Monthly Archives: February 2016

Muni Credit News February 25, 2016

Joseph Krist

Municipal Credit Consultant


The current presidential campaign has highlighted healthcare  as a major issue. Candidates have proposed various schemes ranging from single government payer to completely private schemes. while this all plays out, providers are grappling with how to plan under the existing scheme. Intermountain Healthcare, a nonprofit health system in Salt Lake City, is a major issuer of tax exempt debt. Operating 22 hospitals throughout the American West, it is a major provider in that region. As such, it is at the forefront of many of the current trends in healthcare finance. So it is with interest that we look at IHC’s answer.

It has a new health plan, SelectHealth Share, which guarantees to hold yearly rate increases to one-third to one-half less than what many employers across the country typically face. To help keep the rate increases roughly in line with changes in consumer prices, Intermountain says it will produce savings of $2 billion over the next five years. IHC believes it has established itself as a leading health system by tracking and analyzing costs and the quality of patient care, allowing it to improve treatments and reduce unnecessary expenses.

Intermountain has already saved money by renegotiating the cost of surgical staplers, pitting a cheaper manufacturer against another and saving $235,000 a year. It saved $639,000 a year by ensuring that heart attack patients get into the catheterization lab within 90 minutes of emergency room contact, thereby helping patients recover faster.

Intermountain’s Share program sets the increase at approximately 4 percent — which is seen as particularly attractive to employers because coverage then becomes a predictable expense. IHC said its new effort was not a marketing gimmick. But there are risks for its Aa1/AA+ credit as it experiments. Intermountain, for example, could incur significant losses if it wound up having to spend a lot on caring for patients, which is why few, if any, systems — or insurers — make similar guarantees.

Intermountain is concentrating on its most costly patients, most of whom have complicated chronic conditions like diabetes that also might be accompanied by depression or other problems.  There have been growing pains. A two-year-old clinic created to deal with these sick patients was expected to manage about 1,000 patients, but so far only about 140 are enrolled, many of whom need a daily check-in. Patients are also staying longer — while the ultimate goal is to send someone back to a primary care doctor once stable. Only 19 patients to date have graduated from the clinic and can now see a regular doctor.

Intermountain says it will not have information it can share publicly until this summer. In 2016, the system expects to achieve savings approximately equal to 8 percent of its volume, or about $500 million. It decided it would not keep the savings or wrangle with outside insurers about who gets to pocket the money.“What we’ve decided to do is to give it back to the community in terms of lower rates,” said Dr. Brent James, the executive director for Intermountain’s Institute for Health Care Delivery Research.

Intermountain is taking a somewhat different tact in that it has agreed to care for about a third of its patients for a fixed amount. That puts the risk on IHC if its health care costs rise too much because it did not do enough to keep people healthy or because its treatments were too expensive. It is among the minority of systems ready to do so.

Doctors who are not affiliated with Intermountain who care for patients under the plan must agree to changes like using an electronic medical record and sharing information about their outcomes. Employers must agree to offer coverage that their workers can afford by paying for at least 70 percent of average premiums and funding a savings account with a sizable contribution. Businesses must also choose SelectHealth as their and doctors to take care of patients without worrying about whether they will switch if their health plan changes or skip a needed doctor’s visit because of a high deductible.


Before the financial crisis in the last decade in the era of high energy prices, many smaller municipal utility consumers of natural gas looked for ways to stabilize their future supplies and prices through transactions with financial institutions and gas suppliers. These transactions effectively allowed the utilities to pre-pay for long term supplies of gas under long-term supply contracts. These complex transactions involved bond issuances, gas supply contracts, interest rate swaps, investment agreements all supplied by a variety of financial intermediaries. When the creditworthiness of some of the financial institutions providing the necessary products declined or even resulted in their financial failure, investors in these transactions saw significant declines in market value of their bonds and even some risk to principal repayment. Hence, they went out of fashion.

Now we are in a new era in the energy and financial markets with restored financial institution balance sheets, a new understanding of the risks inherent in these transactions, and a new cost environment for supplies of natural gas. These factors have joined to renew interest in pre paid gas transactions to enable utilities to lock in lower prices and provide an outlet for potential oversupplies of gas stocks. this is evidenced by at least two transactions proposed for the first quarter in the municipal bond market.

The Lower Alabama Gas District hopes to sell up to $675,000,000 of bonds to finance the prepayment for a 30 year supply of natural gas for sale to municipal gas systems in Alabama and Louisiana. The transaction involves purchases of gas from the commodity trading subsidiary of Goldman Sachs who will guarantee that entity’s financial performance as well as act as underwriter for the District’s bonds. Goldman will also guaranty the performance of the provider of an Investment Agreement for the Debt Service Reserve Fund, the earnings on which along with net revenues from the purchasing utilities will pay off the bonds. The economics of the transaction will also involve commodity swap agreements with a Royal Bank of Canada subsidiary.

