Muni Credit News July 7, 2016

Joseph Krist

Municipal Credit Consultant


And so it’s done. Puerto Rico covered only about $150 million of the $958 million in constitutionally guaranteed debt it owed Friday, according to the government. In all, it missed $911 million out of the $2 billion in debt-service payments due. “When I became governor, Puerto Rico was a colony of Wall Street,” Gov. Alejandro García Padilla told reporters in his typically theatrical style. “There should be no doubt today that I have chosen to protect the Puerto Rican people, and that we have been telling the truth all along”.

That statement reflected the fact that, at 3 a.m. Friday, the Puerto Rico government released its audited financial statements for fiscal year 2014. The Government reports a net deficit of $49.7 billion. The current FY 2014 operating deficit was $2.7 billion. The Government expressed concern over its ability to operate as a going concern. A 7% decrease in revenues was not met with anything close to cuts of that magnitude on the expense side. The report spends significant space on the difficulties facing the Commonwealth, PROMESA and its provisions. It projects the insolvency of its primary pension systems by 2018 and 2019 respectively.

Of the $958 million of bonds that carry the island’s full faith and credit, the government missed $780 million worth of general obligations (GOs), while paying about $150 million of the $178 million owed in Public Buildings Authority (PBA) bonds. Fiscal authorities stated that “over $800 million” in debt guaranteed by the commonwealth was still owed July 1 and the administration won’t use “clawed back” revenues to pay for this debt, and instead will leave the roughly $150 million on a separate account, while its final use has yet to be determined.

The rest of the payments due Friday, or about $1 billion corresponding to several public entities, were covered mostly by siphoning the entities’ debt-service reserves held by their trustees. As a result, the commonwealth defaulted on roughly half of the $1.9 billion due July 1, including the $780 million in GOs and $77 million tied to the Infrastructure Financing Authority.

On Thursday, the Governor signed executive orders authorizing the government to miss payments on its constitutionally guaranteed debt, while also declaring moratoriums on certain obligations of the Highways & Transportation Authority (HTA), Convention Center District Authority, the Public Employees Retirement System, the Industrial Development Co. (Pridco) and the University of Puerto Rico (UPR). Despite the executive orders, partial payments were still be made, although coming from debt-service funds already held by a trustee. In addition, the orders seek to preserve cash and protect against potential legal action by creditors.

At the same time Puerto Rico’s reported only about $200 million in cash in its operating account, according to the government’s statement. It warns it would need to continue taking emergency fiscal measures over the next six months to avoid depleting its liquidity.

We have many problems with the process that is included in Promesa that will likely allow Puerto Rico to evade its constitutional requirement to pay debt. We are not ignorant of the human and economic realities on the ground. However, the reasons notwithstanding, any precedent that allows constitutionally enshrined promises to be broken is troubling. We stand with those who fear the establishment of such a precedent. At the same time, it reinforces one of our basic tenets of credit. Namely, that one should always rely on economic viability rather than legal provisions to support investment in a credit.


The split of the existing Detroit Public School District into two distinct entities took effect on July 1. Immediately, Standard & Poor’s downgraded its credit rating for Detroit Public Schools bonds and said there is more than a 50% chance of additional downgrades in the coming months as those bonds will remain with the old district when the school system splits into two entities. Standard & Poor’s lowered the district’s bond ratings because of the risk for bondholders and uncertainty about the restructuring plan that places their debt into a non-operating district.

DPS is being split into two districts as part of a massive restructuring brought on by a recently passed $617-million state-aid package. The school district previously known as Detroit Public Schools becomes two entities — one that will provide education to its students and one that will exist solely to collect property taxes to pay down the district’s debt. Standard & Poor’s is concerned that bondholders face much higher risk of repayment for bonds that will stay with a district whose debt is no longer secured by the state.

S&P downgraded one set of the district’s bonds from A to BBB and another set of bonds from A- to BBB- and kept the bonds under “Creditwatch with negative implications”. Despite the state’s promises to meet its financial obligations, Standard & Poor’s said the complicated nature of the restructuring results “in a more than 50% chance we will lower the rating over the next three months, and could take more than one rating action during that time if warranted.” S&P even said the rating could sink to a ‘D’ rating, which is far below investment grade, or could be completely withdrawn.

Steven Rhoades, the former bankruptcy judge now leading the District, has sought board approval for a bond refinancing for $235million of debt but was turned down. This despite district officials saying in an e-mail to the Detroit Free Press that the bonds must be refinanced because they are no longer tied to a traditional school district. “The original bonds are secured by state aid,” the district said. “Since (the old district) will not have state aid funding … the bonds have to be refinanced to reflect that they will be secured by property tax.”


Illinois lawmakers overwhelmingly approved a spending plan that will allow K-12 schools to operate for another year and keep other essential state services operating for the next six months. But before one gets too excited heed the words of Gov. Rauner who said “It is not a budget. It is not a balanced budget.”

The budget compromise voted on boosts general state aid to schools by $331 million. It also provides $250 million more for schools that have high concentrations of low-income students. No school district will get less state aid than it did during the just-concluded school year. About $1 billion is going to higher education, including money for grants made under the Monetary Award Program.

The bill also provides $720 million for state operations, such as food for prisons and other state facilities, gasoline for state cars and medical care for prisoners or residents of state facilities. About $670 million will go toward human services, including autism programs, breast and cervical cancer screenings, funeral and burial services for the indigent and additional services for seniors and the homeless. Road construction projects will be able to continue, and the state will be allowed to spend federal money as it comes in.

All in all the deal simply puts off any serious budget reform until after the legislative elections in November and potentially sets up another fiscal cliff for the State and its universities in January. This continues to be a political problem. The danger for investors is that once the November elections come and go that the budget players shift their focus to the next gubernatorial vote in two years. That will merely serve to delay a serious long term fix to the State’s credit problems.

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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