Muni Credit News May 10, 2016

Joseph Krist

Senior Municipal Credit Consultant


We have recently discussed proposals for public financing for stadiums for professional sports franchises, including those for teams in California. We note however, that the state’s largest city has been taking a different route. While most attention has been rightfully focused on the relocation of the NFL Rams from St. Louis to a privately financed stadium, the groundwork was being laid for a new facility for a major league soccer facility in Los Angeles.

Those efforts culminated in the announcement of Friday that the Los Angeles City Council unanimously approved plans for a privately financed $250-million stadium in Exposition Park, clearing the way for the expansion Los Angeles Football Club to begin construction on the most expensive soccer-specific project in Major League Soccer history.

The 22,000-seat stadium will be the cornerstone of a complex that will include a conference center, restaurants and a soccer museum. It will be built next to the Coliseum on the site of the 56-year-old Sports Arena, which held its final event in March. Construction, including the demolition of the Sports Arena, is scheduled to begin this summer with the target of getting the stadium finished in time for LAFC’s first home game in March 2018.

LAFC’s facility will be the first open-air professional sports stadium built in the City of Los Angeles since Dodger Stadium, which played host to its first game in 1962. That too was a private project although it was catalyzed by a donation of land by the City to the O’Malley family. Likewise, this new facility is being built on City land.


Regardless of what you think his chances are, it is important for investors to know and weigh the views of Presidential candidates on matters impacting the municipal bond market. This week, Donald Trump let us know his views on Puerto Rico’s debt crisis. In his own words – “I know more about debt than practically anybody, I love debt. I also love reducing debt, and I know how to do it better than anybody. I will tell you with Puerto Rico they have too much debt. You can’t just restructure; you have to use the laws, cut the debt way down, and get back to business, because they can’t survive with the kind of debt they have. I would not bail out if I were — if I were in that position I wouldn’t bail them out.”

So now we have the presumptive Republican presidential nominee standing with the Obama administration in favor of allowing the Commonwealth access to Chapter 9. He stands against those Republicans who are against a “bailout” of the Commonwealth. He is consistent in favoring a haircut for debtholders, something his high yield creditors in the 90’s are all too familiar with. Confused yet?


Much of the debate on both sides of the Puerto Rico issue seem to be ignoring certain facts. Supporters of the Puerto Rican government like to lament the end of Section 236 tax in the last decade which had formerly encouraged manufacturing businesses to locate production facilities on the island. Many of those supporters portray the island as having been cut adrift to fend for itself by an evilly motivated U.S. government. As for the “anti-bailout” faction of the body politic, they fail to acknowledge a huge amount of funding the Commonwealth gets for its General Fund from U. S. tax policy. What both sides share is an ignorance of provisions under Act 154 of 2010.

Under Act 154, Puerto Rico enacted a special excise tax on American companies there — mostly pharmaceutical and medical device companies — in an effort to offset lost revenues as the result in reductions in the marginal tax rates on income levied by the Commonwealth on its residents. But the government had effectively promised many of those companies that it would not raise their taxes. So it designed the tax to be eligible for the foreign tax credit in the U.S. That took advantage of the fact that Puerto Rico is treated as a foreign country for foreign tax purposes. That way, it would basically be a wash for the companies, while Puerto Rico could still reap the money it would raise. The plan left U.S. taxpayers footing the bill as companies here can take a foreign tax credit for paying standard taxes there.

So since 2010, U.S. taxpayers have effectively been subsidizing 20% of Puerto Rico’s revenues. Ironically, the amount of money provided essentially covers the Commonwealth’s annual debt service requirements for its general obligation and guaranteed debt obligations. This under actions promulgated by Treasury not by Congressional authorization. Further, these provisions have been under scrutiny by the IRS (part of the Treasury) which conveniently will not address the “creditability” of these taxes for corporations.

So in the  end, the U.S. is providing a pretty favorable subsidy via the Administration of the tax code and Congress does not seem to be fully aware of the issue as it debates whether or not it should start to bailout Puerto Rico. Confused yet?


The Puerto Rico Electric Power Authority (“PREPA”) Bondholder Group today announced an offer to pre-fund the purchase price of the 2016 Bonds that the Group agreed to purchase under the Bond Purchase Agreement (“BPA”) to facilitate the completion of the Restructuring Support Agreement (“RSA”) with PREPA. Under the terms of the offer, the BPA deadline would be extended until the earlier of the passage of an amendment by the Puerto Rico legislature excluding PREPA as an RSA party from the Moratorium Act or May 31, 2016.

The Bondholder Group is prepared to deposit the approximately $61 million to fund the BPA into escrow or other segregated accounts. Under the arrangement, the funds would be transferred to the PREPA bond trustee following the passage of legislation, which would address issues created by the Moratorium Act preventing the consummation of the BPA, and the satisfaction of other agreed-upon conditions precedent to the BPA.


We find it interesting and something for investors to look at that the Municipal Electric Authority of Georgia (MEAG) is proposing changes to its Project One bond resolution designed to provide management with additional “flexibility” in its requirements for future financings and oversight requirements. This at a time when MEAG is a participant in construction of new nuclear generating capacity, a risky financial venture to say the least.

The proposed changes would loosen restrictions on when and how MEAG can issue debt, reduce the requirement for outside review of projects and operations by consulting engineers which are required to be reported to the Trustee for the bondholders. The proposed changes would also create new categories of senior debt which may be identified as being “Refundable Principal Installments”. These bonds would require fewer assets to be accumulated for their payment prior to maturity. They would also alter the method of calculating debt service coverage in favor of the Agency. Additional proposed changes would also allow MEAG to decide to divest the agency of assets without the review of some outside entities as is currently required.

While quality management in our mind always trumps bond requirements, we are always concerned by changes that position investors to get less information and fewer sets of “outside eyes” acting on their behalf. MEAG does have a good track record overall and a good record with nuclear construction and generation, we are more comfortable with an overabundance of protection given the risks of participation in a new nuclear project at this time.


If the constitutional amendment is approved Nov. 8, all money raised through various transportation-related levies such as the gas tax, tolls, licenses fees and vehicle registration costs would be put into what amounts to budget “lockbox.” That money could then only be spent on road construction and repair, enforcing traffic laws, paying off debt on transit projects and even costs associated with workers injured on the job. The change would not apply to state and local sales taxes that are added on top of the gas tax collected at the pump. The proposed change to the Illinois Constitution that would prevent cash-strapped state government from raiding funds intended to be used on transportation projects.

Illinois imposes a base tax rate of 19 cents per gallon for gasoline and 21.5 cents a gallon for diesel. The gas tax has not been increased since 1991, and revenue collections have been essentially flat as vehicles become increasingly fuel-efficient. The effort comes as the Legislature grapples with an overall state budget for the second straight year.

Illinois has over the years segregated various revenue streams to support specific programs or categories of debt to enhance their security and insulate them from claims of general obligation bondholders. While the segregation enhanced the security for the benefiting bonds, it did theoretically weaken the ultimate security of general obligation debt. We view the proposed segregation of transportation of revenues as a continuation of this trend. Given the current budget conditions facing the State, it is an additional point of concern for the state’s general obligation creditors.

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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