Municipal Bond News 6/24/24

Federal Appeals Court Upends PREPA Debt Plan…Credit Positive Revenue Lien Ruling Sets Favorable Precedent… JFK Airport Bonds See Strong Demand…Muni Bonds comparable taxable U.S. Treasuries. Rally…Fed Projects Fewer Rate Cuts…California Budget… Rating Firms Debate MTA Congestion Toll Halt…

Federal Appeals Court Upends PREPA Debt Plan…The oversight board proposed debt plan for Puerto Rico’s electric utility is unlikely to stand. On June 12, the U.S. Court of Appeals for the First Circuit overturned a 2023 Title III court ruling that sharply reduced PREPA bondholder claims. The Appeals Court ruled that bondholder of the Puerto Rico Electric Power Authority (PREPA) have a claim for over $8.5 billion and valid liens on utility revenue, reversing the lower court on both issues. A three-judge panel concluded that the language in a trust agreement governing the revenue bonds created a security interest in the net revenues of PREPA. The decision also found that the bondholders have a bankruptcy claim for the full amount of the bonds issued. PREPA bondholders including Assured Guaranty and Golden Tree Asset Management said “We are pleased with the First Circuit Court of Appeals’ decision reinstating the bondholders’ claim for the principal amount of the bonds plus matured interest (approximately $8.5 billion) and finding that the claim is secured by all of PREPA’s past, present and future Net Revenues.” PREPA bonds rallied on the favorable ruling, which has boosted bondholders’ bargaining power in PREPA’s debt restructuring.

Credit Positive Revenue Lien Ruling Sets Favorable Precedent for Bondholders…A landmark decision from the U.S. Court of Appeals for the First Circuit on PREPA bonds signals stronger protections for municipal utility revenue secured bondholders. “The appeals court opinion attributes a great deal more value to this kind of security feature, which would be a strong credit positive for holders of municipal utility revenue bonds if it becomes the generally prevailing law of the land,” Moody’s added “For a market that has grappled with uncertainty surrounding certain bondholder protections such as special revenue designations or liens on revenue, the appeals court ruling is important.” Assured Guaranty said, the decision is “not only important to the PREPA bondholders, but also to the municipal revenue bond market as a whole, as the court confirmed the ability of municipal issuers to create liens on both current and future project revenues, a fundamental security provision that is essential to the proper functioning of the revenue bond market.” The appeals court sets a binding precedent for its circuit. The decision restores the municipal market’s understanding of the proper functioning of special revenue bonds.

Strong Demand for JFK Airport Bonds…JFK Airport sold $2.5 billion green muni bonds last week, one of the year’s largest muni bond offerings. Strong demand led the issuer to upsize the bond sale and yields were up to 10 basis points lower than anticipated. Uninsured ‘Baa3/BBB-/BBB-’-rated bonds offered a top yield of 4.84%, and Assured Guaranty insured JFK tax-free bonds offered a top yield of 4.47%. This year, 27 muni megadeals totaling $43 billion have been sold. The volume of new muni bond offerings over $1 billion, termed ‘megadeals’ have surpassed the prior record set in 2020. Larger muni bond sales are being driven by pent up capital needs and relatively lower borrowing costs.

Muni Bonds Rally…Long term top-rated muni bond index yields have dropped 20 basis points in June, following a similar drop in comparable U.S Treasury bond yields. Muni bond indices gained 1.76% this month, paring last month’s losses. Bond markets have rallied after slower U.S. retail sales data fueled rate-cut expectations. Municipal bonds tend to rally in the summer months as maturity and coupon payments flowing back to investors boost reinvestment demand. More than $31 billion muni bonds are slated to mature over the next 30 days. This year, muni bond issuance is 40% higher than a year ago. The uptick in muni bond supply provides investors with a wide range of options to purchase. Trading in the muni bond market has surged to the highest since the mid-1990s. Current muni yields are at historically high levels.

Fed Projects Fewer Rate Cuts…The Federal Reserve estimates one rate cut this year, down from three projected in March. Four Fed officials forecast no rate cuts in 2024. The revised projections signal central bankers’ cautious approach amid mixed economic data. Inflation has eased in recent months after a surprising increase in the first quarter. Consumer spending has moderated despite strong employment growth. Boston Fed President Susan Collins said it’s important not to “overreact to a month or two of promising news.” The Fed has held rates at a four-decade high for over a year. Meanwhile, bond markets assign 70% odds of at least two rate cuts this year, with the first cut possibly in September. This is double the chances seen in late May.

Rating Firms Debate MTA Congestion Toll Halt…S&P said it does not anticipate revising the MTA’s transportation revenue bonds (TRB) rating or outlook (‘A-’/Positive) at this time. Although the indefinite postponement of the new tolls raises uncertainty for MTA’s capital plan, it cuts the risk of lower traffic on MTA’s bridges and tunnels. However, Moody’s said that Governor Hochul’s decision is credit negative for MTA. The indefinite delay in congestion tolls opens up a nearly 30% gap in the MTA’s capital funding. MTA CEO said that the nation’s largest transit agency will “reprioritize and shrink the current capital program.” Governor Hochul said that the state has set aside funding to backstop the MTA’s capital plan and stakeholders are exploring other funding sources.

California Budget… California’s legislature passed a $211 billion spending plan for Fiscal 2025. The preliminary spending plan meets the legal June 15 budget deadline, while Newsom and legislative leaders are still negotiating how to fix a $27.6 billion shortfall before the start of the new fiscal year on July 1. Earlier this year, the governor signed legislation to lower budget pressures through $17 billion in spending cuts and deferrals. Newsom presided over back-to back surpluses when he took office in 2019, including a record almost $100 billion surplus in fiscal year 2022- 2023. California’s deficit ballooned largely due to swings in the stock market and inaccurate projections for personal income, corporations and sales taxes.

Compare 30-Year taxable U.S. Treasury yield 4.40% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.76%; “AA” 4.04%; “A” 4.30%. For investors in the 35% tax bracket, a 4% tax-exempt yield is equivalent to a   6.15% taxable yield. Top-rated long- term tax-free bonds yield 85% of comparable taxable U.S. Treasuries.