Week of 7/29/2019

Market Outlook-Low Growth-Low Interest Rates… Chicago Board of Education Plans GO Refunding… Chicago to Pay Down Short Term Commercial Paper… NY/NJ Port Auth Plan Atlantic City Airport Takeover… New Jersey Boosts Pension Funding, Rainy Day Funds… War on Corruption Creates Puerto Rico Bondholder Optimism… Judge Swain Wants Additional Mediation on PR GO Debt… NYC GO Munis 3x Oversubscribed…

Market Outlook-Low Growth-Low Interest Rates Outlook…Sharply lower global trade is slowing the global economy more than expected. IMF forecasts slower world economic growth of 3.2% in 2019 compared to 3.6% last year and 3.8% in 2017. U.S. 2019 second-quarter GDP grew 2.1% down from 3.1% in the first quarter and 2.9% in 2018. In Europe, economic outlook is “getting worse and worse” in European Central Bank head Draghi’s words. Major central banks, from the U.S. Federal Reserve to Europe and Asia, have signaled a return to ultralow interest rates in recent months amid cooling global momentum. This week, the Fed is widely expected to cut rates by a quarter percent and signal the pace of further rate cuts.

Chicago Bd of Ed Plans GO Refunding…With an improved credit profile, Chicago Public Schools (CPS) has started to chip away at pricey prior debt. CPS plans to issue $430 million general obligation bonds to refund prior bonds. Interest savings of $10-$15 million are in the cards. Junk-rated CPS enjoyed two positive ratings actions last year from S&P and Moody’s. CPS bonds’ yield gap relative to top-rated munis has dropped significantly over the last two years due to higher state aid and a pension levy. Investors are looking for accord on a contract with teachers. An oversubscribed recent short-term note saw lower yields and lower interst costs relative to prior years. CPS state aid revenue secured general obligation bonds are sought by tax-free investors seeking higher yields for a diversified portfolio.

Chicago to Pay Down Short Term Commercial Paper…Chicago stands to lower financial risks by paying down short-term debt. The City plans to retire all outstanding commercial paper notes with an upcoming $729 million GO bond issue. Part of the new issue will finance the City’s capital upgrades. Chicago’s preliminary budget gap, or variance of actual revenue/expense from budget, has decreased over the last eight years to $97 million in 2019 from $635 million in 2012. The City closes its budget gap each year through varied savings and revenue enhancements. Recurring revenue and cost initiatives have lowered Chicago’s structural deficit bringing its expenses more in line with revenue. In response, Chicago general obligation bonds rated S&P “BBB+” Fitch “BBB-” gained in price.

NY/NJ Port Authority Plan Atlantic City Airport Takeover…Port Authority of New York and New Jersey, a large scale muni bond issuer, which owns NYC’s JFK and La Guardia could lift the fortunes of Atlantic City and ease congestion at east coast airports. New Jersey lawmakers are pushing for Port Authority to buy, not just operate, the underutilized Atlantic City Airport. Earlier takeover efforts during Governor Chris Christie’s tenure were thwarted. If the plan goes forward, more airport traffic and tourism to Atlantic City’s diverse recreational amenities could expand Atlantic City’s economic footprint.

New Jersey Boosts Pension Funding, Rainy Day Funds…A higher surplus, $1.2 billion in 2019, allowed New Jersey to boost pension funding to historically high levels and contribute to its rainy day reserves after a decade-long gap. “This budget allows New Jersey to do many good and long overdue things. But it falls short in some ways.” Governor Phil Murphy referred to the $38 billion state budget which did not include his Millionaire Tax plan. The budget, which forecasts a $867 million surplus in fiscal 2020, takes into account the record national economic expansion and appears to be conservative.

