Muni Credit News June 20, 2017

Joseph Krist

Senior Municipal Credit Consultant




Future Tax Secured Tax-Exempt Subordinate Bonds

Moody’s: Aa1

The state legislature established TFA as a separate and distinct legal entity from the city. Further, the state did not grant TFA itself the right to file for bankruptcy. While bondholders are protected from bankruptcy, city or state fiscal stress still could pose risks because both the city and the state retain the right to alter the statutory structure that secures TFA’s bonds. The city has covenanted not to exercise those rights if debt service coverage were to fall below 1.5 times MADS on outstanding bonds. Since enactment of the TFA, policy actions have both increased and decreased the pledged revenues. Those actions have included the abolition of the city’s income tax on commuters, and establishment of various sales tax exemptions.

The pledged taxes are collected by the New York State Department of Taxation and Finance and held by the state comptroller, who makes daily transfers to the trustee (net of refunds and the costs of collection). The trustee makes quarterly set-asides of amounts required for debt service due in the following quarter on the outstanding bonds, as well as TFA’s operational costs (with the collection quarters beginning each August, November, February and May). Half of each quarterly set-aside is made beginning on the first day of the first month of each collection quarter and the second half is made beginning on the first day of the second month of each collection quarter. If sufficient amounts for debt service are not on deposit after those two months, the trustee continues to set aside funds in the third month, on a daily basis, until the deficiency is cured. Functionally, personal income tax revenues are expected to provide sufficient amounts for debt service; if they do not provide at least 1.5 times coverage of maximum annual debt service (MADS), sales tax revenues are available to make up the difference. Additionally, the TFA’s future tax secured bonds issued before November 2006 have a first lien on appropriations of state building aid to the city if necessary to meet debt service requirements.

The TFA was created by the state legislature in 1997 to provide a method of financing New York City’s vital capital construction program but outside the constraints of the debt limit imposed on the city by the state constitution (the city’s general obligation bonds are rated Aa2 with a stable outlook). TFA’s original statutory authorization was $7.5 billion. In 2000, it was increased by $4.0 billion and following the 2001 World Trade Center attacks, that amount was increased to permit $2.5 billion of subordinate “Recovery Bonds” used partly as deficit financing to bolster the city’s general fund in fiscal 2003. Authorized issuance was increased again by an additional $2.0 billion in 2006, to an aggregate of $13.5 billion (the Recovery Bonds were excluded from that cap) for senior and subordinate lien bonds.

$825 million new money and refunding senior lien general airport revenue bonds (GARB)

Moody’s: A2  Fitch: A

The ratings reflect the strong local market, the strategic location of Chicago, IL as a hub and the demonstrated importance of the airport to both United Airlines  and American Airlines. The rating also reflects continued favorable progression of the airport capital programs with overall costs remaining in line within existing budgets, while airport traffic is trending in a positive direction. Leverage is elevated at nearly 12x but should evolve to a lower level over the next five years.

The passenger base ranks among the nation’s largest for both origination and destination (O&D) traffic as well as international services. Nearly 60 domestic and foreign-flag carriers operate out of O’Hare to 168 domestic and 65 international non-stop destinations. In 2016, the airport handled 38.9 million enplaned passengers with slightly over half being origination/destination traffic. O’Hare has experienced a healthy rate of traffic growth over the past three years, up 16.7% since 2013. Early traffic data for fiscal 2017 indicate marginally positive traffic increases. Both domestic and international segments realized increases over the past three years, as well as ongoing increases in service from low-cost carriers.

Three of four new runways have been completed along with one of the two planned runway extensions. Remaining costs will cover additional airfield projects such as another new runway and runway extension project, are also anticipated to be close to $1.6 billion. Other projects include  a nine-gate expansion at terminal 5, a facility used for international and domestic flights. Airport management is also exploring future terminal projects to increase capacity. The timing and costs are unclear but will likely take many years to fully complete.



$442,135,000 REVENUE BONDS

Moody’s: Aa3  S&P: AA-  Fitch: AA-

Sutter Health is issuing bonds to refinance outstanding debt. Sutter’s ratings reflect its strong presence in northern California, its large size, its history of generally stable cash flow production, and its conservative asset-liability structure, including a well-funded pension plan. Challenges include relatively high leverage, more modest operating performance in recent years, cash balances that are modest compared to other Aa rated credits, and a $4.5 billion capital plan over the next five years. The system operates 28 acute care facilities, manages four medical foundations that contract with medical groups organized as professional corporations that account for the services of over 2500 physicians, recently started a small health plan, and operates a large number of out-patient facilities.

Bonds are secured by a gross revenue pledge pursuant to Sutter’s 1985 Master Trust Indenture (MTI), with payments made by Sutter’s Obligated Group (approximately 96% of the System’s total revenues). All members of the Obligated Group are jointly and severally liable with respect to the payment of each obligation secured under the MTI. Operating EBITDA margins have consistently been around 10% since 2014 (Dec. 31 fiscal year end). Operating performance has weakened in the first quarter of 2017 due to lower than expected patient volume. However, management has implemented necessary expense reduction initiatives and the full year operating EBITDA margin budget of 8.4% should be met or exceeded based on management’s historical track record.