The second transaction is a $1,000,000,000 issue from the Black Belt Energy Gas  District to finance the prepayment of a 30 year supply of natural gas for sale to municipal gas systems in Alabama, Tennessee, and Georgia. In this deal, Royal Bank of Canada and its subsidiaries will act a gas supplier, interest rate swap counterparty, liquidity provider, and bond underwriter. The Bonds are paid from the net revenues of the ultimate gas supply customers.

Each of the states in which purchasers of the gas are located have had experience with these kinds of transactions and have been involved in essentially failed transactions. The major risk in these deals stems from their complexity and the multi-faceted roles of the primary financial institution providing the underlying financial performance guarantees of the various participants. A prime example of this is when Lehman Brothers collapsed thereby involving a number of gas prepayment transactions to experience payment interruptions and involvement in its bankruptcy and subsequent unwinding.

So in the end, investors are buying a municipal bond that is on a practical basis bank debt. It is important for individual investors to understand that this is likely where the primary risk is, not the ultimate gas utilities or their customers.  That is why the rating of the primary financial institution participant is the real basis for the rating on the bonds. There still are many moving parts which can result in deal restructuring or early termination so it remains difficult for the individual investor to understand what their bond is worth at any given point in time.


The following are excerpts from the 2015 SIFMA Municipal Market review. Long-term public municipal issuance volume totaled $76.4 billion in the fourth quarter of 2015, a decline of 11.3 % from the prior quarter ($86.1 billion) and a decline of 23.0 % year-over year (y-o-y) ($86.1 billion). Including private placements1 ($8.4 billion), long term municipal issuance for 4Q’15 was $84.7 billion. Despite the fourth quarter decline, full year issuance was $377.6 billion, an increase of 19.9 % from 2014 and just slightly above 10-year volume averages. According to the SIFMA Municipal Issuance Survey (“Survey”), respondents expect long-term municipal issuance in 2016 to decline slightly to $388.5 billion.

Tax-exempt issuance totaled $67.4 billion in 4Q’15, a decline of 11.2 % q o-q and 24.9 % y-o-y. For the full year, tax-exempt issuance was $338.4 billion, an increase of 19.7 % from the prior year; Survey respondents expect tax-exempt issuance to rise slightly to $347.5 billion. Taxable issuance totaled $5.2 billion in 4Q’15, a decline of 34.1 % q-o-q and 22.8 % y-o-y. For the full year, taxable issuance was $27.8 billion, an increase of 21.2 % from 2014; for 2016, Survey respondents expect taxable issuance to rise slightly to $30.5 billion. AMT issuance was $3.8 billion, an increase of 60.8 % q-o-q and 42.3 % y-o-y. For the full year, issuance was $11.3 billion, 24.0 % above 2014 volumes; Survey respondents expect 2016 volumes to be lower at $10.5 billion. By use of proceeds, general purpose led issuance totals in 4Q’15 ($15.7 billion), followed by primary & secondary education ($14.7 billion), and water & sewer ($8.4 billion).

For the full year, general purpose led issuance totals ($91.2 billion), followed by primary & secondary education ($82.5 billion), and higher education ($36.6 billion). Notable sectors that saw increased q-o-q issuance were solid waste ($152.3 million, an increase of 882.6 %and 468.3 % q-o-q and y-o-y, respectively), airports ($4.1 billion, an increase of 36.3 % and 232.4 % q-o-q and y-o-y respectively), and single-family housing ($2.4 billion, an increase of 3.2 % and 28.4 % q-o-q and y-o-y, respectively). Refunding volumes as a percentage of issuance declined slightly from the prior quarter, with 43.4 % of issuance attributable to refundings compared to 48.9 % in 3Q’15 and 53.1 % in 4Q’14.

According to the Investment Company Institute (ICI), fourth quarter net flow into long-term municipal funds was positive, with $10.8 billion of inflow in 4Q’15 compared to $2.5 billion of outflow from 3Q’15 and $9.6 billion of inflow y-o-y. For the full year, approximately $14.9 billion of inflow was recorded, down from the $28.0 billion of inflow from the prior year. According to Bank of America-Merrill Lynch indices, municipals returned 1.72 %in the fourth quarter of 2015 and 3.55 % in the full year.


Efforts to have the state intervene in a financial restructuring for Atlantic City, ran in to a near term hurdle when the City’s elected officials of this struggling gambling resort calling the state’s plan to take more control of the city fascist and hypocritical. Mayor Donald Guardian urged lawmakers to reject legislation introduced last week in the State Senate, saying it would hand too much power to the state. “We cannot stand here today and accept any bill with the broad, overreaching powers as the one presented to us last week contained,” Mr. Guardian, a Republican, said. “It is unacceptable. The civil rights of our citizens are being trampled on.”

The legislation was introduced by the Democratic president of the Senate and would give the state nearly complete control of Atlantic City’s finances and the power to renegotiate contracts with the police and fire departments. A similar bill was introduced in the Assembly on Monday. Atlantic City officials had drawn up different legislation that they hoped would be introduced soon, though he declined to say who might sponsor it. A key difference in this bill, he said, would be a provision for redirecting more of the taxes collected from casinos to the city.

