Muni Credit News May 19, 2016

Joseph Krist

Municipal Credit Consultant

PROMESA BILL INTRODUCED…

H.R. 5278, the bipartisan Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which addresses the fiscal crisis in Puerto Rico while preventing a taxpayer bailout for the territory. The bill establishes an oversight board which will be given the Authority to order audited financial statements, hold hearings, prevent the execution of legislation, orders, regulations rules, or contracts that would violate the Act.

It provides that any debt adjustment must respect liens in effect prior to the execution of the Act. At the same time, it would stay litigation pending litigation pending the production of audited financials. During such stays, Puerto Rico must pay interest when due. The Act explicitly excludes the Commonwealth from Chapter 9 and designates the Board as the entity to direct the adjustment of Puerto Rico’s finances. Only the Oversight Board could present a plan of adjustment for creditor vote or judicial approval.

On the economic front, it would provide for a lower minimum wage than the prevailing mainland minimum and would increase the age it applies to from 20 to 25. As for its applicability to other entities, the Act is explicit in its enactment under the territories and insular affairs provisions of the U.S. code not as any amendment to the 10th Amendment. A state seeking to use its provisions would have to ask to have its status as a state revoked and return to territorial status.

The legislation (http://naturalresources.house.gov/uploadedfiles/promesa_hr_5278.pdf) is not truly bipartisan in that it is sponsored by the Republicans on the Natural Resources. House Speaker Ryan has made it clear that the legislation will be moved out of committee for a vote under the Hastert rule which means that unless a majority of the majority in the House supports the measure it will not move forward.

The introduction of the bill for committee consideration now sets out the opposing views of what to do about Puerto Rico’s debt crisis. It follows Monday’s statement from Senator Bernie Sanders on the subject. It reads straight out of the Garcia administration’s playbook. According to his campaigns statement, “Bernie Sanders believes the U.S. has an obligation to help Puerto Rico with its ongoing financial crisis by allowing it to declare bankruptcy.  To that end he sent a letter to the U.S. Treasury which could have been written by the current government of Puerto Rico.

He would  urge the Administration  to take  the following steps. First, he would urge a meeting as soon as possible with the government of Puerto Rico, key elected officials, its major creditors, labor unions, business leaders, and pension advocates, to work out a debt repayment  plan that is fair to all sides. At this meeting, it should be made clear that the last thing Puerto Rico needs right now is more austerity. The economic situation in Puerto Rico, in Sanders’ view will not improve by eliminating more public schools, slashing pensions, laying off workers, and allowing corporations to pay workers starvation wages by suspending the minimum  wage and relaxing labor laws.

Second, before any debt restructuring plan is agreed to, there needs to be an independent and transparent audit of Puerto Rico’s debt and the results need to be made public — consistent with recent legislation that was signed into law in Puerto Rico. Importantly, if any debt was issued to creditors  in violation  of Puerto Rico’s  constitution , it must  be immediately  set aside.

Third, he strongly believes Puerto Rico must be afforded the same bankruptcy protections that exist for municipalities and public utilities across the United  States.  Puerto Rico must be given the same authority granted to every state in this country to restructure the debt of public utilities and  municipalities  under the  supervision  of a bankruptcy court.

If there is not action  soon, Sanders says the well-being of 3.5 million American citizens who live there will  be put at risk.  He notes that  the people of Puerto Rico pay the same Medicare and Social  Security taxes as we do, but they  only get about half the rate of federal health care dollars as those who live in the 50 states.”

If this all sounds familiar, it is because these are almost verbatim the arguments advanced by the Governor. It represents a very doctrinaire and populist response to PR’s difficulties and does little to advance the debate.

… FOLLOWING PRHTA REVENUE FREEZE

Puerto Rico Gov. Alejandro García Padilla froze the transfer of revenues from the Puerto Rico Highways and Transportation Authority to its bonds, making the commonwealth the biggest technical defaulter in United States municipal history. While not imposing moratorium on HTA’s debt-service payments — which the government says  are covered until next year — Gov. Alejandro García Padilla is suspending the remittance of certain funds that go toward paying debt obligations in a bid to guarantee continuity of essential services provided by HTA. The administration says HTA needs $25 million a month to do the latter, and $150 million more to pay down what it owes to its suppliers.

“The executive order is suspending the obligation of the HTA to transfer revenues to its bondholders from tolls and any other income received  and imposes a ‘stay’ in legal  claims and of any kind,” the Commonwealth stated. The HTA is expected to meet in full roughly $240 million in debt service due July 1, but would do so by using its reserve accounts.

