Muni Credit News August 18, 2016

Joseph Krist

Municipal Credit Consultant

MCN TO PARTNER WITH COURT STREET GROUP RESEARCH

We are excited to announce that the Muni Credit News is partnering with Court Street Group Research. CSGR is the publisher of The Weekly Perspective, a review of current market issues and credit issues reflecting those events. Through this partnership, investors will have access to some of the best data, thought, information and opinion available today. Make CSGR and the Muni Credit News your most important tool as you navigate the increasingly diverse municipal bond marketplace.

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LOUISIANA CONSIDERS CASH FLOW BORROWING

It has never a good sign when a state undertakes short-term borrowing to fill in gaps in cash flow. In bygone times, revenue anticipation notes (RANS) were often issued to deal with timing issues between receipts and expenses. They also were used to cover gaps resulting from revenue shortfalls resulting from poor forecasting practices or unanticipated economic changes. As time has gone by, revenue estimation has become more sophisticated and better overall cash management practices have taken hold so the need for this type of borrowing at the state level has diminished significantly.

So it was disappointing to see that the State of Louisiana will consider this week a proposal to issue some $500 million of RANS to finance cash shortfalls in the first half of the fiscal year which began on July 1. The State budget process was particularly difficult and protracted this year as a new administration sought to rectify some of the questionable budget practices of the prior administration of Bobby Jindal. His program of tax and expense cuts led to a weaker financial position for the historically low rated State of Louisiana credit.

Legislative supporters of the Jindal era are attributing the need for the borrowing to naturally occurring timing differences between revenues and expenses. The more likely explanation is that In the past the state has been able to shift funding from savings accounts as needed to keep up. Those pools of money, including a Medicaid trust fund and contingency fund in the Division of Administration are now gone. those funds were applied to cover shortfalls in prior fiscal years.

Should such a borrowing be authorized and undertaken, it would be the first time since the 1980’s that Louisiana had needed such a borrowing. We view the use of such a borrowing to be a negative credit event which should place pressure on the State’s already low ratings. This despite the efforts of the new administration to address the impacts of the Jindal era budget practices.

ILLINOIS MOVING FORWARD WITH P3 TOLL PROJECT

The Illinois Department of Transportation is soliciting private partners to help develop the Interstate 55 managed lane project — new toll lanes from Bolingbrook to Chicago designed to alleviate congestion. This project is anticipated to include the addition of one lane in each direction within the existing median of I-55 between I-355 to the west and on the east at I-90/94 needed to accommodate implementation of a managed lane, which could include Express Toll Lane (ETL), High Occupancy Vehicles (HOV) lane, High Occupancy Toll (HOT) lane, Congestion Priced lane, or other feasible managed lane configurations as determined to be appropriate for a projected 2040 travel demand.

Interstate 55 experiences severe congestion for extended periods of time on a daily basis and is unable to accommodate the existing traffic demands (regional, daily commuter and local) due to limited roadway capacity, roadway design constraints at some locations, high truck volumes and numerous interchanges. In addition, commuters have limited available public transit options. This has resulted in increasingly long and unreliable travel times, decreased safety and increased costs for delivery of goods and services.

The Federal Highway Administration (FHWA) has determined that the Illinois Department of Transportation’s proposed I-55 Managed Lane Project will have no significant impact on the human environment. The FHWA issued a Finding of No Significant Impact (FONSI) based on the Environmental Assessment (EA) prepared for the study. The Illinois Department of Transportation (IDOT) has completed the voting process among property owners and occupants identified as benefited receptors regarding proposed noise mitigation along the I-55 Managed Lane Project corridor.

Thirteen noise walls totaling over 11 miles in length with 1,776 benefited receptors were found to be feasible. As established by Federal Highway Administration regulations, property owners and/or tenants identified as benefitted receptors are able to vote for or against noise walls in their area. In order for a person to be eligible to vote, the noise wall must decrease the noise level at the property by at least 5 decibels, which is a readily perceptible change in noise (typically homes within 300 feet of a noise wall). If more than 50% of the votes received are in favor of a wall, the wall is likely to be implemented with the proposed project.

Private developers would help defray the estimated $425 million cost of the project, according to IDOT. Private partners would have a hand in designing, building, operating and managing the toll lanes. Potential partners need to submit proposals by Sept. 8. IDOT needs approval from the General Assembly for the I-55 toll project. If all goes as planned, construction could start as early as next year and wrap up in 2019, officials said.

Last month, the state approved a similar project — a public/private toll bridge linking Interstate 80 to the CenterPoint intermodal facility in Joliet and Elwood. The Houbolt Road bridge will cost $170 million to $190 million, with CenterPoint building and operating the toll bridge over the Des Plaines River. IDOT is covering $21 million of that cost.

LIPA UPGRADED BY MOODY’S

Moody’s Investor Service upgraded the Long Island Power Authority’s (LIPA) credit rating one notch to A3 from Baa1 (senior debt) and to Baa1 from Baa2 (subordinate debt). Moody’s cited “enhancements” to its ability to recover costs from customers following last year’s rate-hike proceeding. It also noted improvements in LIPA’s operating performance, better customer satisfaction levels, more transparent and credit supportive regulatory relationships and an expectation for better financial performance on a sustained basis.

On January 1, 2016 a three-year rate plan was put into effect, which called for modest electric distribution rate increases and automatic recovery mechanisms that provide protection against certain external factors. Supportive automatic recovery mechanisms approved and implemented include a revenue decoupling mechanism (RDM) and a delivery service adjustment (DSA). Together, these mechanisms provide automatic cost recovery should certain external events occur, including revenue variations that result from changes in economic conditions, weather or energy efficiency programs as well as higher-than-budgeted storm costs.