State officials oppose allowing Atlantic City to make what would be the state’s first municipal bankruptcy filing since the Great Depression. The issue of racism as a factor in the dispute was introduced when the NAACP said the organization would file a civil-rights lawsuit against the state if the takeover proceeded. About 70 percent of Atlantic City residents are black or Hispanic.  The experience of Flint, MI. was cited by one local official as a reason to protest any attempt by state officials to take control of the provider of water in the city, the Municipal Utilities Authority. The authority is one of the few assets the city has to sell to pay off some of its debts, but residents fear that their water bills will rise and that the quality of the water could decline under private ownership.

A spokesman for the Democratic leadership of the Senate, said, “No one has been a better partner or a better advocate for Atlantic City than Senate President Sweeney, but the city has had more than two years to make the types of cutbacks and reforms needed to bring finances into line but has failed to do the job.”

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News February 18, 2016

Joseph Krist

Municipal Credit Consultant


The long-awaited release of a draft of the Commonwealth of PR’s FY 2014 financial statements has finally occurred. Before a recitation of the numbers, this language is important. “The Commonwealth is currently experiencing a severe fiscal and liquidity crisis. The Commonwealth and its instrumentalities face a number of fiscal and economic challenges that, either individually or in the aggregate, could adversely affect their ability to pay debt service and other obligations when due. The Commonwealth is currently considering a number of emergency measures that could affect the rights of creditors. Recipients of the Draft should be advised that to the extent that the Commonwealth or any entities related to the Commonwealth are unable to materially improve their financial position in the immediate future, such entities and/or the Commonwealth may need to seek relief under existing or potential future laws regarding receivership, insolvency, reorganization, moratorium and/or similar laws affecting creditors’ rights, to the extent available, and may resort to other emergency measures including nonpayment of debt obligations.”

Nothing new or unexpected in terms of the language or the numbers. The Commonwealth’s net deficit position increased $47.48 billion at June 30, 2013 to $50.06 billion at June 30, 2014, an increase of $2.58 billion. The increase is the result of higher operating expenses than operating revenues and an increase in the Commonwealth liabilities, such as bonds and notes, net pension obligations, legal claims and compensated absences, among others. Approximately 57.39% of Governmental Activities’ revenue (including transfers) came from taxes, while approximately 35.69% resulted from grants and contributions (primarily federal financial assistance). Charges for services represented approximately 3.62% of total revenue. The largest expenses were for general government, education, public housing and welfare, health and public safety. In fiscal year 2014, Governmental Activities’ expenses, which amounted to $20.70 billion were funded by $10.78 billion in general revenues, $7.12 billion in program revenues and transfers of $214 million from Business-Type Activities.

So there it is without a surprise in the lot.


When the PR restructuring saga began, it was clear that the path to resolution would be fraught with many artificial hurdles based on the island’s strained political environment. A tradition of populist policies that resulted in artificially low taxes and charges for services was clearly going to be the largest hurdle. We saw more evidence of that this week when the PR House passed the Puerto Rico Electric Power Authority Revitalization Bill (Senate Bill 1523 ) with 26 votes in favor and 22 against. The bill  must now return to the Senate so senators can concur with the House amendments to the legislation.

The process was as untidy as expected. Two members asked to abstain from the vote because they are PREPA employees. The NPP delegation announced it was going to submit a written explanation of its vote against the bill. Members of the Irrigation & Electrical Workers Union (Utier by its Spanish acronym) protested the bill. Some began to shout their discontent from the House galleys after the bill was passed. The bill does not guarantee workers rights.

The bill would create a separate corporation, the PREPA Revitalization Corp., that will issue new bonds that will be exchanged for the PREPA bonds that are currently on the market through a new securitization that will also be used to finance the $2.4 billion Aguirre liquefied gas facility. It will restructure PREPA’s board, create a new structure of contribution in lieu of taxes with cities and promote an increase in the utility rates through the Energy Commission. The restructuring will be financed through a so-called transition charge to consumers. As part of the deal, bondholders are expected to accept a 15% haircut on their investment.

PDP Rep. Javier Aponte Dalmau expressed misgivings about the bill and wanted the vote on the bill to be postponed, insisting that bondholders and PREPA should negotiate further cuts to the utility’s $9 billion debt. He believes that the 15% cut was insufficient. He said his vote on the bill was conditioned to the amendments introduced to the bill. “I am proposing language in the bill stating that the 15% cut is the minimum amount in the cut. I don’t want us to limit ourselves…. If that does not happen, then I have to see which amendments are introduced in the bill so I can determine how am I going to vote,” Aponte Dalmau said. The amendment Aponte Dalmau requested, however, was accepted by the majority late Monday and he announced he would vote in favor of the bill.

The action comes on the heels of a PR Senate investigation into irregularities in PREPA’s fuel purchases that officials say cost millions for customers. The legislation calls for a separate office to handle the purchases. For years, it is alleged that authority bought cheap, residual oil that failed to meet federal clean-air standards, and faked tests to make it look like it had passed. Ledgers were falsified too to make it appear as though the authority had actually bought the higher-grade oil, which cost more. The higher price was then passed on to consumers. In the 1990s, the Environmental Protection Agency found that the oil being burned did  contain unacceptable levels of sulfur. If true, the accusations would go beyond errors in judgment and amount to a decades-long fraud.

