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Muni Week Review / Preview 5/15/2017

Monday, May 15, 2017

INSURERS CONTEST PR FISCAL PLAN/TITLE 3 FILING… PR GOVT DEV BK/BONDHOLDERS REACH AGREEMENT… CHICAGO PUBLIC SCHOOLS (CPS) MULL OPTIONS… HARTFORD DEFICIT SPARKS BANKRUPTCY TALK… ROBUST INFLOWS INTO MUNICIPAL BOND MARKET…

Insurers Contest PR Fiscal Plan and Title 3 Filing…. If this is the way they want to go forward, we don't believe it's in the long-term interest of the citizens of Puerto Rico in terms of their being able to ever access the market-place again,” stated Assured Guaranty CEO asking, “How could the board approve a plan that fails to respect the rule of law?” Laws of the land, U.S. Constitution and PR Constitution, Priority liens and Contractual rights embedded in Bond Indentures are Legal Instruments that have been enforced by the Court of Law. Puerto Rico’s Board Certified Fiscal Plan has drawn wide flak from bond insurers, bondholders and senators. AMBAC stated, “AMBAC and other creditors expected a Fiscal Plan with the focus on cutting expenses and promoting growth, while respecting creditors' rights and priorities at each of the instrumentalities of the Common-wealth. Additionally, we expected the Fiscal Plan to prioritize a holistic restructuring of all Commonwealth debt, through a combination of negotiated debt deferrals and modifications to allow the Commonwealth to grow its way into debt sustainability. Unfortunately, the Fiscal Plan fails on all fronts.”  MBIA noted on May 10, “The Oversight Board's Certified Fiscal Plan does not comply with PROMESA in many regards, including its requirement that legal structures and priorities be respected.” Satisfactory good faith negotiations and a valid Fiscal Plan are amongst preconditions for a bankruptcy-like Title III filing. National and Assured Guaranty have requested the court halt Title III proceedings “We believe that Puerto Rico and the Oversight Board, in passing its Fiscal Plan fails to satisfy the preconditions for gaining access to Title III in the first place, said MBIA, parent of National Public Finance Guarantee. AMBAC has also complained to prohibit any Title III filing promised on the flawed Fiscal Plan. The Federal Court Judge will determine if Puerto Rico's Title III filing for $30 billion debt issued by its central government and COFINA Sales Tax Corporation satisfies Title III preconditions. AMBAC listed its restructuring principles, In summary, we are focused on arriving at a fair, restructuring of the Common-wealth debt. We believe this is possible if: One, the Oversight Board significantly revises the Fiscal Plan to include more reasonable assumptions and to respect creditors' rights; two, any restructuring incorporates short-term deferrals and doesn't rely on out-sized investor losses to subsidize the Commonwealth's budget; three, the recommendations of the bipartisan Congressional Task Force on economic growth in Puerto Rico are adopted and implemented to provide the Commonwealth with appropriate support from the federal government; and four, the Commonwealth, the Oversight Board and U.S. Congress recognize that the  Puerto Rico debt restructuring could materially and ad-versely impact muni debt markets in the future. Puerto Rico and its creditors are set to meet in court on May 17 in San Juan before U.S. District Judge Swain to begin restructuring hearings. Bank of NY has asked the judge to let them bring up June 1 COFINA monthly payment at the hearing.

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PR Govt Dev Bank /Bondholders Reach Agreement… Puerto Rico announced an agreement between creditors and the Govern-ment Development Bank (GDB) to exchange its GDB bonds for newly issued securities. The agreement that the GDB reached with bondholders would allow them to exchange their securities for 55% to 75 % of their face amount, according to the following terms released in a bond filing: 1.) Bondholders can choose which of three tranches of bonds they’d receive; 2.) Debt could be issued for first lien bonds at 55% of par with 7.5%   coupons, or 60% of par with 5.5% coupons; 3.) Those electing for subordinate bonds would get 75% of par and coupons of 3.5%; 4.) New exchange bond issue will receive assets of GDB, with a book value of $5.3 billion.

