabilities in question, at this time the ability to model out any sort of recovery scenario for debt holders is near impossible. The lack of precedent will open the door for illinformed pundits to mislead and confuse bondholders. Prices for Puerto Rico’s most actively traded bonds unsecured 8% G.O. bonds due 2035 remained steady to firmer after the filings while secured sales tax backed COFINA bonds weakened on very light odd lot trading. It is very early in the process; the divergence in opinions  of likely outcomes prior to legal action may not be indicative of final recoveries on consti-tutional unprotected and dedicated revenue secured debt.

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CT Budget Turns Deficit as Top 100 Taxpayers Drop 45%… Connecticut is projecting an almost $400 million hole in its budget for the current fiscal year and a deficit of $1.46 billion by fiscal 2018 because of a large drop in income tax collections. Previous drivers of the state’s economy, finance and insurance have failed to establish a solid foothold since the recession’s end while the manufacturing sector is shrinking in the state. As Connecticut is battling increased G.O. Bond spreads, state legislators are working on an alternative capital market access program. The Plan, very similar to the COFINA structure in Puerto Rico, would allow the state to securitize portions of the income tax revenue stream and issue secured revenue bonds in lieu of G.O. Bonds.

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Muni Flows Stay Positive Even After Puerto Rico’s Filing... Puerto Rico’s filing for Title III restructuring and lawsuit protection has not dissuaded municipal investors from continuing to put money to work in the market,  Lipper continues to report positive market inflows. Supply to meet the unabated demand remains well above the 52-week average, with Bloomberg reporting $13.6 billion of bonds via 30-day visible supply. The largest deals next week are $915 million for “BBB” rated Metrohealth in Ohio and $856 million for Hawaii.

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