During her speech in the House opposing the bill, one House member complained that the restructuring support agreement between PREPA and the bondholders was not included in the bill that enables it. “If this bill validates the agreement, why it is not in the bill? She alerted the public to the fact that the wording in the restructuring support agreement (RSA) and the wording of the bill were not the same. The RSA, she said, put consumers on the hook if the corporation or PREPA failed to pay the debt. “It appears that the debt here is not divided among everyone but that the customers are responsible for it together with PREPA,” she said.

An amendment was introduced in the bill that made it clear that PREPA’s clients could not be held liable for the debt. Another amendment introduced by the House made it easier for consumers to challenge the amount in their utility bills. It was then asked of the bill’s sponsor, if the legislation was eliminating customers as “obligors” of the debt. He did not answer the question.

During his speech on the floor, Aponte Dalmau noted that two years ago he had proposed the creation of a separate corporation for PREPA but was called “crazy.” He was referring to a bill he introduced in 2013 that would have replaced PREPA with a new entity, end the utility’s monopoly in the area of power generation and create separate entities to purchase fuel and set consumer power rates. He did so at the time to help make the utility more efficient. The utility ended up paying Alix Partners nearly $30 million to come up with the idea of creating a separate corporation to handle the securitization of PREPA’s bonds. The new corporation will not be able to incur new debt. “This new corporation will securitize the debt but the only project it can finance is the Aguirre one,” he said.


In spite of a very checkered history for such projects being successfully financed in  the muni market, a Maryland community wants to try to tax-exempt finance a conference center/hotel project. These projects are seen by many suburban entities as a way to jumpstart local downtown development. Yet suburbs in New Jersey, Illinois, and Maryland previously have previously seen those projects fail to pan out.

Frederick County, MD lawmakers hope to move through the state General Assembly session as a delegation divided — at least on two issues: a downtown hotel project and a hotel tax. A bill authorizing $19.8 million of Maryland Stadium Authority bond funding to help support a proposed downtown Frederick hotel and conference center project failed to get majority support from the County delegation. The bill was nonetheless introduced in the House of Delegates on Friday. It outlines how Maryland Stadium Authority funding will move forward, if approved by the General Assembly. The bond bill represents the largest piece of public funding for the conference center, which is now projected to cost about $69.8 million.

About $44 million of that cost will be paid by the hotel’s developer, Plamondon Hospitality Partners. The rest would be a combination of city, county and state funding. The budget includes $14.8 million in bond funding from the Stadium Authority, but the bill is written to include a figure the Maryland Stadium Authority believes could be paid back through revenue generated by the project. In July, a Stadium Authority report concluded that the state could leverage up to $17.8 million in bonds that would be paid off, including interest, through the project’s revenue in 20 years. This week, that number was increased to $19.8 million, the figure included in the filed bill.

The bill outlines what would happen if the project fails to be in line with the projected budget if there are cost overruns. Those would be assigned to the city, which intends to pass along such costs and responsibilities to the developer in separate legal agreements. If the project comes in under budget, rebates would be returned to the city and county. The city of Frederick will buy the land for the hotel and conference center, and the city and Stadium Authority would each own half of the leasehold interest for the property.

Income from an increase in the County hotel tax was included as part of a funding plan for the downtown hotel and conference center, but Republican members of the County delegation voted to introduce a bill to cap the tax at its current rate of 3 percent. Those members said it would be unfair to pass a tax on to customers of other hotels to help finance the construction of a competitor. County leaders said the bill interferes with local authority to set the rate, and other revenue increases from a proposed 5 percent rate would have helped fund other tourism programs. The county collected about $1.3 million in hotel taxes last year. An increase to a 5 percent rate would increase revenue to about $2 million.

The proposed hotel and conference center will continue to face obstacles, aside from the General Assembly bill. After the session, a financing plan must be approved by the state Board of Public Works before bonds can be issued, and other legal requirements, like approval from the city’s Historic Preservation Commission, must also be met. County Executive Jan Gardner said county government would also continue to support the project.


From time to time, advocates for direct user financing schemes for highway expansion and development bring up the idea of imposing tolls on many currently untolled sections of the Interstate Highway System. Recent experience has shown that the introduction of tolls on those roads as well as on existing toll roads can be a political minefield. The most recent effort was in Pennsylvania where the tolling of Interstate 80 was proposed. That effort was concurrent with the enactment of a plan to use higher Pennsylvania Turnpike tolls to generate revenues for statewide road expansion.

Now the Congressional Budget Office (CBO) has weighed in on the subject through a recently released report. The report states that ” more widespread charging for the use of roads could increase economic output by giving drivers a financial incentive to switch to other roads and discouraging some travel and reducing congestion. Highly valued freight would thus move more quickly and more reliably, reducing delivery costs for producers as well as inventory costs for retailers, thereby freeing up resources to accommodate additional demand by consumers or allow for additional investment by businesses.

