Week of 2/28/2022

‘Flight to Quality’ Seeks Municipal Bonds… Bondholders Mull ‘Plan B’ PREPA Debt Fix… More Transit & Travel Favors COVID-Hit Muni Sectors…MTA Cuts Deficit…Big Money Race For Illinois Governor… Federal Impact Grows…

‘Flight to Quality’ Seeks Municipal Bonds… Considered to be a ‘safe haven’ by investors, municipal bonds are second in safety only to U.S. Treasury bonds. Investors’ ‘flight to quality’, seeking safety and shelter from complex geopolitics in the aftermath of Russia’s invasion of Ukraine, cut yields for municipal bonds. Municipal bond yields dropped across all maturities. Ten-year tax-free bond yields slid 7 basis points to 1.58%, the biggest decline since the November 2020 U.S. presidential election. Municipal bond valuations are attractive relative to U.S. Treasuries. Municipal bonds yield about 90% of U.S. Treasury bonds, down from a low of 67% in June 2021. A higher Muni-Treasury ratio indicates value in municipal bond prices.

Bondholders Mull ‘Plan B’ PREPA Debt Fix… Consensus is building towards an ‘alternative, non-legislative option’ to implement the PREPA Restructuring Support Agreement struck in 2019 between the electric utility and 90% of bondholders. The federal oversight board is open to a ‘Plan B’ that does not hinge on legislative action. Judge Barbara Houser, who had been duly dismissed after completing the central government debt mediation, is willing to be a mediator and assist the parties with an expedited negotiation. “The time has come to work out the final implementation mechanics for the restructuring support agreement and to develop an alternative that does not require legislation, given the legislature’s failure to act over the past two years,” a major bondholder group seeks an April 15 deadline for Puerto Rico’s oversight board to file a debt restructuring plan. The Island’s legislature has been unwilling to enact legislation to hike electric rates, a necessary component of the RSA. Island lawmakers believe that higher electric rates could be unfavorable to the economy, while bondholders stress that “Prepa’s restructuring and emergence from bankruptcy is necessary and critical to Puerto Rico’s future prosperity.” The Island’s resurgent economy and the growth of electric cars are reasons that some surcharges planned in the 2019 RSA may not be necessary. Governor Pedro Pierluisi told the board that changed circumstances could warrant a renegotiation of the 2019 debt pact. Bondholders urged, “It should be possible for the limited number of mediation parties to work through the details of a Plan B proposal in a matter of weeks with appropriate oversight and direction from a skilled mediator,” Oversight board member Justin Peterson agreed “I think that’s a very good thing. Mediation is how we got the GO deal done. I think it will be critical to getting the PREPA deal done.” Judge Swain, bondholders and the oversight board want an early resolution of PREPA bonds. National echoed, “Time is of the essence.”

More Transit & Travel Favors COVID-Hit Muni Sectors… Signs of post-COVID re-opening could favor airport and transit sector municipal bonds, arguably the most impacted by the pandemic. NJ Transit leader said ridership is “showing signs of bouncing back,” following the latest COVID-19 variant surge. NJ Transit weekday rail usage is about 40% of pre-pandemic levels, up from about 30% during the height of the omicron surge. MTA’s ridership levels are the highest since the Omicron variant slowed activity in mid-December. New York’s Metropolitan Transportation Authority saw subway ridership fall by more than 90% during the pandemic, gutting the transit agency’s revenue collections. Recent MTA ridership count was 60% of 2019 levels. Air travel dipped noticeably at year end and much of January as Omicron raged. About 1.4 million travelers passed through airport checkpoints in mid-February, roughly double the volume from last year. Air travel volume is about two-thirds of the 2020 level per Transportation Security Administration. Air travel recovery has been higher for domestic connecting hubs and tourist destinations. Spring break will boost domestic air travel, which generally lags in January and February, and international travel recovery strengthens. Airport bonds, a roughly $120 billion slice of the U.S. municipal-debt market, have largely emerged from COVID-19 related travel disruptions and are poised to benefit as the pandemic fades. Airports in Los Angeles and San Francisco have issued new bonds this year, and Orlando and Tampa airports will follow with sizeable new money and refunding bonds.

MTA Cuts Deficit… Government partnerships have been a critical lifeline to the nation’s largest mass transit system. Generous state aid has cut MTA’s projected deficit in 2025 to $500 million, down 66% from a previous $1.4 billion shortfall. MTA does not face budget shortfalls through 2024 due to substantial federal aid. In 2026, the MTA could face a $2 billion deficit. MTA CFO said, “We hope we can continue to have that disappear and make sure any of our borrowing goes toward capital and not toward operating.” MTA plans to revise ridership projections in the near future.

Big Money Race For Illinois Governor… Richard Irvin, the mayor of Aurora, will be the Republican candidate fighting Democrat Governor J.B. Pritzker. Hedge fund billionaire Ken Griffin has pledged $20 million to unseat the incumbent, also a billionaire. Griffin’s money has stirred Illinois politics in the past. Griffin put more than $50 million to topple Governor Pritzker’s progressive tax plan which failed in 2020. Undaunted, Pritzker has added $90 million of his personal fortune to the race after spending $171 million to oppose former Governor Bruce Rauner’s re- election campaign, which received millions of dollars from Griffin. The war chests of the wealthy will fund the high stakes battle for the highest office in the state.

Federal Impact Grows… Federal contribution to state revenues is growing. Federal dollars made up a record high 36% of state revenue in 2020, a fallout of the $150 billion from CARES Act enacted in March 2020. The record is likely to be surpassed in 2021, due to unprecedented $350 billion direct aid to states and local governments from the America Rescue Plan enacted in March 2021. Most recent, the Infrastructure Investment and Jobs Act, enacted in November 2021, brings an additional $26.5 billion to fix nations bridges, although it could cost up to $58 billion to replace bridges in poor condition across the country. Nationally, 7% of bridges are in poor condition. The funding gap varies across states. California’s share covers replacing 28% of its bridges in poor condition, while New Jersey expects to replace 45%. U.S. territories will receive over $1 billion, including $900 million earmarked by Puerto Rico. The Federal Highway Administration stated, “The historic legislation will improve life for residents in Puerto Rico and the territories and create good-paying jobs and economic growth.” On states’ utilization of federal aid, Pew Research noted, “They should not be used to fund new recurring commitments like permanent tax cuts or major spending programs.” Pew added “If they do, states will face a fiscal cliff when that federal dollars eventually dry up.” States have until 2026 to spend the historic federal aid, which has been credit positive for the municipal bond sector.

Compare 30-Year taxable U.S. Treasury yield 2.22% to 30-Year tax-exempt muni bond yield “AAA” 2%; “AA” 2.28%; “A” 2.64%; “BBB” 3.02%. For investors in the 35% tax-bracket, a 3% tax-exempt yield is equivalent to a 4.6% taxable yield. Top rated tax-free bonds yield 90% of comparable taxable U.S. Treasuries.