Muni Credit News April 20, 2017

Joseph Krist

Municipal Credit Consultant

TO OUR READERS

Hopefully you’ve noticed a change in our format. We plan to highlight new issues that feature some unique component or represent sectors or issuers of interest.

Next week we are taking our first vacation in nearly two years. We hope that the change of scenery and the new format keep the Muni Credit News fresh and on point. So look for our next edition on Tuesday May 2.

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STATE OF CALIFORNIA

$1,248,070,000 FEDERALLY TAXABLE GENERAL OBLIGATION

HIGH-SPEED PASSENGER TRAIN BONDS

Moody’s: Aa3; S&P: AA-; Fitch: AA-

California is marketing these taxable bonds to investors both domestic and international.

The State is taking advantage of its size (its economy is bigger than that of most countries), name recognition, and the world’s familiarity with the concept of high speed rail. With rates still low, especially in Europe, the bonds are likely to have appeal to large institutional investors overseas. The issue will include traditional fixed rate bonds, mandatory put bonds, and index rate floaters.

The general obligation bonds benefit from the State’s recent sequence of more successful budget operations after the effects of the financial crisis. The State of California has a population of 39.4 million and a gross state product of $2.5 trillion. It has a large and diverse economy, and relatively high wealth. Relative to recent years, the state has a relatively stable financial position, high but declining debt metrics, adjusted net pension liability ratios that are close to the 50-state median, and strong liquidity.

Geisinger Health System

$850,000,000 Fixed Rate and Indexed Floating Rate Bonds

Moody’s: Aa2  Standard and Poor’s : AA

The bonds are secured by a general unsecured obligation of Geisinger Health System Foundation (GHSF) as the only legal obligor. The inpatient operating divisions and the Geisinger Health Plan (the Health Plan) are not members of the obligated group, but designated affiliates. The designated affiliates, which are required to upstream funds to GHSF for debt service obligations, can be de-designated at any time. Under the designated affiliate structure, the potential for future subordination of the bonds is possible.

Geisinger Health System is a vertically integrated, physician-led health system which has as its main components: a range of health services providers, including seven acute care hospitals with multiple campuses; a multi-specialty physician group practice of approximately 1,653 physicians practicing at 216 primary and specialty clinics; and Geisinger Health Plans (‘GHPs’), comprised of Geisinger Health Plan (‘GHP’), Geisinger Indemnity Insurance Company (‘GIIC’) and Geisinger Quality Options, Inc. (‘GQO’). Geisinger operates in 45 of Pennsylvania’s 67 counties, with a significant presence in central, south-central and northeastern Pennsylvania, and in 7 counties in southern New Jersey.

In spite of an excellent reputation and strong service area position, Moody’s has assigned a negative outlook to its rating. The negative rating outlook reflects several financial and strategic challenges including material operating losses related to the health plan’s exchange product, underperformance of a clinical provider and our expectation of still weak consolidated financial performance through FY 2017, relative to peer group medians. As the System digests and continues to pursue acquisitive growth, failure to demonstrate meaningful margin improvement in FY 2018 will result in a downgrade.

Moody’s states that the Aa2 rating acknowledges multiple key strengths including the organization’s large size and leading market position in Central Pennsylvania, its exceptional clinical and research reputation, management’s historic ability to execute strategy, very strong balance sheet resources, moderate leverage and effective management of debt structure risks. Credit concerns include multiple years of very modest consolidated financial performance compared to national Aa2 medians and peer organizations, challenges at the health plan which represents a sizable portion of the enterprise, underperformance of a clinical provider, an increasingly fluid and consolidating competitive landscape and the execution of multiple growth strategies simultaneously.

NYU Hospitals Center

$600,000,000 Taxable Bonds

Moody’s : A3

Yet another significant hospital provider is taking advantage of a favorable rate environment to issue taxable municipal debt to refinance existing debt and bank borrowings. NYUHC is a tertiary care teaching hospital with campuses located in midtown Manhattan and Brooklyn. NYUHC owns three inpatient acute care facilities in Manhattan and Brooklyn: (1) Tisch Hospital, located in Manhattan on the campus shared with NYU School of Medicine; (2) NYU Hospital for Joint Diseases Orthopaedic Institute, an orthopaedic, neurologic and rheumatologic specialty hospital located in Manhattan, which also houses the Rusk Institute of Rehabilitation Medicine; and (3) NYU Lutheran, located in Brooklyn. NYUHC also operates over thirty ambulatory facilities in Manhattan, Brooklyn, Queens and Long Island.

After recovering from damage due to Hurricane Sandy, NYUHC has embarked on an extensive program of affiliations with a number of NY metropolitan area providers. This has created some risk related to executing the new affiliation strategies and absorbing incremental debt, which challenge NYUHC to meaningfully reduce balance sheet leverage in the near term. These pressures constrain the rating.

The rating was accompanied by a change in the outlook to positive. The outlook  assumes no further affiliations or additional leverage at this time. Growth of unrestricted cash and investments translating to evidence of sustained reduction of leverage, maintenance of strong operating performance, smooth absorption of newly affiliated entities, and continued progress in completing campus redevelopment on time and on budget would be the grounds for an upgrade.