LIPA’s has received grant funds from FEMA, which along with internal generated cash flow sources and incremental debt will fund a capital investment program focused on storm hardening and enhancing system reliability. Because of the existence of the FEMA funds, currently held in a restricted cash account, the debt ratio is expected to continue its declining trend even while incremental debt is incurred to fund the capital investment program.  A higher rating could occur if the fixed obligation charge coverage were to reach 1.50 times while its debt ratio declined below 100%, both on a sustained basis.

PREPA ROAD TO RECOVERY HITS MORE SNAGS

The path to recovery for PREPA appears to have run into some more problems. It appears that the time line for recovery will be extended through year end with the announcement of an extension of the contract of PREPA”s restructuring advisor through December 15. The extension, which will cost $6.713 million, has been criticized with the news that the advisor had paid Standard and Poor’s some $365,000 in consulting fees to help secure an investment grade rating for bonds to be exchanged as part of an Special Purpose Vehicle that is a cornerstone of the Restructuring Support Agreement (RSA) it has secured with 70% of its bondholders. As of yet,  all of the credit rating agencies declined to give the new bonds an investment grade. Since that did not happen, PREPA must return to the negotiating table with bondholders.

PREPA continues to believe that there is a path to obtaining an investment grade rating for the securitization bonds and intends to initiate a formal rating process with rating agencies in the near future. The investment grade, which is key to consummate the deal for an exchange of debt for new securitization notes to receive 85% of their existing claims in new securitization notes, is not yet guaranteed by credit rating agencies despite a securitization mechanism tied to a rate hike that could surpass 22%.

That rate hike is already facing potential challenges. As we go to press, it is expected that eight leading Puerto Rico business and industry organizations will announce the filing of a major lawsuit to block no-limit (“blank check”) rate increases as part of the controversial Puerto Rico Electric Power Authority (PREPA) debt restructuring scheme. U.S. groups are also joining in support of the litigation effort.

The industry groups are the  Institute for Competitiveness and Economic Sustainability of Puerto Rico, the Puerto Rico Manufacturers Association, the United Retailers or “Centro Unido de Detallistas,” the Puerto Rico Products Association,  the Chamber of Marketing, Industry and Food Distribution, Puerto Rico Hospitals Association, the Puerto Rico Hotel & Tourism Association, and the Association of Contractors and Consultants of Renewable Energy.

ALL ABOARD FLORIDA BONDS DERAILED IN COURT

Martin and Indian River Counties in Florida won a favorable decision in a U.S. District Court in their challenge to the private activity bond allocation granted to the private developer of the high speed train project, All Aboard Florida. Now known as the  Brightliner, the project would provide service between Miami and central Florida. (See the MCN, 6/16/16) The counties have sought to block the project on environmental grounds, a hurdle which we have discussed numerous times as a major investor risk in public-private (P3) projects.

Fourteen months ago, the Court denied preliminary-injunction motions filed by the two Florida counties,  which sought to invalidate the U.S. Department of Transportation’s (“DOT’s”) authorization of $1.75 billion in tax-free bonds to be issued to finance a private passenger-rail project known as All Aboard Florida. The Court found that the counties had not met their burden of demonstrating standing because they had failed to show that enjoining DOT’s authorization would significantly increase the likelihood of halting construction on Phase II of the project, the portion that runs through their borders. The Court did permit the Counties to conduct discovery designed to provide Plaintiffs an opportunity to uncover evidence to support their assertion that, without the ability to issue $1.75 billion in tax-free private activity bonds (“PABs”), AAF would be significantly less likely to proceed with the project.

Both counties allege violations of the National Environmental Policy Act (“NEPA”), the National Historic Preservation Act (“NHPA”), the Department of Transportation Act (“DTA”), and Martin County additionally alleges a violation of Section 142 of the Internal Revenue Code, as amended by the Safe Accountable Flexible Efficient Transportation Equity Act (“SAFETEA”). Because Plaintiffs have alleged facts showing that the AAF project qualifies as major federal action, the Court denied Defendants’ motions to dismiss Plaintiffs’ NEPA, NHPA, and DTA claims.

The project is divided into two phases. In Phase I, AAF intends to provide rail service linking West Palm Beach, Fort Lauderdale, and Miami. Phase I has received private funding and is in development; in fact, it is nearly complete.  Thus far, AAF and its parent company, Florida East Coast Industries (“FECI”), have spent over $612 million on development and construction and expect to commit to spending an additional $200 million.

To fund Phase II of the project, AAF applied for a $1.6 billion loan through the Railroad Rehabilitation and Improvement Financing program (“RRIF”). RRIF is both a loan and loan- guarantee program administered by the FRA for the development and improvement of railroad tracks, equipment, and facilities.  RRIF loans are subject to NEPA review of the proposed project’s environmental effects.  FRA has been acting as the lead agency in preparing an Environmental Impact Statement (“EIS”) and Record of Decision to determine the environmental effects of Phase II prior to making a final determination as to AAF’s loan application. FRA, in cooperation with the U.S. Army Corps of Engineers, U.S. Coast Guard, and Federal Aviation Administration, issued a draft EIS in September 2014 and a final EIS (“FEIS”) in August 2015. The FEIS analyzed a wide range of potential environmental and other consequences of the project and “identified and evaluated measures that would avoid, minimize, or mitigate impacts that would result from the Project.”  under the RRIF program.

The Court cannot to address the sufficiency of the allegations in the counties’ complaints unless they have standing to bring their claims. With a finding of standing, the Counties can challenge on environmental grounds. The hope to at least delay bond issuance through the current (after two extensions) January 1, 2017 deadline to issue the bonds. The counties’ burden in this phase of the case was to show that invalidating the PAB authorization would significantly increase the likelihood that AAF would abandon Phase II of the project. The Court found that they have. An appeal is expected.

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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