Muni Credit News May 3, 2016

Joseph Krist

Municipal Credit Consultant

PR

The GDB and a group of hedge funds — which own about one-fourth of the bank’s $4 billion debt — have agreed to enter into a 30-day forbearance agreement. It would cover more than $100 million of the bank’s payment on Monday. The bank would have faced a $400 million payment on principal, with an additional $22 million in interest. But during the past week, The Puerto Rico government announced late Friday that the cash-strapped GDB had reached an agreement with a group of local cooperatives that pushes, for a year, payment on roughly $33 million that was originally due May 2.

The announcement followed on the heels of a televised message Sunday, in which Gov. Alejandro García Padilla announced he has declared a moratorium on the Government Development Bank’s (GDB) debt service, as the commonwealth stood ready to partially default on as much as $270 million due May 2 on the bank’s debt.  “Pursuant to Act 21 [Puerto Rico Emergency Moratorium & Financial Rehabilitation Act], I ordered a moratorium on the debt service payment due by GDB [on May 2]. In light of Congress’s inaction, we were forced to enact Act 21 to protect the education, health and public safety and other essential services of our citizens from creditors,” the governor said. “Let me be very clear, this was a painful decision.”

García Padilla reiterated there is simply not enough cash to pay for both government services and the commonwealth’s debt service. The García Padilla administration has been lobbying Capitol Hill for months to achieve a broad debt-restructuring mechanism. For their part, the Republican majority delegations in both chambers of Congress have been skeptic of granting access to such a restructuring regime and instead have leaned toward establishing strong fiscal oversight on the island.

During the next few weeks, sides are expected to continue negotiations after agreeing to a “framework of indicative terms,” in an effort to reach a debt-restructuring agreement in principle, the GDB stated Sunday. The bank warned that important items remain which are still subject to further negotiation, while several conditions “would need to be met over the coming months before the deal could proceed.” “To be very clear, this is but one piece in a complicated process that will require every Commonwealth creditor to participate,” Acosta stressed.

A bill being pushed in the U.S. House Natural Resources Committee seeks to strike a balance between both demands, but has yet to garner enough support to secure passage. The Governor said,  “We would welcome an oversight board that would assist the elected government of Puerto Rico in balancing its budgets and improving its fiscal discipline,” “But we strongly oppose a board that overrules an elected government by deciding how our taxpayer money is spent or who gets paid first, or that is permitted to veto, amend or repeal our laws at will and without any accountability to the people of Puerto Rico.”

Plans call for having any debt restructuring deal reached with GDB creditors become a part of the commonwealth’s superbond proposal, if it is achieved down the road. To date, the so-called “superbond” is a “global” structure whereby the island’s different would include a “two-step restructuring” of the bank’s debt, in which holders would first exchange their GDB debt for new paper, amid haircuts, or reductions to principal, of 43.75%. Once and if the superbond takes place, GDB creditors would agree a haircut of 53%. However, even if timely achieved, these deals would only cover about half of the $422 million in a best-case scenario, which would prompt the government to miss the remainder of the bank’s payment, officials have warned.

Under this scenario, the governor is expected to declare a moratorium on the GDB’s debt-service payments, as allowed under the recently enacted Puerto Rico Emergency Moratorium Financial Rehabilitation Act. García Padilla has already declared an emergency at the bank, with an executive order that placed restrictions on GDB’s cash outflows. It is highly expected that the García Padilla administration meets in full roughly more than $40 million in debt payments across other commonwealth credits that are also due on Monday.

LAGUARDIA AIRPORT DEBT POISED FOR TAKE OFF

For many years, LaGuardia Airport has come in for criticism for the condition of its aging facilities. Vice president Joe Biden even compared them to air facilities in third world countries. These sorts of comments have finally motivated the State of New York to undertake a renovation and expansion of the terminal infrastructure at LaGuardia. The financing for the project will be in the form of a bond issue that will be sold as early as this week.

The $2.5 billion issue will be sold through the New York Transportation Development Corporation. The proceeds will be sold to a special purpose corporation which will construct and operate the new terminal (Terminal B) and will construct additional facilities(a terminal and connecting facility)  as a part of the overall airport development. The SPC will operate the existing terminal that is being replaced by the project during construction of the new facility.

The security differs from that seen at many other airport projects. Payments on the loan made from NYTDC to the SPC will be repaid from revenues derived from the operation of the terminal facilities such as payments for use of the gates and payments from concessionaires. Landing fees paid by airlines for the right to land at the airport and paid to the Port Authority of NY/NJ as operator of the airport will not be available for repayments on the loan by the SPC operating the terminal to the NYTDC. Those payments will be secured under the Loan Agreement which creates a leasehold  mortgage in favor of the  bondholders.

