Week of 11/1/2021

Puerto Rico Heads To Title III Exit… Chicago Budget Wins Broad Approval… Murphy Eyes NJ Rating Upgrade… Bond Insurance Climbs… MTA Ridership Surges… Growth Drops… Fewer Tax-Free Bonds…

Puerto Rico Heads to Title III Exit… ‘Ending Puerto Rico’s Bankruptcy Act’ signed into law by Governor Pierluisi last week sets the stage for the Island’s exit from a four-and-a-half year bankruptcy process. The newly enacted law establishes that the Island’s elected officials support the plan to restructure the Island’s central government debt. The enacted law is sufficient to allow issuance of new bonds that are at the core of the Island’s Title III exit, the Federal Oversight Board said. “The restructuring of the debt of the government of Puerto Rico is essential to be able to end the bankruptcy process and to be able to return to the progress that our people expect and deserve,” Governor Pierluisi welcomed the accord with the Oversight Board. “I am relieved and pleased that we are back on track and can move forward with the Plan of Adjustment to end Puerto Rico’s painful bankruptcy,” Oversight Board Chairman David Skeel added, “This plan reduces Puerto Rico’s debt to sustainable levels and its confirmation will provide a foundation for sustainable economic growth.” On November 8, Judge Swain will conduct confirmation hearings on the debt pact. As the Island moves forward to a bankruptcy exit, Puerto Rico bond prices have rallied.

Chicago Budget Wins Broad Approval… “Truly the most progressive and forward- looking budget in our city’s history,” Mayor Lightfoot referred to City Council approval of the $16.7 billion Chicago budget. Generous federal aid bolstered City Council’s support for the Mayor’s spending plan. Aldermen voted 35-15 to approve the budget without demanding changes. Last year, the rookie Mayor was chided for last minute deal making amid narrow City Council support for her budget plan. An alderman applauded the budget, “There is something for everyone,” while fiscal watchdog Civic Federation struck a cautious note, “While this federal windfall has been good news for stabilizing the city’s finances over the short term, these funds are not recurring and only provide fiscal breathing room for a couple years at most.” An influx of $1.9 billion in federal aid led the Windy City to be generous with affordable housing and mental health including a $31 million guaranteed income plan. When questioned if the higher spending would implicate Chicago’s long term finances, the Mayor reassured that the higher spending is an one-time investment. A modest property tax hike and substantial borrowing plans are in the budget. Lightfoot’s Chicago Recovery Plan includes several new investments over the next three to five years, paid for with a mix of federal aid and general obligation bonds. Ahead of the budget vote, Fitch restored Chicago’s stable credit outlook last week, after Moody’s returned its stable outlook in August. The Lightfoot administration pushed off its structural balance target by one year due to the pandemic, as the CFO estimates it remains attainable in 2023.

Murphy Eyes New Jersey Rating Upgrade… Murphy said it may take at least another year to win an upgrade, after 11 downgrades under his predecessor, Republican Chris Christie, “They take it down fast, maybe even based on a moment in time or on a data point.” Pointing out ratings agencies’ recent outlook raises on New Jersey, Murphy added “But they take you up only because you’re rebuilding trust with them over time.” New Jersey plans to pay down about $3 billion of debt from a revenue windfall. Fighting a close race to keep New Jersey’s top office, Governor Murphy has made lower debt and more pension payments among his priorities. Last year, the Democrat Governor sparred with Republicans for a $4 billion COVID-19 related emergency borrowing. Since then, the conversation has changed amid outperforming revenue, massive federal direct aid and a tight election battle.

Bond Insurance Climbs… More than 8% of new municipal bonds issued this year are insured. The ratio is the highest since 2009. Record low borrowing costs dimmed bond insurers’ appetite for bond insurance, a form of credit enhancement typically most valuable to lower rated bond issuers. Before the Great Recession, more than 50% of new muni bonds would be insured. More insured bond volume is positive for bond insurers’ book of business. Only two muni bond insurers, Assured Guaranty and Build America Mutual, are writing new bond insurance. “The COVID-19 pandemic reminded investors that unexpected developments can disrupt an economy and strain municipal budgets,” Assured Guaranty highlighted. Build America Mutual echoed, “The market disruption caused by COVID-19 widened credit spreads.”

MTA Ridership Surges… A post-COVID peak, over 3 million New Yorkers rode the subway daily last week. MTA estimates $2.8 billion in farebox revenue for 2021, less than half of 2019 revenue. Congestion pricing in Manhattan could provide up to $15 billion through bonding and the nation’s largest transit system is looking for untapped and lost revenue in an upcoming financial plan. MTA has out put the brakes on fare hikes at least into 2022 to gain transit riders. In the Boston area and Southern California, lower fares and improved fare payment technology boosted mass transit ridership. When COVID-19 hit, New York’s subway and bus system hit the most acute financial crisis in its history. An MTA official stated, “Bringing back riders and delivering service has to be our top priority right now.” As the area gradually emerges from COVID-19, MTA officials admit that it could take years to get back to pre-pandemic levels.

Growth Drops… Defying expectations, the world’s largest economy expanded at a 2% annualized rate in the third quarter. Snarled by flagging spending, the economy hit a soft patch after stimulus checks from the federal government helped drive economic growth to 6.7% in the second quarter. Supply chain disruptions and shortages are to blame. At the Fed’s most recent meeting in September, Powell indicated that the U.S. economy would probably be on a firm enough footing to allow the central bank to begin reducing the scale of its bond purchases. All eyes are on the Federal Reserve’s view of disappointing economic growth.

Fewer Tax-Free Bonds… In October, 50% fewer municipal bonds were issued than last year, continuing a downtrend in municipal bond supply. So far this year, municipal bond supply is about 8% lower than last year. California, Texas, New York, Pennsylvania and Florida were the top five municipal bond issuers. States and locals may need to resort to taxable bonds for refinancing costly prior debt. Short supply of tax-free municipal bonds is likely to continue.

Compare 30-Year taxable U.S. Treasury yield 1.97% to 30-Year tax-exempt muni bond yield “AAA” 1.77%; “AA” 2.02%; “A” 2.24%; “BBB” 2.98%. For investors in the 35% tax-bracket, a 2.9% tax-exempt yield is equivalent to a 4.4% taxable yield. Top rated tax-free bonds yield 90% of comparable taxable U.S. Treasuries.