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Bond Insurers Puerto Rico Expo-sure Manageable, Moody’s… “We believe that prospective PR related losses remain manageable within the context of the guarantors’ capital and core earnings power,” Moody’s stated in a May 8 report. Importantly, much of guarantors PR exposure relates to GO and COFINA sales tax bonds secured by strong legal protec-tions. PR’s pension fund with $49 billion liabilities is expected to run out of funds by end of 2017; its restructuring is critical and could have a significant effect on bondholder recoveries. Rating agencies and bondholders view Title III as preferable to a potentially disorderly and chaotic process involving proliferating lawsuits among compet-ing creditors.

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Chicago Public Schools (CPS) Mull Options… Rhetoric on payment of $721 million teacher pensions due June 30 continues to heat up. City officials continue to huddle over options; community groups and some City Council members have criticized the continuing lack of a public plan. An Alderman said a plan could involve a city bridge loan of Tax Increment Financing (TIF) funds, a different plan than Chicago Teachers Union (CTU)’s earlier request calling to declare a TIF surplus and give the money outright for teacher pensions. Other options include delaying a portion of the pension payment, a short term borrowing or delaying vendor payments. Amid Illinois’ budget grid-lock, delays in state grants to the order of $467 million are piling up on CPS as it figures ways to close a $129 million deficit.

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Hartford CT Deficit Sparks Bankruptcy Talk... Hartford faces a $65 million deficit next year and a $14 million shortfall this year Mayor Bronin has proposed cuts and concessions from the unions, but is still seeking $40 million in additional state aid to close next year’s budget gap. The mayor noted that more than half of the State Capital’s properties are tax-exempt. Therefore, Hartford has limited options for revenue. The city resorted to short-term borrowing to cover costs such as payroll payments this year. The mayor has said the city is not in a position to rule anything out. Council President Thomas Clark called any exploration of bankruptcy premature; “We haven’t exhausted every option and every avenue for us to go down this road.” The state statute covering any municipal bankruptcy says that a city or town must receive consent from the Governor who “shall submit a report to the treasurer and the joint standing committee of the General Assembly”. Bridgeport CT filed for bankruptcy in 1991, but a Federal Judge dismissed the petition, saying the city was capable of paying its bills and debt. S&P downgraded Hartford rating from “BBB” to “BBB-” on May 15, 2017

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Robust Inflows Into Municipal Bond Market…The week ending May 10 saw a robust $606 million of inflows, the most since April 12 and a pace well above the year-to-date average of $212 million. The first quarter of 2017 marked a sharp departure from last year when state and local governments sold the most municipal bonds on record. As issuers await President Trump’s reforms, overall issuance is down 12% year-to-date compared to 2016 according to Bloomberg. The new issuance calendar is finally starting to perk up with new supply of $14.6 billion over the next 30 days. Inflows to muni bonds help to keep up with increase in the pace of new bond sales. Approximate tax-free muni yields 30-yr: “AAA” 3.00% “AA” 3.50% “A” 3.80% “BBB” 4.30%; 10-yr: “AAA” 2.15% “AA” 2.30% “A” 2.65% “BBB” 3.15%. Approximate taxable Treasury bond yields: 30-yr 3.00%, 10-yr 2.35%

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Atlantic City Progress Update… Material progress has been made by Atlantic City in collaboration with the State. Most notable are the balanced 2017 budget and the $72 million Borgata settlement. To pay for the Borgata settlement, the city plans to issue GO bonds with an unlimited ad valorem pledge enhanced by additional statutory security from a state program in which the state automatically withholds state aid sufficient for debt service. The city’s proposed budget for cal-endar 2017 cuts expenses by 14.6% mostly related to  public safety; the expense cuts have allowed modest tax cuts. The city’s casino revenue increased in 2016 for the first time in 10 years.

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