Muni Credit News January 28, 2016

Joseph Krist

Municipal Credit Consultant


It was supposed to be a model for the overall restructuring of all of the Commonwealth of Puerto Rico’s debt. Whether that was actually going to be the case was the subject of debate. Right now, the model lies in pieces – crushed by the weight of pride, impracticality, intransigence, and irresponsible politics. So it seems as it was announced that negotiations to restructure roughly $9 billion of the debt of Puerto Rico’s power company collapsed late Friday, according to a statement from a group of creditors involved in the talks.

“Today the PREPA Bondholder Group put forward an offer to extend the RSA until February 12th in order to give the Puerto Rican legislature more time to pass the PREPA Revitalization Act. Based on our direct and positive conversations with Puerto Rican lawmakers, we are optimistic that the bill will be passed and it was our desire to be as supportive of the legislative process as possible. In addition, we also offered to extend our Bond Purchase Agreement (“BPA”) with PREPA, under which RSA creditors would provide $115 million in additional financing once the energy commission approves the securitization charge, with a deadline of May 23rd. This amendment to the BPA reflects a milestone that was previously agreed upon, and was included in order to help ensure the deal would get done – as the energy commission approval is a vital element of the agreement.

“Unfortunately, PREPA is choosing not to extend the RSA. Over the approximately 18 months that we have been negotiating this plan it has consistently been our desire to reach a fair, collaborative agreement that would benefit all stakeholders, including the people of Puerto Rico. The plan has been described as fair to all parties and beneficial to Puerto Rico – not only by key legislative leaders but by other decision-makers in the Commonwealth. This is why we were willing to offer these further concessions, recognizing the complexities of the legislative process. While it is extremely disappointing and perplexing that PREPA has chosen to take this stance, we continue to remain open to reaching a deal with PREPA and it is our sincere hope that they reconsider their position and assume postures beneficial to the people of Puerto Rico.”

The statement did not say whether the creditors would now declare PREPA in default. If they did so it would be by far the largest and most momentous default in Puerto Rico’s growing debt crisis. PREPA has a debt payment of about $400 million due to bondholders on July 1. It also owes about $700 million to two financial institutions that help to finance fuel purchases.

It is said that PREPA was still willing to keep the negotiations going and that the talks broke down because the creditors attempted to impose a new requirement in exchange for granting more time. Before the deal could proceed, the Puerto Rico legislature had to approve it, and some lawmakers argued that PREPA and its creditors were rushing to close the deal before the island’s new public utility commission had a chance to properly review it. This is the second “deadline” missed by the legislature. The creditors had expected the legislature to approve the deal in a special session in December. When that did not happen, they said they would wait until Jan. 22, and they offered $115 million to help finance PREPA while the legislature considered an enabling bill.

It is rumored that the creditors were willing to wait until February, but the new public utility commission was more likely to need until May. The debt exchange would have required PREPA’S first increase in its base rate for power since 1989. The public utility commission is so new it has never been through a rate-setting process before. In the meantime, the Commonwealth clings to its strategy of running out the clock in the hope that the U.S. Congress can be persuaded to bail out the Commonwealth.


The recent troubles of Flint, MI have cast a negative light on the concept of state “takeovers” of the financial operations of municipalities. The well known troubles in Flint resulted in the reinstatement of local control by the State. The usually poor reception given to outside managers has been a factor in the length of time given to Atlantic City, NJ to resolve its own deep financial troubles. As we have previously documented, a long term trend of decline and consolidation in the City’s economic engine – gambling – has resulted in a serious financial bind. The City has toyed with bankruptcy in an effort to undo contracts with Civil Service unions and to renegotiate tens of millions of dollars in tax refunds.

For the City’s creditors, the presidential race may have driven the State – or more precisely, Governor Chris Christie – to intervene in the City’s finances one week after Christie vetoed an aid package for the city, and his spokesman issued a statement denouncing local leaders for being fiscally irresponsible. “Atlantic City government has been given over five years and two city administrations to deal with its structural budget issues and excessive spending; it has not,” the statement said. “The governor is not going to ask the taxpayers to continue to be enablers in this waste and abuse.” The Council and the mayor had been scheduled to hold an emergency meeting this week to discuss a court filing under Chapter 9 of the federal bankruptcy code. In New Jersey, cities must seek approval from the state’s Local Finance Board to file for bankruptcy.

The reality is that with the Iowa caucus coming up next week, the city’s falling into bankruptcy would have proved deeply embarrassing for Mr. Christie who has sought to present himself in the race as a responsible executive, tested by crises and capable of extracting major compromises from Democratic adversaries. The timing of the announcement is reflected in the fact that the legislation still needs to be drafted and passed by the Legislature and signed by Mr. Christie. As planned , it would give the state the authority to act on the city’s behalf for five years, including the right to negotiate, amend and terminate all labor agreements for the city.

The City government, which opposes a state “takeover” faces daunting challenges. Casino revenue has fallen by half since 2006, to $2.56 billion last year from $5.2 billion. Thousands of jobs have been eliminated. And now there is the possibility that state lawmakers might end the city’s monopoly on gambling by allowing it in North Jersey. All of this combines to increase the difficulty the City faces in dealing with a declining taxable property base and more than $150 million in tax appeals from just one casino, the Borgata.


In two weeks, Gov. Tom Wolf is scheduled to deliver a budget proposal for the 2016-17 fiscal year, despite significant portions of the current 2015-16 fiscal year still unfinished. The Republican-controlled legislature reconvened this week amid a 7-month-old budget fight that has left billions in school aid in limbo, but lawmakers took no action on budget-related legislation. Prior to his formal proposal, the Governor made some extensive comments on the situation.

Wolf said lawmakers have not figured out how to pay for the spending in a plan they sent to him before Christmas. “If we don’t fix the budget deficit by 16-17, there are going to be huge cuts in education, and huge cuts in local services, so that local taxes are going to go up and services are going to decline”. “So we need a real balanced budget, we need some honesty, we need fiscal responsibility. It’s not just me saying that, it’s the rest of the world looking at Pennsylvania and they’re going to watch us and we’ve got to get it right.”

Wolf signed $23.4 billion of the main appropriations bill in a $30.3 billion budget package that had been written by House GOP majority leaders. He call it emergency funding to prevent schools from closing and social service agencies from laying off more workers. However, Wolf vetoed billions for public schools to keep pressure on the Republican-controlled House to pass the bipartisan deal. The action did keep some school districts from having to undertake short-term borrowings but was too late for others. Many social service providers are struggling to maintain their finances as the process drags on.

As is the case in Illinois, this situation is all about the politics. That is the one factor that separates municipal credit from all other fixed income credits. Until that changes, the concept of full equality of ratings across all classes of fixed income debt will be essentially impossible to achieve. We would not be surprised to see one more downgrade of the Commonwealth’s rating before the budget process is finally resolved.

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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