Similarly, shorter commutes could translate to a boost in the supply of labor in the economy by allowing workers to spend more time on the job or encouraging some people to take a job at a more distant location. Charging for the use of roads could allow for more travel overall by reducing congestion, which occurs in many urban areas during peak periods. That counterintuitive effect occurs because user fees, by diverting even a relatively small number of users to other roads or to another time of day on the same road, can cause speeds to rise sharply, increasing the total number of vehicles that can pass through a bottleneck during peak periods.1 In addition, charging drivers would raise revenues, which could be used to make repairs, expand capacity, substantially renovate the Interstate System, or pursue other purposes.”

While they make an excellent argument, it goes awry with the last three words of the excerpt from the report – pursue other purposes. This is where toll proposals go off the rails. Look at the bad reaction to a similar scheme for the PA Turnpike whereby toll revenues for that road were to be raised for other highway purposes throughout the state. It lead to lower usage, more frequent toll increases, higher bond and debt service requirements and an overall degradation of the credit. That is just one example for  tolling opponents to point to.


Standard & Poor’s made nearly twice the number of upgrades as downgrades in United States Public Finance in 2015, the fourth consecutive year and the 13th consecutive quarter that S&P’s upgrades outnumbered its downgrades in the sector. Every subsector except higher education and charter schools saw more upgrades than downgrades. S&P downgraded 69 higher education ratings and upgraded 29 in that group. It downgraded 25 and upgraded nine charter school ratings.

Unsurprisingly, Puerto Rico and other organizations in the commonwealth accounted for more downgrades – 115, including four defaults – and more multiple notch downgrades than any other entity. These were 7% of all of S&P’s U.S. public finance rating changes in the year. The upgrade of California to AA-minus from A-plus in July affected 97 ratings. Improved issuer finances were the primary reason for upgrades outnumbering downgrades. At the same time, S&P’s rated issuers had 12 defaults in 2015, the third highest since 1986.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News February 11, 2016

Joseph Krist

Municipal Credit Consultant


Nearly one year ago, Moody’s downgraded debt of the Washington Metropolitan Area Transit Authority to A1 as the result of the Authority’s use of short-term debt as a tool to bridge restrictions on its receipt of federal funds. These restrictions were the result of findings from a Federal Transit Administration (FTA) audit of the Authority’s grant’s management process. The slow receipt of grants through the FTA has constrained WMATA’s liquidity and led it to draw fully on its lines of credit and enter into private financings to maintain capital spending. WMATA’s short-term debt is now in excess of its low level of long-term debt.

Since the downgrade, the Authority has continued to face declining farebox revenue coupled along with increased maintenance and upgrade expenses. While the downgrade has caused some bondholder concerns, a more recent move by the operator of the capital city’s Metrorail and Metrobus systems, along with MetroAccess paratransit has raised some more serious red flags. It has come to light that WMATA has hired leading bankruptcy lawyer Kevyn D. Orr to advise the agency on getting its finances in order. Mr. Orr comes to the Authority after stints managing Detroit’s bankruptcy and advising Atlantic City as it considered bankruptcy.

Among the options Orr could advise WMATA taking are to restructure its debt, not agree to any wage or benefit increases in this year’s contract negotiations with its labor unions, and try to get more money out of its member jurisdictions. Unlike most U.S. transit systems that enjoy dedicated funding from the Highway Trust Fund’s Mass Transit Account, WMATA relies on annual appropriations from Congress and its member jurisdictions: the District of Columbia, State of Maryland, Commonwealth of Virginia and the Maryland and Virginia counties it serves.

As muni participants who went through the Detroit bankruptcy saga know, Orr is the partner in charge of the Jones Day law firm’s Washington office. Under a contract worth up-to-$1.74 million, he will serve as “part-time strategic executive adviser” to WMATA’s newly-installed General Manager, Paul J. Wiedefeld, according to WMATA officials cited by The Washington Post.

WMATA’s major problem is reflected in its budget for fiscal year 2017 (starting July 1, 2016). Its operating budget is $1.7 billion, $1.2 billion of which is employee pay and benefits. Contracts with each of three unions expire June 30, and negotiations are expected to begin soon. WMATA officials say that management has little latitude to implement financial reforms. So it hopes to use Orr in a role of talking to officials and organizations that interact with the commuter system.

Bondholders should be concerned that the system plans to spend $1.3 billion on capital improvements in fiscal 2017, for which it is relying heavily on federal grants — money that may not be coming after an audit report revealed the agency’s extensive mishandling of such funds for years.

As an offset for delays in federal grants, WMATA has relied on short-term borrowing, amassing a debt of around $500 million with costly interest payments. Officials hope Orr will convince the jurisdictions served by WMATA to increase their funding levels. Orr was said to be on a “short list” to be WMATA’s General Manager after the January 2014 retirement of Richard Sarles, but said he was more interested in practicing law.