This issuance is expected to reduce pro forma MADS to $239.7 million from the current $242.7 million, which was also a reduction from prior levels due to refinancings in 2016. Debt service coverage is adequate at 4.8x in 2016, 4.3x in 2015 and 5.3x in 2014 compared to the ‘AA’ category median of 6x. The capital plan for 2017-2021 totals $4 billion with a significant reduction in 2020 after the San Francisco facilities are complete. Sutter typically finances capital expenditures from cash flow and issues debt for reimbursement based on a balancing of cash and leverage metrics. An additional $500 million debt financing is expected in the next two to three years to fund or reimburse capital expenditures.

Moody’s assigns a stable outlook to its rating based on an assumption that operating measures will continue to improve over time, and that balance sheet measures will generally improve, despite the very large capital plan.



The U.S. House Natural Resources Committee demanded that the board approve the agreement to restructure PREPA’s $9 billion debt. It also follows various groups’ call, including the Puerto Rico Manufacturers Association and the Coalition for the Private Sector, which urged stopping the RSA, whose terms were renegotiated earlier this year. PREPA extended a deadline to June 28 to finalize the required documentation and begin the creditor voting process over the “qualifying modification,” as defined by Promesa’s Title VI. The extensions followed a Wall Street Journal report that the deal was on the verge of collapsing because fiscal board members could not reach a consensus over the RSA’s terms.

PREPA’s executive director, Ricardo Ramos, said he had expected the RSA to go through the process of court approval in July. He had previously said PREPA is receiving a lot of pressure from Congress to move the RSA forward.

On another front, The recently announced deal between the Government Development Bank (GDB) and a group of its creditors does not exclude the possibility that the bank could end up in a Title III bankruptcy process to restructure its debt. While the proposed deal calls for using most of the deposits and assets left in the GDB as collateral for payment of the new bonds to be issued by a special-purpose vehicle (SPV), there are no guarantees either. According to the RSA, if there is not enough money to pay in full all interest on the new bonds, any unpaid balance shall be paid in kind, which means it would be accumulated until the next payment.

The proposed transaction seeks a bond exchange mechanism for the bank’s $3.76 billion debt, in which three different tranches would be issued by an SPV. Haircuts would hover from 25% to 45%, depending on the tranche, while GDB assets, particularly the municipal loan portfolio, would pay for these bonds. The process under the federal Promesa law calls for Financial Oversight & Management Board approval of the RSA as a “qualifying modification,” after which the GDB will need more than 66.6% of its voting creditors to be in favor of the deal. The agreement would then have to be certified by a judge.


The State of Indiana announced an agreement to take control of construction of the 21-mile stretch of I-69 from Bloomington to Martinsville, an admission that its touted public-private partnership failed. The agreement terminates a contract with I-69 Development Partners, the private company responsible for designing and building I-69 Section 5 and maintaining it for 35 years.

The agreement would settle all disputes and allow the Indiana Finance Authority to assume direct control of the project, which is about 60 percent finished. The project was supposed to be completed by October 2016, but has been delayed four times since construction started. The new estimated completion date is August 2018, nearly two years late.

In a news conference, state officials insisted that the state made no mistakes concerning the project. They also did not discount the possibility of using a public-private partnership for I-69 Section 6 from Martinsville to Indianapolis. The state however, now assumes the risk of costs increasing beyond projections to operate and maintain the road for 35 years. The contract that was terminated called for the state to make annual $22 million “availability payments” to I-69 Development Partners for 35 years. That company was to have operated and maintained the road during that time.

State officials said Friday that — in today’s dollars — the entire project, including maintenance costs, would cost $560 million. They say it would have cost $590 million with its now-former private partner. The emphasis on savings to taxpayers over 35 years, represents a real change in how the state sold the project to the public in 2014.

When the agreement was signed, the state emphasized the $325 million winning bid by I-69 Development Partners. That was the cost of construction. The state will have to pay off bondholders and cover about $115 million in increased construction costs, Huge said. The state says it will get the money from a bond issue, at a lower interest rate than the bonds for the public-private partnership. It also negotiated a $50 million settlement payment from the company. As part of the termination agreement, I-69 Development Partners also will pay $12 million to the bondholders.


A $28 billion-plus Louisiana operating budget won final legislative passage, a week after a stalemate in the spending negotiations forced lawmakers into a special session. The spending plan for the fiscal year that begins July 1 would keep most agencies free of cuts and fully funds TOPS. More than 38,000 state government workers would get 2% pay raises, and dollars would be allocated to open a vacant new juvenile prison in Acadiana. Prisons, state police, public colleges and the child welfare agency would be among those areas shielded from reductions. It would be the first time college campuses would be spared cuts to their state financing in nearly a decade.

Some programs would see cuts. Mental health services would get less money, as would a program for “medically fragile” children and the private operators of Louisiana’s safety-net hospitals and clinics. A gas tax increase failed. Another special session is planned over the next eight months (an exact date hasn’t been set) for lawmakers to consider raising taxes before Louisiana hits what is called the “fiscal cliff.” That’s when temporary sales taxes expire June 30, 2018 and leave a budget hole estimated to be as much as $1.3 billion or more.

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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