Muni Credit News December 15, 2014

Joseph Krist

Municipal Credit Consultant

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THE HEADLINES…

HOSPITAL CONSOLIDATION CONTINUES

ALL ABOARD FLORIDA LITIGATION TRAIN CHUGS ON

NEW YORK STATE CREDITS GET GOOD RATINGS NEWS

DALLAS FINALLY GETS A DOWNGRADE

COURSE CHANGE COMING FOR MCDC

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HOSPITAL CONSOLIDATION CONTINUES

MultiCare Health System is a low double A rated not-for-profit health system based in Tacoma, Wash. Recently, it announced that it has reached a deal to purchase the for-profit Rockwood Health System. MultiCare Health System plans to purchase the assets of Rockwood Health System in Spokane from subsidiaries of Tennessee-based Community Health Systems, Inc. (CHS). The facilities are currently run on a for profit basis. Rockwood Health System includes Deaconess and Valley Hospitals and Rockwood Clinic, a multispecialty physician practice. When the transaction is complete, the agreement will expand MultiCare’s  network of to the state’s eastern region.

MultiCare may not stop its acquisition plans with this deal. MC said that “it is continuously looking for like-minded organizations dedicated to improving the health of communities that can join it on its journey to strengthen and expand its care network.”  Rockwood has a network of urgent and ambulatory care and surgery centers in and around Spokane which serves as a health care service hub for the 1.5 million people in the region comprising eastern Washington, northern Idaho and western Montana.

MultiCare will become the largest community-based, locally-governed health system in the state when the transaction is complete. The transaction is expected to be completed in the first quarter of 2017. Rockwood Health System will become part of MultiCare’s integrated not-for-profit health care system, which includes four acute-care adult hospitals, one acute-care children’s hospital, and a robust network of community-based primary, specialty and urgent care facilities.

We see this transaction as indicative of a continuation of the trend of consolidation in the healthcare industry. We feel that regardless of what results from a trump administration in terms of insuring Americans, that the pressure on costs and need to drive volume will continue to motivate market concentrating consolidations.

ALL ABOARD FLORIDA LITIGATION TRAIN CHUGS ON

The ongoing All Aboard Florida saga continues. Attorneys for Martin and Indian River counties would like a federal judge to examine the new bond financing strategy employed by the private developer of the passenger train project in order to evaluate the “full extent” of the proposal. Attorneys for the counties contended in court filings last week  that All Aboard Florida has told them and the court “half of the story” about its planned use of federal private activity bonds to fund two separate phases of the project to link Miami and Orlando.

“It is clear from what little information the defendants have provided that AAF has not abandoned its strategy of financing the project in its entirety with private activity bonds,” the attorneys said. “It has merely reshuffled the capital stack to secure that funding in a two-step process in order to circumvent the court’s prior ruling in these actions.”

The counties, in separate lawsuits, filed motions seeking a stay to conduct a “limited” amount of discovery. The motions were opposed by the U.S. Attorney General, on the behalf of the U.S. Department of Transportation.

The counties are looking for material that will support their views of AAF’s real financing intentions.  They are primarily interested in information about the  $1.15 billion PAB application to fund the much-contested second phase of the project between West Palm Beach and Orlando, which would take the train through Martin and Indian River counties without stopping. The counties are seeking documents about the first phase of the project from Miami to West Palm Beach as well, saying they want to ensure that bonds allocated to it would not fund phase two, raising questions about whether phase one debt will be used to finance the trains that would travel the entire 235-mile route.

AAF, a company owned by Fortress Investment Group LLC (FIG), recently developed a new plan to finance its Brightline-branded train service in two phases – a plan that AAF and USDOT have said would “moot” or negate a need for a final ruling in the federal lawsuits. The second phase has not received final federal clearance through the NEPA process.

The counties said in a joint filing that they want to see documents pertaining to the $1.15 billion application “because it goes to the heart” of whether DOT has truly withdrawn the PAB allocation. Project opponents as well as the counties said they also want to determine whether AAF and USDOT are attempting to navigate around U.S. District Judge Christopher R. Cooper’s Aug. 16 ruling to avoid “a looming adverse final decision.” Many observers believe that this is the case.

The case is of interest for projects like this in general as an ultimate ruling in the counties’ favor would be precedent-setting because it would – for the first time – subject USDOT bond allocations to strenuous NEPA reviews. AAF and USDOT have both said that a number of environmental, historical and public safety issues were not considered in the NEPA review that was conducted but to date has not been completed. The

Assistant U.S. Attorney General has said  that USDOT had not received an application for $1.15 billion of PABs from All Aboard Florida and the agency opposed the counties’ motions.

NEW YORK STATE CREDITS GET GOOD RATINGS NEWS

In a region where three of its bordering states face significant ongoing pension and budget issues, New York State has stood out as a positive outlier. That status was recently reinforced when Moody’s Investors Service announced that it has affirmed its Aa1 rating on New York State’s general obligation, personal income tax revenue, sales tax revenue, New York Local Government Assistance Corporation (LGAC), and New York City Sales Tax Asset Receivable Corporation (STARC) bonds. Moody’s also affirmed Aa2 ratings on most other appropriation-backed debt and affirmed Aa2 issuer ratings on state intercept programs and enhanced Aa2 ratings on most intercept financings.

