We Want To Be Your Municipal Bond Authority

Muni Week Review / Preview 6/09/2017

Friday, Jun 09, 2017

COFINA CREDITORS REQUEST HIGH COURT RULING... FUND MANAGERS NOT SELLERS OF ILLINOIS BONDS... PUERTO RICO MUNICIPAL BOND TRADING SURGES... JP MORGAN WINS $396 MM CHICAGO SCHOOL NOTES...

COFINA Creditors Request High Court Ruling..To resolve Puerto Rico’s (PR) debt dispute in short order, mutual funds holding over $4 billion COFINA bonds believe that a Puerto Rico Supreme Court (PR SC) certification of sales and use tax dedicated to COFINA bondholders will be constructive. The question, are COFINA revenues “available resources” of the Commonwealth relates to the PR Constitution. An authoritative, final and definite answer from the Island’s highest court on this aspect of the PR Constitution could be pivotal. It could determine the ‘constitutionality’ of the Federal Board Certified Fiscal Plan and foster consensus in PR’s other Title III cases. Most of all, it will tell bondholders whether or not PR courts enforce securitization structures such as COFINA for the Island’s future capital access, a main goal of PROMESA. Whether or not COFINA dedicated sales tax revenue are “available resources” for the Common-wealth is the lynchpin question for PR debtors and creditors. The final and definitive answer lies with PR SC. Despite bond enabling legislation, bond documents, bond opinions and many statements by PR in support of the COFINA structure, conflicting information is testing the Puerto Rico law and has brought uncertainty to bondholders. Any decision by a lower court on an issue that raises significant policy concerns will likely be appealed by disappointed parties; this could unduly delay other PR Title III cases. Therefore, a direct Puerto Rico Supreme Court certification could bring a final and definitive decision. The District Court may be able to refer the matter to PR SC within 21 days; following validation, the PR SC would be in a position to confirm the validity of the COFINA structure, Oppenheimer Funds, Franklin Funds, The UBS Family of Funds and The Puerto Rico Family of Funds asked the District Court administering PR’s Title III cases to consider their request. At the first day hearing on May 17, the Court correctly recognized that “The Commonwealth plan doesn’t work unless the COFINA funds can be invaded.” COFINA’s sole resources are the dedicated sales tax revenues it has to pay bondholders per enabling legislation. In 2006-2007, COFINA was created as a financing vehicle to issue bonds secured by dedicated sales and use tax. COFINA bonds do not have recourse to PR and sales and use tax revenue dedicated to COFINA “shall not constitute resources available to Commonwealth” by law. This disclosure was made to General Obligation (GO) bondholders when PR sold GO bonds in 2014. Over the last year, GO bondholders challenged the COFINA structure stating it violates PR Constitution. Federal Board Certified Fiscal Plan depends on the use of dedicated sales and use tax to fund PR budget, a statutory violation. Governor Rossello’s Fiscal Plan Compliance Act, which purports to sweep COFINA revenues to the PR General Fund is another violation. Confirming the validity of the COFINA structure will facilitate resolution of other Title III cases. Accordingly, GO bondholders will better understand the value of their unsecured claims against PR and PR will respect legal contracts and property rights, setting the stage for global settlements and consensus. The COFINA ruling would determine if the Federal Board Certified Fiscal Plan and PR 2018 budget will need to be revised. PR has assumed unfettered rights to take, and to spend for its own purposes, billions of dollars of revenue that PR by statute transferred to COFINA and pledged to COFINA bondholders a decade ago. A final determination from PR’s highest court will remove the uncertainty as to whether PR courts will enforce a securitization structure such as COFINA for the Island’s future capital access a main goal of PROMESA. Until the COFINA dispute is resolved sales tax revenue will continue to flow to the bond trustee and be held in escrow along with the $400 million currently held in escrow. Judge Swain could decide to rule on whether COFINA bonds are in default by mid July. The COFINA case is fluid and barring the unforeseen should be resolved no later than year-end.

Back to Top

Bond Fund Managers  Not Sellers of IllinoisBonds... Some of the top holders of Illinois debt aren't bailing out as the state faces a possible junk bond rating. They say Illinois isn't an economic basket case, just the victim of a political logjam that will one day be broken. Illinois's problems are self-inflicted, said director of muni bonds at Alliance Bernstein, which owns about $550 million of the bonds.They have the resources to pay their debt and we think they ultimately will.” Fidelity Investments is the biggest public holder of Illinois GO bonds, with about $1.8 billion, according to Bloomberg. Vanguard holds about $1.6 billion and Nuveen about $920 million. Three other firms Dodge & Cox, Alliance Bernstein and Wells Fargo Asset Management hold more than $500 million each. Like other money managers, Black-Rock sees Illinois as a state with a solid economy but serious political problems. In that sense, it is very different from places like Detroit and Puerto Rico,” he said. Illinois has a $800 billion economy. It has been adding jobs, sending its unemployment rate to 4.7% from more than 11% in the aftermath of the recession. State law requires the government to appropriate sufficient money to pay debt service and it can draw from all unrestricted funds to do so. Dropping the state’s already low-rating to junk won’t unleash a wave of selling, said John Miller, co-head of fixed income at Nuveen, who oversees about $124 billion of municipals. Illinois’s plight reflects in part the expiration of temporary tax increases that helped the state deal with the toll of the recession. Facing a $13 billion deficit in 2011, it boosted the income tax from 3% to 5%. It dropped to 3.75% in 2015 and officials have been at loggerheads over how to eliminate the deficit ever since. “Pushing the tax back to 5% would go a long way to plugging the state’s ongoing deficit”, said Nuveen who has held an outsized allocation of Illinois bonds for five years. Nuveen also said, “A cut to junk could be the catalyst that compels politicians to act.” Alliance Bernstein said, “We might add more if the bonds get cheap enough after a downgrade.” “Nuveen might add to its position, depending on how much more yields widen against other securities,” Miller said. A spokesman for Vanguard, said it made sense to continue holding Illinois based on their confidence the state will find a path through the budget impasse. Schroders is also examining Illinois investment opportunities. “Illinois will get through without default; whether it gets through without downgrade to junk is “up in the air”. The state’s ability to pay isn’t in question, rather its political will-ingness”, head of Schroders U.S. fixed income said at an event in NY.

Back to Top

Puerto Rico Muni Bond Trading Surges… Puerto Rico bondholders who don’t want to continue to roll the dice during the Island’s record bankruptcy have no problem finding buyers. The volume of trading in Puerto Rico securities has ticked up since the Island turned to a Federal Court last month to cut its debt. A daily average of $267.4 million of Commonwealth debt changed hands in the past 50 days, higher than the $195.9 million average seen over the past 200 days, according to data compiled by Bloomberg. While the securities are easily sold, some are still hovering near record lows.

Back to Top

JPMorgan Wins $396.5 Million Chicago School Notes... Chicago Public Schools announced JP Morgan had the winning bid for up to $396.5 million notes intended to keep the cash strapped school system afloat. JP Morgan has lent the school system over $1 billion via tax anticipation notes over the past two years. The city's CFO said Illinois's budget impasse has been disruptive for Chicago and its school system. The CFO also stated that Chicago has a lot of revenue that doesn't depend on the state, if the state budget dysfunction isn't solved the city will work with the schools to ensure certainty. The city is doing what it can to insulate itself from depending on state funds. The CFO assured the city is not considering bankruptcy for the school district  and is hopeful the Governor will sign legislation that will prevent Chicago's municipal and laborers pension funds from insolvency. The CFO affirmed the city has no intent on allowing either fund to reach insolvency.

Back to Top

 

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