Joseph Krist

Municipal Credit Consultant

WHY WE WOULD NOT BUY PRASA

The abandonment of a current sale of $750 million of revenue bonds may finally show the municipal bond market saying enough is enough to Puerto Rico. Initially the sale was delayed until this week ostensibly to give more investors time to absorb new information and better “understand” the credit. A supplement to the preliminary statement for the issue was then released. After reviewing all of the documentation, we believe that the case against buying PRASA debt is even stronger.

We have previously covered our concerns about the Authority’s unwillingness to provide adequate ongoing financial disclosure. We see this as being very important given our concerns about the Authority’s ability to service its own debt as well as uncertainties about the level of insulation that exists for Authority debt holders from the Commonwealth’s overall debt problems.

In connection with the postponement of the sale, the GDB went out of its way to say that PRASA has no need to avail itself of pending legislation permitting the Authority to restructure its debts. At the same time, the supplement to the preliminary official statement makes clear that ” the Commonwealth’s three major public utilities, which provide electricity, water , and roads for its citizens, have a combined debt of some$20 billion which they cannot pay. The final nail in the coffin was the move by Puerto Rico to appeal a ruling to the U.S. Supreme Court that prevents the agency from reorganizing under Chapter 9. The petition said that it needed to have a legal framework in case PRASA’s debts have to be restructured.

The government assumes that if PRASA meets its financial projections that it will not have to restructure. But the supplemental disclosure also details the limits on debt service costs through interest rate limits of 12% and limits on the size of annual rate increases. All of these should be red flags for potential investors (and some speculators) in the debt of the Authority. It also details potential hurdles to the use of acceleration as a tool for debt holders if the pending legislation survives ultimate judicial review.

PRASA’s senior bonds are secured by a first lien on the gross revenues of the authority. Under the Master Agreement of Trust (MAT), authority revenues flow to a trustee-held account from which monthly transfers are made to the bonds’ debt service funds. Only after the required amounts have been set aside for debt service do funds become available for PRASA’S operating expenses and other purposes. The MAT also requires the authority to manage its debt burden and service rates such that gross revenues will cover maximum annual debt service by at least 2.5 times. The bonds will be issued under New York State law, with the exception of any provisions related to receivership.

The gross lien pledge is offset by two factors. One, is that the utility must operate to generate revenues and those expenses have to be covered. Second is that overhanging all of this is the fact that currently, there just is not enough water to meet demand. There are already significant water use restrictions and effective rationing in place and there is no way to determine when the highly unfavorable climate conditions will end.

We think that investors should be exactly that – investors – in municipal bonds. If one wants to gamble in Puerto Rico, then go visit and play in one of the island’s casinos. Last time we looked, its municipal bonds were not available through casinos.

VA. TO TRY P3 HIGHWAY FINANCING AGAIN

Virginia will attempt another P3 development of a major highway project after earlier unsuccessful ventures. This project is the Transform66 Outside the Beltway Project designed to address congestion near the District of Columbia in northern Virginia. The project would cost $2.1 billion and has been certified for approval.

Under the proposed plan, I-66 would be improved to provide three regular lanes in each direction, two express lanes in each direction, high-frequency bus service with predictable travel times, and direct access between the express lanes and new or expanded commuter lots. The proposed express lanes would be dynamically-priced toll lanes that are designed to provide a reliable, faster trip. Drivers traveling with three or more occupants would be considered high occupancy vehicles, and could use the express lanes for free at any time.

By the end of 2016, the team is working to complete environmental work and begin construction in 2017. VDOT will decide between three options. A toll revenue concession – similar to the 495 and 95 Express lanes, in which the state would make a public contribution, but the private entity would take the risk in financing, designing, building, operating and maintaining the project; a design-build-operate-maintain project where the state would finance the project and collect the toll revenues, but the private sector would take the risk in designing, building, operating and maintaining the project, or a design-build-alternative technical concepts project where the state would finance the project, collect toll revenues as well as operate and maintain the project while the private sector would take the risk in designing and building the project and be able to come up with engineering savings during the bidding process, which cannot be done  currently under a typical design-build project.

Under any scenario chosen, a toll revenue concession – similar to the 495 and 95 Express lanes, in which the state would make a public contribution, the private entity would take the risk in financing, designing, building, operating and maintaining the project.

PA. BUDGET IMPASSE DRAGS ON

Pennsylvania House Republicans failed in their unprecedented attempt to partially override Governor Wolf’s eight week old veto of the state budget. Democrats, including Governor Wolf, declared unconstitutional the effort to override the veto on a selective line by line basis. The stunt-like effort reflected a view on the part of some Republicans expressed by one member who said “it shouldn’t matter” if the move was not legal or sustainable.

The effort reflected pressure on legislators to maintain funding for certain programs like human service agencies whose programs are supported by recipients of many political stripes. The lack of a budget and spending authorization is beginning to pinch those providers. The process remains mired in the dispute over efforts to increase taxes, impose new taxes on the natural gas industry, and increase education funding by the Commonwealth.

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.