Week of 9/9/2019

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Chicago Public School Bond Sale Seven Times Oversubscribed… How Chicago Fixes Budget Gap Will Be Crucial For Ratings… Mediation of Puerto Rico GO Bonds… Appeals Against COFINA Plan Advance… U.S. Lawmakers May Review Puerto Rico Oversight Board’s Powers… August Sets Lowest Muni Yield Record… Views on U.S. Interest Rates…

Chicago Public School Bond Sale Seven Times Oversubscribed…Bond yields on Chicago Public Schools (CPS) have dropped near the lowest on record. CPS further chipped away at its yield penalties in a $369 million bond sale last week. The 9- year and 10-year bonds with a 5% coupon landed at 2.63% and 2.68%. Relative to top-rated benchmarks, CPS bonds fetched about 135 to 150 basis points additional yield. The yield penalty paid by CPS has dropped considerably by 70 basis points. Last December, the yield penalty for 9-year CPS bonds was 221 basis points. CPS bonds issued last week were more than seven times oversubscribed and saw broad investor support with orders from 41 institutional buyers. This is a significant change from recent years when the district’s financial situation was more uncertain. With the refunding bond sale, CPS will save $20 million in interest costs and has lowered financial risks as it no longer has any variable rate bonds. Two years ago floating-rate bonds made up about $1 billion of the district’s $7 billion general obligation (GO) debt load. “Today’s successful refinancing, which eliminated all long-term variable rate debt from the district, is further recognition of the financial turnaround CPS has made since facing a nearly billion dollar deficit just over two years ago. CPS is fully committed to building on its financial progress so it can continue to support the investments that have helped our schools reach record levels of academic success,” said a CPS spokesman. A surge of investor demand for high yield tax-free munis and CPS improved finances fueled the strong market reception for CPS bonds.

How Chicago Fixes Budget Gap Will Be Crucial For Ratings…While Chicago’s Fiscal 2020 budget poses great challenges, it also represents a great opportunity, S&P stated. If the city is able to tackle the fiscal 2020 budget in a structural, sustainable manner, it will have made a substantial down payment on projected budget gaps. Structural solutions are likely to depend on Springfield and could take time. While not off the table, Chicago does not favor property tax hikes allowed under its home-rule status. The Mayor’s commitment to make politically difficult choices and her initiative to begin conversations with citizens and lawmakers bode well for fiscal progress and are viewed positively. To what degree the city can feasibly close its Fiscal 2020 budget gap with structural measures, whether the state can provide sufficient support while it tackles its own financial problems, and the timeliness of revenue streams will be pivotal to Chicago’s ratings, per S&P.

Mediation of Puerto Rico GO Bonds…Mediation talks to restructure Puerto Rico’s GO bonds are ongoing. The spotlight of the mediating team is on $15.1 billion of funds available in the 800+ government bank accounts. How much of these funds could be available for debt service is a key issue that mediators are discussing. The numbers targeted in the Oversight Board certified Fiscal Plan are under consideration. In court, the Oversight Board had challenged that validity of fullfaith- and-credit bonds issued after 2012. To allow mediation, Judge Swain has ordered to stay or halt court proceedings on Puerto Rico full-faith-and-credit debt restructuring until November 30. Mediators are trying to establish a “base” around which to negotiate. Judge Swain could elect to extend the stay based upon the progress of the mediation. Mediation Team Leader Judge Barbara Houser is expected to provide an update on October 28. Due to the legal complexity of Puerto Rico’s debt, mediation off

Appeals Against COFINA Plan Advance…The United States Court of Appeals for the First Circuit has allowed appeals against the COFINA Plan to proceed. The First Circuit rejected Puerto Rico, COFINA and Oversight Board request to dismiss COFINA Plan Appeals. Despite objections from holders of Junior COFINA Bonds, the federal District Court confirmed the COFINA Plan in February 2019. Several retail holders of Junior COFINA Bonds and certain unions appealed against the District Court’s COFINA Plan confirmation in the First Circuit. The First Circuit rejected Puerto Rico, COFINA and Oversight Board request to dismiss COFINA Plan Appeals “equitable mootness grounds”. The First Circuit expects opening arguments on the appeals to be filed by October 8, 2019.

U.S. Lawmakers May Review Puerto Rico Oversight Board’s Powers…U.S. House Natural Resources Cmte, in charge of U.S. territories, is pushing for legislation aimed at reviewing the powers of the Board and wants to reform PROMESA. A House hearing in September is in the cards. The Committee on Natural Resources also wants to debate Cmte Chair Grijalva’s proposal to create a kind of Federal Inspector General to oversee the transformation process of Puerto Rico’s power grid, for which the Island’s government seeks to receive nearly $17 billion in federal funds. It remains to be seen whether President Trump will reappoint current Oversight Board members or wait for a U.S. Supreme Court decision on board constitutionality. President Trump’s nominations will require Senate confirmation. The Senate reconvenes on September 9 and so far, there are no nominations for Senate consideration. Actions of the controversial Oversight Board have come under fire from Island’s former governors, its unions and bond insurers. Board members are eager to continue their positions. The Board’s term ended on August 30th and the legitimacy of its actions is questionable.

August Sets Lowest Muni Yield Record…In August 2018, muni yields dropped to record lows with top-rated 10-year muni yields falling to 1.21% and the 30-year to 1.83% tax-free. New muni supply surged to a 20-month high. Driven by record low tax-free yields, state and local government issuers offered $38 billion new tax-free bonds in August, 13% higher than a year ago. A third of the new munis refunded prior debt. For 35 straight weeks, investors have added funds to municipal bonds. Higher August supply was a welcome refuge for tax-free investors.

Views on U.S. Interest Rates…Former Fed Chair Alan Greenspan says bond yields could drop further. “You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States,” Greenspan referred to negative interest rates. Meanwhile, Lawrence Summers, a Treasury secretary under President Clinton, an economic adviser to President Obama and a former president of Harvard added, “I would hope to see significantly more easing. In the course of this year, most people are looking for meaningful easing, and I would expect that to play out. But I doubt it will be nearly sufficient to meet our challenges.”

Compare 30-Year taxable U.S. Treasury yield 2.07% to 30-Year tax-exempt muni bond yield “AAA” 2.01%; “AA” 2.26%; “A” 2.43%; “BBB” 2.85%. For investors in the 35% tax-bracket, a 2.8% taxexempt yield is equivalent to a 4.35% taxable yield. Top rated tax-free bonds yield 97% of comparable taxable U.S. Treasuries.