Metrorail ridership has been trending downward since 2010 since reductions in federal employees’ transit benefits (federal workers make up an overwhelming portion of Metro’s weekday riders), while its member jurisdictions are reluctant to increase their contributions in light of several highly publicized incidents and safety lapses in the subway system.


The chair of the U.S. Senate Finance Committee, Sen. Orrin Hatch (R., Utah), sent on Wednesday a letter to Gov. Alejandro García Padilla, asking for a host of information to be delivered no later than March 1. Se. Hatch  is seeking information that would “prove useful” in how Congress would deal with the Puerto Rico issue. “Unfortunately, it has been challenging to acquire recent verifiable financial information about Puerto Rico’s financial condition,” Hatch wrote.

As a result, the senator is calling for the delivery of the commonwealth’s audited financial statements for fiscal year 2014, which were due last May but have yet to be delivered by the García Padilla administration. Officials have pointed to a number of reasons for the delay, and a draft of the statements is expected to be made public this week.

During a hearing to discuss the federal budget on Wednesday, featuring U.S. Treasury Secretary Jacob Lew as witness, Hatch suggested that GOP members in the Senate have already worked on legislation for the commonwealth that could be introduced as soon as March. Along with two other Republican senators, Hatch presented last year a bill that sought to implement a federal fiscal control board on the island, although without access to a debt-restructuring or funds to provide short-term liquidity assistance to Puerto Rico.

Meanwhile, in his letter to the governor, Hatch also requests detailed information on Puerto Rico’s debt and wants to know García Padilla’s position on whether general obligations (GOs) have repayment priority according to the commonwealth’s Constitution. Hatch is particularly interested in the island’s severely underfunded main pension systems.

Hatch is also questioning the expenditure side of the island’s fiscal equation. Specifically, he asks about the spending-control measures that have been implemented, and how much the Puerto Rico government has paid during the past five years in such areas as healthcare, public housing, welfare and education. Hatch is also following up on the U.S. Treasury’s technical assistance and how exactly it has been provided.

At some point Puerto Rico will realize that financial disclosure must occur. The inability or, in our view, unwillingness to provide decent ongoing financial data would be comical were it not for the overwhelming need for the data. We look forward to next week’s draft financial report.


Puerto Rico’s Senate approved legislation that would enable the island’s main electricity provider to restructure almost $9 billion of debt. The upper chamber passed the bill in a 16 to 10 vote. The measure now moves to the House. The debt reduction agreement between the Puerto Rico Electric Power Authority and its creditors is due to expire Feb. 16 unless lawmakers pass the legislation. Two deadlines have already been missed.


With so much negative attention being focused on the City of Flint’s water catastrophe, it has been easy to lose sight of the improvement in its new old water supplier, the Detroit regional water utility. That improvement was highlighted this week when Moody’s upgraded the rating of the new Great Lakes Water Authority (GLWA). The upgrade of the senior lien and second lien water revenue ratings to Baa1 and Baa2, respectively, reflects the GLWA’s assumption, in full, of all debt previously secured by net revenue of the DWSD. While DWSD retains ownership of both the City of Detroit (local) and suburban (regional) water system, it has executed a lease agreement with the GLWA whereby the GLWA will assume full responsibility of regional system operations. The GLWA is also granted sole ownership interest in revenue generated by the combined regional and local system.

This is seen as significantly limiting the risk that a future bankruptcy filing by the City of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt. The across the board investment grade ratings vindicate the view of this newsletter that holders of Detroit Water and Sewer debt would be well served through the bankruptcy process by holding on to their debt.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

Muni Credit News February 4, 2016

Joseph Krist

Municipal Credit Consultant


The Working Group for the Fiscal and Economic Recovery of Puerto Rico released details of a comprehensive voluntary exchange proposal presented to advisors to the Commonwealth’s creditors last week. The proposal seeks to reduce the Commonwealth’s mandatorily payable tax-supported debt and near term debt payments. The implementation of the expense and revenue measures in the FEGP – totaling approximately $20.6 billion in revenue increases and $13.8 billion in expenditure reductions over the next ten years – are projected to reduce the Commonwealth’s projected cumulative fiscal deficit for the next decade to approximately $34.0 billion.

A voluntary exchange offer is intended to restructure more than $33 billion of payments due over the next ten years on its tax supported debt to allow the Commonwealth make its tax-supported debt sustainable. The plan provides for the Commonwealth to institute a fiscal control board to provide necessary oversight and ensure the Commonwealth complies with the FEGP and the terms of the exchange offer.

The restructuring proposal contemplates that creditors will exchange their existing securities for two new securities: a “Base Bond,” with a fixed rate of interest and amortization schedule, and a “Growth Bond,” which is payable only if the Commonwealth’s revenues exceed certain levels. The new securities would also provide creditors with enhanced credit protections, such as a Commonwealth Guarantee and statutory liens and pledges with respect to certain revenues. Enhanced credit support would include a statutory lien on and pledge of the 4.5% sales and use tax (“SUT”) and up to approximately $325 million annually of petroleum products tax revenues.

