Muni Credit News February 11, 2016

Joseph Krist

Municipal Credit Consultant

WHAT’S UP AT WMATA?

Nearly one year ago, Moody’s downgraded debt of the Washington Metropolitan Area Transit Authority to A1 as the result of the Authority’s use of short-term debt as a tool to bridge restrictions on its receipt of federal funds. These restrictions were the result of findings from a Federal Transit Administration (FTA) audit of the Authority’s grant’s management process. The slow receipt of grants through the FTA has constrained WMATA’s liquidity and led it to draw fully on its lines of credit and enter into private financings to maintain capital spending. WMATA’s short-term debt is now in excess of its low level of long-term debt.

Since the downgrade, the Authority has continued to face declining farebox revenue coupled along with increased maintenance and upgrade expenses. While the downgrade has caused some bondholder concerns, a more recent move by the operator of the capital city’s Metrorail and Metrobus systems, along with MetroAccess paratransit has raised some more serious red flags. It has come to light that WMATA has hired leading bankruptcy lawyer Kevyn D. Orr to advise the agency on getting its finances in order. Mr. Orr comes to the Authority after stints managing Detroit’s bankruptcy and advising Atlantic City as it considered bankruptcy.

Among the options Orr could advise WMATA taking are to restructure its debt, not agree to any wage or benefit increases in this year’s contract negotiations with its labor unions, and try to get more money out of its member jurisdictions. Unlike most U.S. transit systems that enjoy dedicated funding from the Highway Trust Fund’s Mass Transit Account, WMATA relies on annual appropriations from Congress and its member jurisdictions: the District of Columbia, State of Maryland, Commonwealth of Virginia and the Maryland and Virginia counties it serves.

As muni participants who went through the Detroit bankruptcy saga know, Orr is the partner in charge of the Jones Day law firm’s Washington office. Under a contract worth up-to-$1.74 million, he will serve as “part-time strategic executive adviser” to WMATA’s newly-installed General Manager, Paul J. Wiedefeld, according to WMATA officials cited by The Washington Post.

WMATA’s major problem is reflected in its budget for fiscal year 2017 (starting July 1, 2016). Its operating budget is $1.7 billion, $1.2 billion of which is employee pay and benefits. Contracts with each of three unions expire June 30, and negotiations are expected to begin soon. WMATA officials say that management has little latitude to implement financial reforms. So it hopes to use Orr in a role of talking to officials and organizations that interact with the commuter system.

Bondholders should be concerned that the system plans to spend $1.3 billion on capital improvements in fiscal 2017, for which it is relying heavily on federal grants — money that may not be coming after an audit report revealed the agency’s extensive mishandling of such funds for years.

As an offset for delays in federal grants, WMATA has relied on short-term borrowing, amassing a debt of around $500 million with costly interest payments. Officials hope Orr will convince the jurisdictions served by WMATA to increase their funding levels. Orr was said to be on a “short list” to be WMATA’s General Manager after the January 2014 retirement of Richard Sarles, but said he was more interested in practicing law.

Metrorail ridership has been trending downward since 2010 since reductions in federal employees’ transit benefits (federal workers make up an overwhelming portion of Metro’s weekday riders), while its member jurisdictions are reluctant to increase their contributions in light of several highly publicized incidents and safety lapses in the subway system.

CONGRESS TRIES AGAIN ON INFORMATION FROM PR

The chair of the U.S. Senate Finance Committee, Sen. Orrin Hatch (R., Utah), sent on Wednesday a letter to Gov. Alejandro García Padilla, asking for a host of information to be delivered no later than March 1. Se. Hatch  is seeking information that would “prove useful” in how Congress would deal with the Puerto Rico issue. “Unfortunately, it has been challenging to acquire recent verifiable financial information about Puerto Rico’s financial condition,” Hatch wrote.

As a result, the senator is calling for the delivery of the commonwealth’s audited financial statements for fiscal year 2014, which were due last May but have yet to be delivered by the García Padilla administration. Officials have pointed to a number of reasons for the delay, and a draft of the statements is expected to be made public this week.

During a hearing to discuss the federal budget on Wednesday, featuring U.S. Treasury Secretary Jacob Lew as witness, Hatch suggested that GOP members in the Senate have already worked on legislation for the commonwealth that could be introduced as soon as March. Along with two other Republican senators, Hatch presented last year a bill that sought to implement a federal fiscal control board on the island, although without access to a debt-restructuring or funds to provide short-term liquidity assistance to Puerto Rico.

Meanwhile, in his letter to the governor, Hatch also requests detailed information on Puerto Rico’s debt and wants to know García Padilla’s position on whether general obligations (GOs) have repayment priority according to the commonwealth’s Constitution. Hatch is particularly interested in the island’s severely underfunded main pension systems.

Hatch is also questioning the expenditure side of the island’s fiscal equation. Specifically, he asks about the spending-control measures that have been implemented, and how much the Puerto Rico government has paid during the past five years in such areas as healthcare, public housing, welfare and education. Hatch is also following up on the U.S. Treasury’s technical assistance and how exactly it has been provided.

At some point Puerto Rico will realize that financial disclosure must occur. The inability or, in our view, unwillingness to provide decent ongoing financial data would be comical were it not for the overwhelming need for the data. We look forward to next week’s draft financial report.

PREPA LEGISLATION MOVES FORWARD

Puerto Rico’s Senate approved legislation that would enable the island’s main electricity provider to restructure almost $9 billion of debt. The upper chamber passed the bill in a 16 to 10 vote. The measure now moves to the House. The debt reduction agreement between the Puerto Rico Electric Power Authority and its creditors is due to expire Feb. 16 unless lawmakers pass the legislation. Two deadlines have already been missed.

DETROIT WATER RATINGS SURFACE

With so much negative attention being focused on the City of Flint’s water catastrophe, it has been easy to lose sight of the improvement in its new old water supplier, the Detroit regional water utility. That improvement was highlighted this week when Moody’s upgraded the rating of the new Great Lakes Water Authority (GLWA). The upgrade of the senior lien and second lien water revenue ratings to Baa1 and Baa2, respectively, reflects the GLWA’s assumption, in full, of all debt previously secured by net revenue of the DWSD. While DWSD retains ownership of both the City of Detroit (local) and suburban (regional) water system, it has executed a lease agreement with the GLWA whereby the GLWA will assume full responsibility of regional system operations. The GLWA is also granted sole ownership interest in revenue generated by the combined regional and local system.

This is seen as significantly limiting the risk that a future bankruptcy filing by the City of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt. The across the board investment grade ratings vindicate the view of this newsletter that holders of Detroit Water and Sewer debt would be well served through the bankruptcy process by holding on to their debt.

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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