Muni Credit News January 7, 2016

Joseph Krist

Municipal Credit Consultant


Puerto Rico made $594 million in bond payments due this week but still defaulted on $37 million in interest. The Governor at the same time said that there is no money available for future payments, including $400 million due in May in bonds issued by the Government Development Bank. The Governor reiterated that Puerto Rico needs Congress to give the territory access to debt reorganization under federal bankruptcy laws. “I’m not asking for a bailout,” he said. “I’m asking for the tools to address the problem.”

He said the government would default on $35.9 million in Puerto Rico Infrastructure Financing Authority bonds and $1.4 million of Public Finance Corporation bonds. This is the second time that Puerto Rico has defaulted on Public Finance Corporation bonds. The government missed a $58 million bond payment in August.

The U.S. Treasury said in a statement that the default demonstrates the gravity of the island’s situation and the need for Congress to act. “Puerto Rico is at a dead end, shifting funds from one creditor to pay another and diverting money from already-depleted pension funds to pay both current bills and debt service,” it said. The government has already increased taxes, closed schools, withheld tax returns and taken other numerous measures to cut costs and generate more revenue amid a worsening economic crisis. The Governor said government officials will start meeting with creditors in early January to discuss debt restructuring.

Previously, PREPA officials said that two bond insurers had agreed to take part in a five-year restructuring plan for the Authority. The insurers’ involvement signaled that PREPA had found a way to satisfy its bondholders, who expected to be paid about $177 million on Jan. 1, without having to part with that much cash itself. On Jan. 1, the two participating bond insurers, Assured Guaranty and National Public Finance Guarantee purchased $50 million of new revenue bonds from PREPA; a creditors’ committee known as the Ad Hoc Group will purchase an additional $65 million worth of bonds. Those purchases will give PREPA $115 million of fresh cash, which it can use to honor a large part of its scheduled bond payment due that day. PREPA was to make the rest of the payment out of its own resources.

The restructuring plan resembles terms that were made public earlier this year. They called for giving PREPA five years’ worth of interest-rate relief, which would save the utility more than $700 million. In addition, the creditors have agreed to permanently reduce PREPA’s outstanding bond principal by more than $600 million, according to a summary provided by the utility. This would be accomplished through a debt exchange, in which the holders of PREPA’s current, junk-rated bonds could turn them in and receive new investment-grade bonds. This was facilitated when  the two bond insurers agreed to backstop with a surety. The idea is to induce  investors to exchange their old bonds for the new ones, despite the lower face value, by making the new bonds a better credit risk.

The debt exchange is not expected to take place until next summer, and, until then, the negotiators must clear a number of obstacles. The first is Jan. 23 — a deadline for the Puerto Rican legislature to pass enabling legislation for the deal. Legislators have so far shown little appetite, because they would also have to request a rate increase for PREPA. In addition, a large number of PREPA’s bondholders continue to stay aloof from the restructuring talks, perhaps hoping an even better deal might appear later.

The creditors on board so far represent about 70 percent of PREPA’s $9 billion debt; they include the Puerto Rico Government Development Bank, mutual funds, hedge funds, and banks that finance PREPA’s fuel purchases. The holders of the remaining 30 percent of the debt have not yet signed onto the deal, and it is not clear whether enough of them ever will, at least under the incentives proposed by the current deal. But one more factor is expected to come into play in the first half of 2016: the hope by some investors  that Congress is preparing to make some form of bankruptcy protection available to Puerto Rico.

“While the entry into these agreements is another important milestone in PREPA’s transformation, the transaction is subject to a number of conditions and contingencies,” said Lisa Donahue, PREPA chief restructuring officer. “Chief among them are the enactment of the necessary legislation, the approval by the [Puerto Rico] Energy Commission of PREPA’s rate structure and the securitization charges, execution of a successful exchange offer, and the achievement of an investment grade rating for the securitization bonds, the last of which will of course depend on a number of factors, including the overall situation at the commonwealth.”

Effectively  the bond insurers have put up some money, in particular for the surety bonds, as their contribution for the deal, whereas the bond holders are accepting delays in principal payments and cuts in the interest rates, as their contribution for the deal. The lines of credit holders and the Government Development Bank for Puerto Rico have agreed to accept either an extended payment schedule plus lowered interest rates or to convert to bonds and accept the bond holder deal.

Officials continue to publicly hope that the PREPA agreement may serve as a template for similar agreements between creditors and Puerto Rico’s other debt-issuing entities. Whether  the collateralized debt concepts may be applicable to the ‘super bond’ structure being considered for the rest of Puerto Rico’s debt  is an open question. The statutory and constitutional issues underpinning the security for the outstanding general obligation debt create legal and political issues and involve many constituencies with clearly conflicting goals.

The commonwealth, however, still  has over $2 billion in payments due from February until July 2015. These payments are approximately as follows: $402 million in February; $ 29.3 million in March; $40.9 million in April; $469.4 million in May; $ 71.3 million in June and $1.9 billion in July 2016. In July, specifically, the government must pay $779 million in general obligations. COFINA has a $318.3 million payment due in February. The Puerto Rico Electric Power Authority must pay $423.8 million this year; the Aqueduct and Sewer Authority $147.5 million; the Public Buildings Authority $177.2 million and the Highway and Transportation Authority $232.5 million.