Under this proposal, the $49.2 billion of tax-supported debt would be exchanged into $26.5 billion of newly issued mandatorily payable Base Bonds (a 46% haircut) and $22.7 billion of newly issued Growth Bonds. Interest payments on the Base Bonds would begin in January 2018, scaling up to 5% per annum by FY 2021, when principal payments would begin.

The Growth Bonds would be payable only to the extent the Commonwealth’s revenues exceed its current baseline projections as a result of real economic growth on the Island. The first such payments, if any, would be made beginning in the tenth year after the close of the exchange offer. In any given year in which the Growth Bond would be payable, creditors would receive payment of up to 25% of such revenues. The proposal also seeks to lower the Commonwealth’s debt service-to-revenue on tax-supported debt to approximately 15%, a level consistent with the debt limit contemplated by the Commonwealth constitution. At 15%, Puerto Rico would still remain at levels exceeding the most heavily indebted of the U.S. states. Debt service on the Base Bonds has been structured to give the Commonwealth the opportunity to further reduce that ratio as a result of economic growth and develop into a stronger credit over time. A successful exchange offer, along with the implementation of the measures recommended in the FEGP, should improve the Commonwealth’s credit-worthiness, and, if the Commonwealth’s economy is able to grow in line with the growth assumed for the United States, investors will be able to recover the full principal amount of their investments through payments on the Growth Bonds.

The exchange offer is predicated upon a number of key assumptions, including very high participation levels from the creditor groups as well as the U.S. Federal Government maintaining at least its current percentage levels of programmatic support for the Commonwealth. If very high participation levels cannot be achieved or the U.S. Federal Government allows the level of programmatic support for Puerto Rico to materially decline, then the terms of the exchange offer will have to be revisited and creditor recoveries adjusted accordingly.

A serious proposal would accept the need for outside oversight. It can be argued that the Commonwealth has forfeited the trust of its various stakeholders to oversee its own recovery. The continuing lack of audits, reliable ongoing revenue collection reporting, and the lack of urgency with which these matters have been addressed all convey a serious lack of purpose. The risks to bondholders are basic and clear. Primary among them is that the plan assumes that the Commonwealth can reverse years of negative economic growth in the face of steady declines in population especially among the more educated and skilled segments of the population.

The effective five year moratorium in principal repayment is in line with the Commonwealth’s attempt to pose the situation as an us vs. them (as in the hedge fund investors) situation which has always been a convenient oversimplification of the situation. The size of the proposed haircut and the economic risk sharing aspects of the proposal are in line with an effort to align the various interest groups behind a Congressional bailout.

The plan continues the strategy of delay which the Commonwealth has been employing as it seeks a federal solution. It comes on the heels of a failure by island politicians to approve a PREPA restructuring which might require power users to actually pay for power. At the same time, the proposed interest rates contemplated in the tax-backed restructuring seem quite unrealistic in the face of the yields being demanded by the market for the Chicago Public Schools deal postponed from last week. Hence our view that this current proposal is preliminary at best and a mere stalling tactic for the Commonwealth.


At the same time Puerto Rico is offering its debt restructuring proposal, Sen. Elizabeth Warren, D-Mass., filed an amendment to an energy bill pending before the Senate to include a provision that would temporarily halt litigation over Puerto Rico debt until April 1. If the amendment is passed as part of the energy bill, it would put a stay on any creditor litigation filed on or after Dec. 18. Warren’s effort to include the amendment has support from Sens. Blumenthal, Schumer, and Menendez, co-sponsors of the legislation, as well as Sens. Kirsten Gillibrand, D-N.Y., Chris Murphy, D-Conn., and Bill Nelson, D-Fla.

The amendment asserts that as Puerto Rico continues to deal with roughly $70 billion in debt, “a temporary stay on litigation is essential to facilitate an orderly process for stabilizing, evaluating, and comprehensively resolving the commonwealth’s fiscal crisis.” A stay would avoid a disorderly race to the courthouse, benefitting creditors and other stakeholders, and will only be temporary, according to the proposal.

The April 1 deadline for the stay happens to line up with a late December directive House Speaker Paul Ryan, R-Wis., gave to House committees with jurisdiction over Puerto Rico to create a “responsible solution” for the commonwealth by the end of March. Assured Guaranty Ltd., Ambac Financial Group Inc., and Financial Guaranty Insurance Co. have all filed lawsuits in January, during the time period that would be covered by the moratorium. A judge has consolidated the insurers’ cases in the U.S. District Court for the District of Puerto Rico.

The House Natural Resources Committee held a hearing this week that may lead to legislation designed to aid Puerto Rico. Pedro Pierluisi, Puerto Rico’s sole representative in Congress and a member of the committee said he supports creating an independent board to approve things like Puerto Rico’s long-term financial plan, annual budgets, and effort to publish accurate and timely financial information. But he warned that “if the forthcoming bill seeks to extinguish rather than enhance” Puerto Rico’s democracy at the local level, he “will do everything in [his] power to defeat it.”

