Muni Credit News December 24, 2015

Joseph Krist

Municipal Credit Consultant


PR has finally admitted that it will default on January 1 when the Puertto Rico Infrastructure Finance Authority”s (Prifa) $35.9 million debt-service payment is not made. There are no reserves to cover the payment due to the clawback of the authority’s pledged revenue stream — the rum tax proceeds received from the federal government — to help the commonwealth meet the $331.6 million GO payment due at the same time. There is also  $115 million due Jan. 1 to cover Highways & Transportation Authority (HTA) debt, as well as a $9.5 million payment corresponding to the Convention Center District, but their trustees hold enough reserves to cover both payments.

Despite the clawbacks undertaken, there is not enough to cover the full amount due on the general obligations. The governor has been lobbying Congress to include a bailout in the omnibus budget bill before Congress. this has been ruled out by House leadership. The governor is resorting to threats of a humanitarian crisis and invocation of Puerto Rico’s historic wartime activities in an attempt to shame the Congress into action.

House Speaker Paul Ryan, R-Wis., said on Wednesday that the House will work with Puerto Rico to come up with “a responsible solution” for the island’s debt problems next Unfortunately, the governor has been most closely aligning himself with some of the least mainstream and influential House members. Help will be best earned on the merits, not the emotions.


Recent comments by Antonio Weiss, counselor to Treasury Secretary Jack Lew  may be seen as encouraging those who seek to achieve Puerto Rico’s goal of reducing its debts through the political process rather than through good faith efforts. Last week, Mr. Weiss gave a speech that was seen as endorsing Puerto Rico’s view that the Commonwealth itself –  not just its corporations and municipalities – be given the right to declare Chapter 9 bankruptcy. They were also viewed by some as trying to undermine ongoing negotiations to restructure PREPA’s debt. Weiss used creditor negotiations with the Puerto Rico Electric Power Authority, which have gone on for about 18 months, as a “cautionary tale” in his speech and a reason why the commonwealth needs access to a bankruptcy regime to bring creditors to the table. He is said to have called the need for audited financials before helping a “myth” and said “even without fiscal year 2014 audited financials, the magnitude of Puerto Rico’s problems, and the need for action, are clear.”

We find those remarks to be disturbing at best. The ignorance of the need for such data, if it represents Treasury’s view, is stunning given the precedents established during the New York City crisis. We view any effort to grant the Commonwealth directly the ability to declare Chapter 9 as being detrimental not only to holders of Puerto Rico debt but to the municipal market as a whole.  We agree that the portion of the Treasury plan that calls for a federal restructuring regime through Chapter 9 is advocating for a retroactive change in law that would be unfair to investors.

Assured Guaranty recently expressed such a view very well when it said that “Had Puerto Rico been eligible to file under Chapter 9 at the time these bonds were issued, investors would have priced that risk into the bonds, and Puerto Rico would have had to pay higher interest rates,” he said. “There is no justification for initiatives that would retroactively undermine the Puerto Rican constitution and the legal right and remedies that were the basis on which bondholders agreed to provide financing for the island’s development.”

We do not believe that it is extreme to believe that should Puerto Rico be successful in its quest to obtain the right for the Commonwealth to go the Chapter 9 route, that some states would want the same ability. Chapter 9 would provide a politically expedient route for irresponsible legislators to avoid making good on years of pledges to their employees.

This belief is based on the political trends which have become clear in the four decades since the New York City crisis. These reflect the increased partisanship of legislatures across the country buttressed by the highly ideological views of Republican legislators across the country. The resulting inflexibility in the face of increasing costs, especially for pensions, seems to be a perfect storm of conditions for those who would seek to reduce payments to all creditors including general obligation debt holders.

We hope that the sanctity of contracts and constitutional pledges was behind the U.S. Supreme Court’s decision last month to review a local law that would give the island’s public authorities access to bankruptcy-like restructuring capabilities. Two lower courts ruled the law is pre-empted by federal bankruptcy law but Puerto Rico appealed to the high court. The commonwealth, whose public authorities are not granted Chapter 9 protections under federal law, is arguing that it should not be left out of the federal law but also have the same federal law prevent it from trying to fix the exemption.