The moratorium law provides for a legal stay mechanism that seeks to shield public entities against creditors’ remedies, once they are placed under an emergency period. However, it is still uncertain whether it has a retroactive effect. Last week, Ambac Assurance Corp., a bond insurer with exposure to HTA debt, sued in federal court, calling for a receiver to be appointed at the public entity. Earlier this week, the monoline asked the court to freeze $100 million received from the 10-year extension to the PR-5 and PR-22 concession contract between HTA and Metropistas. Whether those actions may be stayed under the law, is yet to be seen.

LIPA DEBT LIMIT PROPOSED

Legislation introduced Thursday by two Suffolk County legislators would require a public referendum when LIPA wants to issue new debt. The measure which would be known as the Long Island Power Authority Ratepayers Protection Act, would also replace the current appointed LIPA board with eight trustees who are elected by voters from eight districts and a chairman appointed by the governor. The board would have full discretion to consider rate increases and could not approve a final plan until public hearings were held in impacted service areas.

LIPA has consistently been the target of populist legislators. The proposal would interfere with changes enacted by the NY legislature which froze rates for three years but also provided for a significant restructuring and refinancing of LIPA’s massive tax exempt debt load. The regulation of rates by the State along with the initial rate freeze had effectively capped the Authority’s ratings at their present level, but also facilitated the construction of a securitization plan that satisfied credit concerns in the taxable market.

We believe that outside oversight is essential to reassure investors over the long term. The nature of the political situation over many years on Long Island should be of concern to  investors who do not have tolerance for any additional credit weakness. Standard & Poor’s and Fitch Ratings revised LIPA’s credit outlook to stable from negative last November ahead of a $266 million electric system general revenue bond sale citing a three-year rate hike from 2016 to 2018 approved by the New York Department of Public Service. Public Service Commission oversight is essential in our view to the maintenance of a more solid credit profile.

GAME ON FOR MILWAUKEE BUCKS ARENA

The Wisconsin Center District is preparing to sell $203 million in bonds in June toward financing the new Milwaukee Bucks arena. The District board is scheduled to vote Friday on authorizing the bond issue. Assuming the board votes for the authorization, it is anticipated that a sale of bonds “in early to mid-June.” The vote follows months of maneuvering and threats to move the franchise to Seattle which had hoped that such a move would advance financing for a hockey and basketball arena there.

The financing from the Wisconsin Center District will provide the majority of the $250 million in public financing for the $500 million Bucks downtown arena. The Bucks owners will contribute $150 million and former owner Herb Kohl is donating $100 million. The state legislation in 2015 that provided for public funding of the arena designated the Wisconsin Center District as the owner of the arena, which the Bucks will manage under a 30-year lease.

The city of Milwaukee will provide the final $47 million in public funding via tax-incremental financing. The majority of the tax-increment funds will finance a new parking structure for the arena. The Bucks’ owners plan a groundbreaking ceremony for June 18 on the arena with a goal of completing the project before the 2018-2019 NBA season that starts in fall 2018.

The two primary revenue sources backing the bonds include annual appropriations of $4 million each from Milwaukee County and the state of Wisconsin and existing sales-tax revenue streams already collected by the Wisconsin Center District. The district collects sales taxes from hotel rooms, local food and beverages, and car rentals. This package was used by arena advocates to say that no “local” revenues are used for the project since the taxpayers would be mostly visitors to the arena and the City.

CA WATER AGENCIES GET REGULATORY RELIEF

On May 9, 2016, the Governor issued an Executive Order that directs the State Board to adjust and extend its emergency water conservation regulations through the end of January 2017 in recognition of the differing water supply conditions for many communities. The Order notes that the drought conditions that formed the basis of the Governor’s emergency proclamations continue to exist; and the drought conditions will likely continue for the foreseeable future and additional action by both the State Water Resources Control Board and local water suppliers will likely be necessary to prevent waste and unreasonable use of water and to further promote conservation.

It maintains limits on use for landscaping, outdoor plants, and car washing. It does provide that each urban water supplier shall: Beginning June 1, 2016, reduce its total potable water production by the percentage identified as its conservation standard in this section each month, compared to the amount used in the same month in 2013 and the supplier’s total potable water demand for each of the next three years will be the supplier’s average annual total potable water production for the years 2013 and 2014. The supplier’s total potable water supply shall include only water sources of supply available to the supplier that could be used for potable drinking water purposes.

Growth experienced by urban areas and significant investments that have been made by some suppliers towards creating new, local, drought-resilient sources of potable water supply, an urban water supplier’s conservation standard shall be reduced by an amount, not to exceed eight (8) percentage points total. Other adjustments to reflect the drought resiliency of new water supplies and growth in commercial/industrial establishments as well as population are provided.

Bondholders should be heartened by these changes which will relieve at least a portion of the pressures which have resulted from the drought. They are clearly credit positive for water credits throughout the state with primarily non-agricultural customer bases, thus relieving downward pressure on these credits.

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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