With oil prices down along with oil production, the state is facing a huge shortfall. Two-thirds of the revenue needed to cover this year’s $5.2 billion state budget cannot be collected. The governor  has proposed the imposition of a personal income tax for the first time in 35 years.  Many Alaskans are not old enough to remember a time when oil did not provide for state expenses. Oil royalties and energy taxes once paid for 90 percent of state functions. Residents received annual dividend checks from a state savings fund that could total more than $8,000 for a family of four .

Gov. Bill Walker, an independent, is proposing to scale back those dividends as he seeks to get Alaska back on a stable financial footing with less dependence on oil. The Permanent Fund has paid dividends to residents every year since 1982, from $300 to $500 a person in the early years to more than $2,000 this year, based on the fund’s investments.

The income tax would be 6 percent of the amount an Alaskan currently pays in federal taxes, so a person who owed $10,000 to the Internal Revenue Service would also need to write a $600 check to Alaska. Dividend payments would be tied directly to royalties that decrease or increase with oil production. Because oil production is down, next year’s payout would be cut by roughly half under the proposal, to about $1,000 a person. The governor would also raise taxes on alcohol and tobacco and would collect new taxes from the fishing, mining, energy and tourism industries.

Legislative leaders said the governor’s plans would be given fair consideration. The speaker of the House has conceded that some new revenue stream is probably unavoidable. In a deep first wave of budget cuts this year, Alaska eliminated almost all capital spending. The president of the State Senate, who is also an employee of the oil giant ConocoPhillips, said that he thought deeper budget cuts were still necessary and that residents would accept new taxes only when they were convinced that the old pattern of state spending — wasteful and inefficient, in his view — had been permanently changed.

Opponents argue that the governor’s plan would disproportionally hit working-class Alaskans. Which sectors of the state are hurt, or spared, will also be on the table when the Legislature returns to Juneau in January. The income tax plan, for example, would primarily hit urban Alaska, where most jobs are. A sales tax, by contrast, which some lawmakers favor, is seen as hurting rural residents more.


Gov. Tom Wolf used line-item vetoes to allow some spending called for in a $30.3 billion budget lawmakers sent him. The vetoes strike $6.3 billion from the plan, leaving $23.4 billion in spending. The idea is funding will be restored if Wolf and lawmakers can negotiate a final plan. Wolf didn’t support lawmakers’ plan and wants one that includes an education funding boost and new tax revenue to close the recurring budget deficit.

Public schools will receive part of their basic education subsidy, but the vetoes withhold about $3 billion. Most other programs remain intact. The vetoes flat fund community colleges and state-system schools (including Kutztown University), cutting a combined $31.3 million proposed increase. Most funding is provided for student loans and grants, but $59 million is cut. A combined $521 million in proposed aid to state-related universities — Penn State, the University of Pittsburgh, Lincoln and Temple — is not included. But that’s because that funding has not been approved, not because of a veto.

The vetoes withhold the lion’s share of funding for agriculture programs, cutting $68.8 million from areas like dairy and livestock shows and agriculture research. State prisons will receive partial funding, but about $939 million is withheld. Medical assistance will be partially funded with $2 billion withheld. The vetoes cut $9.7 million of what was proposed for health items such as newborn screenings, poison control centers and programs targeting specific diseases.

Wolf flat funded the Legislature and commissions and offices that support it, vetoing a combined $64.7 million proposed increase.


The Scranton PA School District officially secured a $40 million bond, avoiding default on tax anticipation notes due last week. The bond has a 4 percent interest rate for 2016. Earlier in 2015, the district received a note of $18.5 million and secured another note for $14.3 million in November to make payroll through the end of the year.

Directors passed a $146.5 million budget for 2016 on Dec. 21 that increases property taxes 2.8 percent and borrows millions, delays debt payments and uses money set aside for large health care claims. The district will again use procedures delaying paying nearly $10 million in debt and pushing payments into the future. Once the state passes a budget and the district begins to receive state funding again, the district hopes to pay off the loan. Scranton has 10 years to pay back the $40 million per a court order they sought in early December and a state statute.

Without state funding, the district had been unable to repay the two tax anticipation notes taken out earlier this year. After Standard & Poor’s withdrew the district’s credit rating earlier this month because of the state budget impasse, it had been much harder for the district to secure a bond. The bond has to be outstanding for one year. So if the district receives its state funding within the first half of the year, they have to wait until Dec. 1, 2016 to pay off the bond. The 4 percent interest rate is set for one year only. Rates can change through the life of the bond or the district can seek to refinance, he said. It was structured that way to allow the district to pay back as much as possible once state funding comes through. Extra money left over after the TANs are paid off will go toward paying the district’s everyday operations and payrolls, among other expenses.


Hawaii became the first state to raise the smoking age to 21. There will be a $10 fine the first time anyone under 21 is caught smoking and a $50 fine for every offense after that. Store owners will face a $500 penalty if caught selling to a person under the age limit. The rising popularity of electronic cigarettes led to passage of the new legislation. Officials cited a University of Hawaii study that found e-cigarette usage among Hawaiian teens is triple the national average. Twenty eight per cent of revenues received by the State under the MSA are statutorily pledged to support debt service on revenue bonds issued on behalf of the University of Hawaii. None of the revenues have been directly securitized.

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.