Moody’s affirmed the Aa3 rating on DASNY 4201 School Facilities Program revenue bonds. Moody’s affirmed the enhanced Aa3 rating on certain DASNY OMRDD intercept financings. Moody’s also affirmed the enhanced VMIG 1 on variable rate demand obligations backed by stand by bond purchase agreements associated with the New York Local Government Assistance Corporation.

According to Moody’s the Aa1 rating reflects New York’s fiscal governance that has produced on-time budgets with moderate spending growth to match the state’s economic capacity, manageable projected budget gaps, the size and wealth of the state economy, and healthy liquidity. The rating also recognizes New York’s expensive business environment, reliance on financial services and other NYC-based economic drivers, high state debt burden offset by below-average net pension liabilities, and a history of structural budget gaps requiring reliance on non-recurring resources to achieve budget balance.

In affirming the rating, Moody’s also affirmed its outlook for the ratings. Moody’s stated that the outlook for New York is stable, reflecting its adequate liquidity, growth of formal and informal reserves, and continued control of spending growth. The outlook also reflects its expectation that the state will build on its improvements in fiscal management, close budget gaps largely with recurring solutions and contain its structural fiscal imbalance.

The State has managed to achieve this while operating in a highly dysfunctional political environment. Legislative leadership has been significantly impacted by ongoing federal corruption investigations which resulted in convictions and resignations of multiple senior leadership figures. Despite these changes, the annual budget process has proceeded relatively smoothly for several years. Some of this reflects that State’s status as the 3rd largest US state by population. New York continues to have a large and diverse economy with high per capita income at 121% of the US average and gross state product of $1.422 trillion in spite of some ongoing difficulties in its upstate region.

DALLAS FINALLY GETS A DOWNGRADE

We previously commented on the City of Dallas, Texas and its significant pension issues. These have finally impacted the City’s ratings. Moody’s Investors Service has downgraded to A1 the City of Dallas, TX’s outstanding general obligation limited tax (GOLT) debt. The rating action affects $1.6 billion of debt. At the same time, it put the city’s GOLT, Waterworks and Sewer Enterprise, Downtown Dallas Development Authority, Convention Center Hotel Development Corporation and Civic Center Convention Complex bonds under review for possible downgrade. The review of these ratings will be concluded within 60-90 days. We believe that downgrades are most likely.

Moody’s said that the downgrade to A1 from Aa3 on the GOLT debt is based on the city’s ongoing challenges surrounding its poorly funded public safety pension plan and a sizable potential liability associated with a back-pay referendum lawsuit. These challenges have been exacerbated by considerable draws on the public safety pension fund which have reduced liquid assets. The city’s recently announced reform plan includes actuarial projections that the unfunded liability will be amortized in 30 years.

As we have noted, the plan has significant implementation risk because it relies heavily on actions of the state legislature and includes only modest increases in cash contributions to improve funding levels. Absent enactment at the state level of material reforms, and/or a large cash-infusion to the fund, the public safety pension fund is likely to become insolvent within ten years. Also, senior leaders have repeatedly stated that a failure to achieve relief to its financial challenges, or an adverse court ruling in the pending back-pay case, could lead to consideration of bankruptcy.

We believe that the problems are serious and that there are no easy answers. We believe that the likelihood of an actual bankruptcy is relatively remote. Dallas’ issues are the product of a number of acts of poor judgment and poor management. One key difference between this and other recent distressed city credit is the nature and size of the City’s economic base. There may be a shortage of political will but there is not a shortage of means to address the problem.

COURSE CHANGE COMING FOR MCDC

The Securities and Exchange Commission will not bring any more settlements under its Municipalities Continuing Disclosure Cooperation initiative. The MCDC initiative promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. In total, the initiative led to settlements with 72 issuers from 45 states. In addition, 72 underwriters representing 96% of the underwriting market by volume paid a total of $18 million in MCDC settlements.

The SEC will instead focus on those underwriters and issuers that did not voluntarily disclose violations under the MCDC. The unit’s enforcement lawyers view the underwriters and issuers who may have committed violations but did not self-report as part of MCDC as a high risk for future violations, according to the head of the SEC enforcement division’s public finance abuse unit. “That is a group of particular interest to us and we intend to devote significant resources to identifying violations by those parties.”

This comes at the same time that a legislative proposal has been announced in the U.S. House of Representatives which would shift the responsibility for proper disclosure from underwriters to issuers. HR 6488 would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to remove the exemption from registration for certain private activity bonds, to authorize the Securities and Exchange Commission to require the preparation of periodic reports by issuers of municipal securities, to authorize the Securities and Exchange Commission to establish baseline mandatory disclosure in primary offerings of such securities, and for other purposes.

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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