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Muni Week Review / Preview 6/19/2017

Monday, Jun 19, 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...

A Team of Five Federal Judges will Oversee PR Voluntary Mediation… Federal bankruptcy Judge Laura Taylor Swain ordered the designation of five Federal judges who will act as mediators in Puerto Rico’s (PR) Title III bankruptcy cases. The confidential voluntary mediation process will run “separate from, and will proceed concurrently with, the adjudication of issues and proceedings in these Title III cases” the court said it will further explain the process on June 28. Led by Chief Judge Barbara Houser of the U.S. Bankruptcy Court for the Northern District of Texas, the five member team of judges will identify issues related to the restructuring of the Commonwealth’s debt, obtain information from all parties to “facilitate confidential settlement negotia-tions of issues and proceedings arising in these cases”. For various reasons prior to PR’s Title III filing, mediation efforts led by PR appointed Judge Allen Gropper failed to gain traction. Restructuring the largest chunks of PR debt, $13 million GO bonds outstanding and $17 billion COFINA bonds outstanding, could be defined by the resolu-tion of whether or not the Commonwealth can tap into sales tax revenues pledged to COFINA bondholders. Oppenheimer Funds, Franklin Asset Management and Goldman Sachs and others holding over $4 billion COFINA bonds want the PR Supreme Court to provide a final binding determination on COFINA pledged sales tax as the issue relates to the PR Constitution. The Oversight Board voiced opposition to requesting a Puerto Rico Supreme Court ruling.

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PR Fiscal Plan Discovery at Center of Negotiations… Discovery of the Federal Board certified Fiscal Plan is at the center of bondholder talks with Puerto Rico and its Federal Board. Bondholders have demanded all documents relating to virtually every decision the Federal Board made in connection with PR’s maligned Fiscal Plan. While PR states extensive information has been made available to creditors, its Federal Board remains defensive. PR states that some data doesn’t exist and its Federal Board has re-served its rights behind shields of privileges, protections or immunities. “The Oversight Board’s certifications are not even subject to being second-guessed by the Court,” the Federal Board states PROMESA Section 106(e) prevent challenges to a Board Certi-fied Fiscal Plan. Several creditors and bond insurers have commenced legal action in adversary proceedings filed in the District Court. In these adversary proceedings, bondholders are insisting upon discovery of information. PROMESA Section 314(b)(6) requires a plan adjustment to be in the best interests of creditors after considering what creditors would receive if they enforced their remedies under Commonwealth law and its priorities. PROMESA Section 201(b)(1)(N) requires the Fiscal Plan to respect lawful priorities and liens. Creditors are bent on discovery of the Fiscal Plan as Section 314(b)(7) requires a plan of adjustment to be consistent with a certified Fiscal Plan. The Discovery of the Fiscal Plan will likely be resolved in a courtroom. The Oversight Board’s position is that their Fiscal Plan cannot be challenged, therefore discovery may be not necessary.

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From Puerto Rico Courtrooms… The Federal Board aspires for a consensual resolution of the dispute over pledged sales and use tax through independent agents chosen by the Federal Board from creditor nominations. Mutual Funds hold-ing $4 billion COFINA sales tax bonds want the PR Supreme Court to rule on whether pledged sales tax are available resources of the Com-monwealth, the Oversight Board is opposed to going to the PR Supreme Court. Judge Swain has established a mediation team of sitting Federal judges to oversee voluntary mediation. Absent consen-sus, the Court is expected to adjudicate the disputed COFINA funds issue by November 1. According to a Caribbean business article a source seemed to infer a settlement involving COFINA, similar to pre-viously discussed scenarios could see bondholder interest payments protected for a number of years while principal payments are de-ferred. Statutory lien protections, ‘special revenue’ exemptions from bankruptcy stay and validity of “clawbacks” are pivotal issues in Highways and Transportation Authority (HTA) bondholders claims. At HTA’s first bankruptcy hearing, Paeje Investments LLC, an owner of $65 million uninsured PR HTA bonds claimed unlawful diversion of toll revenues has led to ‘destruc-tion of its lien rights, the taking of its collateral and the impairment of its bonds’. The same has been echoed by bond insurers Assured Guaranty, AMBAC and National. Briefing and discovery has been scheduled through August 8 on the HTA litigation. PR bondholders are closely following every move of the Court; the next District Court Omnibus Hearing is June 28.

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COFINA Senior and Subordinate Sales Tax bonds Cut to “D” by S&P on Non-disbursement…. COFINA sales tax bond were downgraded to “D” (default) after the non-disbursement by the trustee of scheduled monthly interest payments due June 1, said S&P. Non-disbursement of interest payments is in compliance with a court order issued by Judge Swain who is overseeing the Puerto Rico bankruptcy. The trustee holds funds in escrow sufficient to make debt service payments through August 1 on both Senior and Subordinate sales tax bonds, stated S&P.

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Illinois Budget Impasse… If Illinois doesn’t pass a spending plan by the start of the next fiscal year on July 1, S&P has warned that Illinois will likely be the first U.S. state ever downgraded to junk bond status, a move that’s expected to lead to punishing borrowing costs. An updated budget package from Illinois Repub-licans, a minority in the state legislature, has emerged to bridge differences between Illinois Democrat law-makers, a majority, and its Republican Governor Rauner. The compromise package cuts $5 billion in costs through lower spending and pension changes and plans to pay down $4 billion of the state’s $15 billion bill backlog. Republicans are now open to roughly $5 billion in tax increases approved by Senate Democrats but they want to sunset the income tax rate hike in four years. The counter-offer adds $250 million in education funding and higher spending on human service programs. Governor Rauner, called the Democrat con-trolled legislature back to the capital in Springfield for a ten day special session from June 21 to June 30 to pass a budget that will end the state’s record two year budget impasse. Investors have long punished Illinois for its financial mess, and its bond yields have jumped relative to top rated debt since Moody’s and S&P dropped Illinois to the lowest investment grade on June 1. The state’s 10-year bonds yield 4.8%, 2 percent-age points more than those on top rated debt. Last week, that gap touched 2.4%, the highest since at least January 2013, according to data compiled by Bloomberg.

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Federal Reserve Raises Key Interest Rate… The Federal Reserve has raised its benchmark interest rate for the third time in six months, provid-ing its latest vote of confidence in  a slow growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise. The increase in the short-term rate by a quarter point to a still low range of 1% to 1.25% could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. The Central Bank chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will prove temporary. It foresees one additional rate hike this year, unchanged from its previous forecast. It gave no hint of when that might occur.

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Illinois Rating Downgrades Priced into Current Prices… Muni bond traders are anticipating that Illinois will become the first U.S. state to be cut to junk, a step that S&P said would likely take place around July 1 if Governor Rauner can’t end a two-year impasse over the budget. Some of the most actively traded Illinois General Obligation (GO) bonds are already priced at yields comparable to those on debt issued by Illinois’s Metropolitan Pier & Exposition Authority. Metropolitan Pier securities were cut to junk by S&P and Moody’s earlier this month. Twenty-year IL state GO 5% are priced around 100.

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