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ANOTHER SPIN FOR MASS TRANSIT IN LAS VEGAS

For some two decades, Las Vegas has pursued a dream of a mass transit option which would link McCarran Airport to the Las Vegas Strip. The well documented failure of the Las Vegas Monorail was the latest ill fated attempt at such a plan. Consistent with the city’s ethos and history of constant reinvention, efforts are underway to try again. This week, Nevada senators took the first step to move a bill that would provide the permission necessary to build high-capacity systems of transportation in Las Vegas. “High-capacity transit” means a system of  transportation services which uses and occupies a separate right-  of-way or rails exclusively for public transportation that may  provide a substantially higher level of passenger capacity by  increasing, without limitation, the number of vehicles utilized by  the system, the size of the vehicles, the frequency of vehicle rides, travel speed or any combination thereof. The term includes, without limitation, rapid bus transit, fixed guideway, light rail  transit, community rail, streetcar and heavy rail.

Senate Bill 149 would lay the groundwork to implement a multi-billion-dollar light rail plan being considered to link McCarran International Airport with the Las Vegas Strip.

For two years, members of the Regional Transportation Commission of Southern Nevada have been drawing blueprints for the light rail as well as makeovers for pedestrian walkways. They’re also considering transit options to connect residential neighborhoods, college campuses, Sunrise Hospital and shopping hubs.

The bill authorizes a regional transportation commission to  construct, develop and operate a high-capacity transit system, as well as enter into  contracts with other local governments to share the costs related to transportation  projects. If a regional transportation commission enters into such a cost-sharing  agreement, the bill requires appropriated by the commission or a local  government in accordance with the cost-sharing agreement. The bill  authorizes a regional transportation commission to use a turnkey procurement process or competitive negotiation process in connection with a high capacity  transit project. The bill would give local officials new authority to seek tax hikes or federal grants to finance developments and explore the use of self-driving cars.

If a majority of the voters approve  the imposition of an additional property tax, the additional rate is exempt from the  partial abatement of property taxes on certain property and the requirement that  taxes ad valorem not exceed $3.64 on each $100 of assessed valuation.

GAS TAXES AT CENTER IN MANY BUDGET DEBATES

California raised its gas tax, Louisiana has proposed an increase, and debates continue in the Southeast over fuel taxes. A bill that includes a plan to raise the gas tax for the first time in 30 years is headed to the South Carolina Senate this week. The latest bill passed the House with a 97-18 vote last month. The bill calls for a $.02 increase on the gas tax each year for the next five years. Only oil-producing Alaska has a lower gas tax than the Palmetto State.

In Tennessee, the governor’s proposal, known as the IMPROVE Act, seeks to raise the tax on gasoline and diesel fuel by 6 and 10 cents, respectively, while also calling for a variety of tax cuts. One state legislator is proposing a substitute in the form of a tax collected from the sale of new and used vehicles. The proposal would use 90 percent of the taxes collected through vehicle sales in Tennessee and distribute the money between the state’s highway fund and local governments. Sixty-four percent of the revenue collected would be distributed to the state’s highway fund, while 24 and 12 percent would be provided to counties and local municipalities, respectively. That would generate $215 million for the state, $80 million for counties and $40 million for cities to be used for transportation needs.

In Massachusetts, a proposed bill would allow cities and towns to establish their own payroll, sales, property or vehicle taxes to fund transportation projects. Under the proposal, these local taxes would expire after 30 years. Voters in the city or town would need to approve them. The bill would also establish a maximum amount that new taxes could be raised and mandate that the revenue from them be only spent on transportation. According to polls, between 70% and 80% of Massachusetts residents supported this idea.

TAMPA AIRPORT EXPANSION TO BE BOND FUNDED

The Hillsborough County Aviation Authority is the owner, operator, and financier of the Tampa International Airport. This week, the Authority unveiled the $543 million second phase of its massive expansion project that includes express curbside drop-off for passengers without checked bags and the commercial development of 17 acres of airport property. It is all part of roughly a $2.3 billion, long-term renovation and expansion that will transform the passenger experience over the next decade and allow the airport to eventually double its passenger traffic to 34 million. This will be the first major renovation to the airport since the terminal was built in 1971. The first phase of the project includes a new 2.6 million-square-foot rental car facility and a new people mover train, which will connect passengers from the rental car area and economy parking garage to the main terminal.

That part of the expansion is expected to be completed next year. Of import to existing bondholders of the Authority’s airport revenue bonds is the fact that the authority hopes to issue bonds in late 2018 to finance the project. A favorable interest rate environment for a refinance of existing bonds plus the authority’s efforts to improve its financial bottom line in recent years in anticipation of this project are relied upon to support financing for the project.

The per-passenger cost charged to the airlines, in the form of landing fees, will increase from the current $5.37, climbing steadily until reaching $8.24 in 2025. A $798 million Phase III is tentatively scheduled to begin in 2023 and includes a new airside D with 16 gates capable of handling both domestic and international flights. That phase would finish in 2026.

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.

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