It is hard to discern what actually went on in St. Louis last week when it approved a municipal financing plan that may be as ugly as the uniforms worn by the Rams in their game last Thursday night. Under the terms, the city would finance $150 million of the overall $1.1 billion project. The rest of the funding would come from the state, the NFL and the team owner. The NFL contribution is pegged at $300 million.

Two problems: the Rams owner is busy pursuing a plan to build a stadium in Los Angeles to return the Rams there and the NFL reiterated its position that the premise of the bill approved on Friday that the league has committed $300 million to the Mississippi River stadium proposal “is fundamentally inconsistent with the NFL’s program of stadium financing.”

The comments of various St. Louis aldermen express the “untidyness” of the plan best. Alderman Antonio French, once a critic of the project, turned into a supporter after amendments were added  to the bill to include minimum  requirements for ethnic and gender based owned contractors to be hired to build the stadium. French said he doubts the stadium will be built. But he said he hoped St. Louis’ action would show a “good-faith effort to hopefully sway a few votes to prevent Kroenke(the owner) from moving to Los Angeles”. Alderman Megan Green, labeled the process of generating  help from construction unions as well as minimum minority inclusion component “legalized bribery.”  But the best comment may have been from Alderman Sharon Tyus who said “we’re like at the strip club…and the stripper is throwing the money back at  us.”

The plan is being driven primarily at the State level through a task force created by the governor. It is of interest that St. Louis County has withdrawn from any plan to finance a stadium even though it is in a much better financial position than is the City. The result is an excellent reflection of the wide disagreement over the wisdom of public stadium finance that makes these financings among the most contentious in the public finance industry. The league is expected to decide in January whether or not it views the total package as viable or whether to support Rams’ ownerships desire to relocate to the L.A. market.

The Rams are in competition to relocate to that market with the San Diego Chargers and the Oakland Raiders. It is unlikely that the league would place three teams in that market. Complicating the process is the fact that interests with the Chargers and the task force supporting keeping the Rams in St. Louis are represented by the same investment banker. The whole situation is almost as ugly as those uniforms.


With the enactment of the Affordable Care Act and its emphasis on cost saving, many have felt that consolidation was the way to achieve the operating efficiencies necessary to constrain costs to health consumers. To that end, significant mergers have occurred between numerous large health systems. Not all mergers have been seen by federal regulators to be in the public interest. Such is the case in Chicago where a proposed merger of Advocate Health Care, the state’s largest health system, and NorthShore University HealthSystem, (both mid AA rated systems) would create a 16-hospital system that would dominate the North Shore area of Chicago.

The Federal Trade Commission said on Friday that it planned to block the combination saying “this merger is likely to significantly increase the combined system’s bargaining power with health plans, which in turn will harm consumers by bringing about higher prices and lower quality.” “Competition between Advocate and NorthShore results in lower prices, higher quality and greater service offerings,” the F.T.C. argues in the complaint filed in the Eastern Division of the U.S. District Court for the Northern District of Illinois. The F.T.C. took similar action to halt the merger of two hospitals in West Virginia in November and, earlier this month, teamed up with Pennsylvania authorities to try to stop a deal between Penn State Hershey Medical Center and PinnacleHealth System.

Advocate argues that because the hospitals’ market was dominated by a major insurer (Blue Cross Blue Shield), the systems were “price takers, not price setters.” The hospital groups say the merger would shift health care from the traditional fee-for-service model of providing high volumes of care for high payments to one focused on a streamlined system aimed at achieving lower costs.

The hospitals believe that the federal government is subjecting mergers of providers to more scrutiny than it does to mergers of insurers to the detriment of providers.

Merry Christmas!! Our next publication date is January 7. Happy New Year!!

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