War on Corruption Creates Puerto Rico Bondholder Optimism…A new governor could give Puerto Rico a second chance at closing the door on a beleaguered past. Contenders for the Island’s top job include former Resident Commissioner Pedro Pierluisi, Resident Commissioner Jennifer Gonzalez, Senate President and ruling party NPP President Thomas Rivera Schatz and Bayamon Mayor Ramon Luis Rivera. Pierluisi, who had a role in the enactment of territory debt restructuring law PROMESA, is being favored in some circles. Next-in-line Justice Secretary Wanda Vasquez declined governorship amid opposition. “Gov. Rosselló’s overdue resignation is a significant step in the recovery process, not the end. “The people of Puerto Rico have shown the world what can happen when a united public demands justice and accountability with a clear voice,” House Natural Resources Cmte Chair U.S. Rep. Raúl M. Grijalva (D-Ariz.) in charge of overseeing U.S. territories stated. The first-ever resignation of a Puerto Rican governor came after twelve days of civil unrest on the Island. Fed up with the Island’s corrupt politicians, Islanders wrested control from a reluctant Governor Rosselló and have made it clear that they will not put up with more of the same. “The most important thing is that it is someone who has credibility, honesty, with proven experience, that earns the respect of the government of United States and Puerto Ricans, so that the recovery funds are released,” an Island source stated. Rosselló’s departure “puts an end to a very sad chapter in the history of Puerto Rico,” said Puerto Rico Senate President Thomas Rivera Schatz. If impeached, Rosselló could have been found guilty of crimes under the criminal code and government ethics law such as embezzlement of public funds, negligence, illegal seizure of public services, a special committee of jurists reported to the Puerto Rico House of Representatives. Given the lack of oversight from a Federal Board that faces Senate confirmation and a U.S. Supreme Court ruling on its constitutionality, FEMA has tightened controls on federal aid disbursement to the Island. “Given the ongoing leadership changes within the Puerto Rican government, combined with continued concern over Puerto Rico’s history of fiscal irregularities and mismanagement, FEMA decided it is prudent to take additional steps to protect its share of the federal investment by reinstating the manual drawdown process,” a FEMA agent stated. For long, bondholders had pointed towards governance debacles. When Islanders themselves took a unified stand against government corruption, results were forthcoming: Puerto Rico Bonds rallied upon Islanders’ victory. With a law abiding new governor, Puerto Rico could chart a new course.

Judge Swain Wants Additional Mediation on Puerto Rico GO Debt…The Fed Board’s proposed tentative agreement with a select group of hedge funds was dealt a blow at the recent Title III court hearing. Judge Swain rejected the Fed Board’s argument to push forward any plan of adjustment on $25 billion Puerto Rico full-faith-and-credit bonds. Instead, Judge Swain wants to build consensus on key topics through mediation before considering any plan. Mediation topics include disputed bonds’ validity and secured status, possibility of consolidating cases, treatment of bonds under the U.S. Constitution and whether the elected government’s consent to any agreement is required. A growing maze of lawsuits on disputed Puerto Rico GO, retirement system, gas tax, and lease supported debt led Judge Swain to halt court proceedings until November-end and turn to mediation. Since 2017, Chief Mediator Judge Barbara Housum and a panel of Federal Judges are mediating the Puerto Rico debt dispute. Flux in Puerto Rico governance has extended the timeframe for GO debt resolution after a controversal restructuring of sales tax backed COFINA bonds in Feburary 2019. However, additional mediation and consensus on key topics could be a beneficial building block for eventual GO debt resolution.

NYC GO Munis 3x Oversubscribed…Overwhelming demand led Big Apple NYC general obligation new bond issue to receive three times as many orders. Retail buyers bid down the yield on Connecticut’s new issue GO bonds. This week, $9 billion new tax-free bonds will be issued. In the 29th straight week of inflows, almost $2 billion new inflows were invested in tax-free bonds. Retail investors have increased the pace of buying tax-free bonds.

Compare 30-Year taxable U.S. Treasury yield 2.57% to 30-Year tax-exempt muni bond yield “AAA” 2.35%; “AA” 2.53%; “A” 2.74%; “BBB” 3.2%.