The question of extending Chapter 9 protections to the commonwealth’s public authorities has even less of a consensus. The argument against a Chapter 9 bankruptcy solution is that it would not force the commonwealth to take steps toward reforming its operating, accounting, and other financial reporting systems. Those who hold this view (such as we do) think that Puerto Rico should be allowed to restructure its debt only after it agrees to real lasting reforms of these practices and the assent of the majority of bondholders supporting the restructuring proposal.

In the meantime, PR House Bill 2786 would create a new, independent corporation whose only task would be to serve as a vehicle for PRASA to achieve financing at reasonable terms. It is based on the legislation that would provide for the restructuring of the Puerto Rico Electric Power Authority (PREPA), as agreed with a majority of its creditors. One difference is based in the fact that “PRASA has already a gross pledge whereby revenues go directly to the trustee, who pays first [PRASA] bondholders and then what is left is given to the utility. In this sense, PRASA does not have the same leverage to bring its bondholders to the table with the argument, ‘I won’t pay you.’” The head of PRASA has asserted that [PRASA has] repayment capacity for about $700 million, at a 10% [interest rate], but there is no access.”

Of continuing concern is the sentiment expressed against rate hikes. PRASA head Lázaro said that in the event of a rate hike, he explained the size would depend on the sacrifices the utility is willing to make when discussing the issue, but that it could be as much as $10 monthly. Lazaro said “I’m the last person who wants to increase the water rate. With House Bill 2786, “we are seeking to give certainty, mitigate the [financing] transaction’s risk and avoid a rate hike,” said Rep. Rafael Hernández, co-author of the measure and chair of the House Treasury Committee.

PRASA’s last water-rate hike back in 2013 was projected to cover all operational costs from its revenue, debt service until fiscal year 2018, and projected deficits during fiscal 2016 and 2017. But it also intended to pay for its capital improvement projects with external financing, and not with the utility’s revenues. What’s more, to pay roughly $90 million in short-term debt maturing on Feb. 29, PRASA would siphon its Rate Stabilization Fund — monies that were supposed to be used to cover projected deficits during fiscal 2016 and 2017.


The Chicago Public Schools yielded to investor uncertainty when it delayed its planned $875 million general obligation bond sale by moving it to the day-to-day calendar. The district’s finance officials said the decision was made to give investors more time to digest the deal and the underwriting syndicate time to make final structure revisions. The action followed  the General Assembly’s GOP minority leadership announcement of legislation backed by Gov. Bruce Rauner to put the district under state oversight and put it on a possible path to bankruptcy. The Board has obtained an opinion that its pledged revenues securing the planned bonds are special revenues for purposes of bankruptcy. We see that as being less than definitive.

The less than helpful comments from Springfield led to a pre-marketing wire offering spreads of more than 500 basis points to the Municipal Market Data’s top-rated benchmark. The 25-year and final 28-year maturities were offering a preliminary yield of 7.75%, 506 basis points and 502 basis points, respectively, over MMD’s AAA. Both were more than 400 basis points over a triple-B credit. The preliminary price on the taxable, 17-year maturity offered a yield of 9.75% with a coupon of 9.50%.

Chicago’s chief financial officer, Carole Brown, and CPS finance chief Ronald DeNard said that it had sufficient order interest to place with buyers at pre-marketing pricing levels distributed Tuesday. CPS bonds had been trading at a 350 to 375 basis point spread before the announcement. The district’s $300 million sale last spring saw a top yield of 5.63% on a 25-year maturity that was 285 basis points over top-rated MMD.


Two years ago, the use of Capital Appreciation Bonds by school districts in California for new construction led State lawmakers to pass AB 182 at the urging of then-State Treasurer Bill Lockyer after it came to light that many school districts had issued non-callable capital appreciation bonds with 40-year maturities and nominal interest-to-principal repayment ratios of 10-to-1 or even 20-to-1. The public relations poster child for the controversy was Poway Unified School District’s $105 million series, issued without a call option and requiring $1 billion of debt service through its 40-year maturity.

Initially the legislation and public uproar caused school CAB issuance to drop to $292 million of CABs in 2014. Once the concern died down, issuance of capital appreciation bonds by California school and community college districts more than tripled from 2014 to 2015. It was the highest level of school CAB issuance since 2009, according to CDIAC data. K-12 school districts conducted 46 CAB sales in 2015 totaling $691 million, compared to $250 million the prior year. The state’s community colleges executed eight CAB sales last year totaling $307 million, up from $42 million in 2014.

The legislation sought to limit CAB issuance by K-12 and community college districts, by requiring ratios of total debt service to principal for each series not exceed 4-to-1, and that bond issues include a 10-year call option. Permitted maximum interest rates were cut to 8% from 12%. Now that the negative uproar has subsided, K-12 school districts conducted 46 CAB sales in 2015 totaling $691 million, compared to $250 million the prior year. The state’s community colleges executed eight CAB sales last year totaling $307 million, up from $42 million in 2014. The increase occurred in the face of comments from some financial advisors and district officials, who have said that districts have been steering away from the structure after the wave of criticism that resulted in AB 182’s passage.

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