Only terminal revenues are pledged to the bonds. There will be a 1.25x rate covenant supporting the borrower’s ability to generate revenues and there will be a debt service reserve account funded at completion from construction account monies so that it will eventually be funded at six months maximum principal and interest.

The credit as structured is weaker in some aspects for bondholders than a general airport revenue bond would be as the result of the concentration of risk in the one facility. That reflects the lack of those revenues in the pledged credit. At the same time, there are benefits  in that the credit is a true project credit, rising and falling on its own merits rather than being caught up in the bureaucratic morass that is the Port Authority of NY/NJ. Then there is the issue of the always complicated ownership structure at the New York airports.

Bondholders must member that the airports are owned by the City and leased to the Port Authority which in turn leases facilities to builders, operators, and tenants. In the event of bankruptcy, these ownership structures complicate the analysis of who owns what for determining rights and remedies under bankruptcy.

So the determination of a credit equivalency for purposes of a bond like this must take into account traditional metrics like those of the local air demand market, the strength of the builder/operators, and the overall creditworthiness and ratings of the potential tenants as well as the technical provisions of the tenant base. Given all of those factors, it would be a surprise if the bonds were to receive a rating better than a BBB.

HARVEY ILLINOIS

The recent news that Harvey, Illinois might default on some of its outstanding debt is actually the culmination of a long process. The Securities and Exchange Commission announced that on January 27, 2015, an Illinois federal court entered a default judgment against Joseph T. Letke, a certified public accountant, served as the comptroller for several municipalities, mostly in the south suburbs of Chicago, including the City of Harvey, Illinois (the “City of Harvey”). According to the complaint, Letke and a firm he owned and controlled also served as a financial advisor to the City of Harvey in connection with certain municipal bond issuances in 2008, 2009 and 2010.

The complaint alleged that according to the offering documents for the 2008, 2009, and 2010 Bond Offerings, the purpose of these offerings was to finance the development of a full-service hotel and conference center in the City of Harvey (the “Hotel Development Project”). But according to the complaint, Letke participated in a scheme to divert the proceeds from these bond issuances for improper purposes, including undisclosed payments to Letke beyond what was disclosed in the offering documents, for payroll for the City of Harvey, and for other purposes unrelated to the Hotel Redevelopment Project. The complaint alleged that as the result of the scheme to divert bond-related proceeds, the Hotel Redevelopment Project turned into a fiasco, with the Hotel Redevelopment Project never having been completed.

Since then, the economically troubled south side municipality of 25,000 has been dealing with the political fallout of this situation. That aftermath has included charges of corruption against various city officials and difficulties administrating basic issues such as the levy and collection of property taxes. A recent effort to enact a tax increase and to collect taxes in amounts sufficient to generate revenues to pay debt service came to a head last week.

On Friday, the Cook County clerk’s office reversed course and approved a levy that will keep Harvey residents paying property taxes for city services. The reversal Friday comes two days after the county clerk declared the same ordinance invalid. The ordinance was passed during a chaotic meeting in which just two of Harvey’s six aldermen voted for it. The mayor argued another two aldermen were in the room, so they were recorded as no votes, which the mayor argued allowed him to break a 2-2 tie to pass the levy. The levy was deemed valid despite a majority of aldermen opposing it. Those aldermen have long argued that the Mayor couldn’t be trusted to honestly spend levy cash.

The levy was deemed valid despite a majority of aldermen opposing it. Those aldermen have long argued Kellogg couldn’t be trusted to honestly spend levy cash. The opposition to the tax had called a special meeting Friday night to attempt to pass a smaller levy. But, after news of the county clerk’s decision spread, only two of the group’s four aldermen came to city hall, and then for only a portion of the meeting.

It is the latest chapter in the debate in Harvey over what is typically in other cities a routine function: passing a property tax levy. Four of the suburb’s six aldermen argue that the Mayor has refused to explain how city money is spent, so they can’t support a tax levy that would continue to pump money to his administration. The Mayor contends that the aldermen are power hungry and played politics in ways that could force the city of about 25,000 to lay off half of its police, firefighters and public works employees.

Caught in the middle has been the County Clerk, whose office has the duty to process local governments’ levy ordinances. State law says municipalities must pass a levy ordinance by the last Tuesday in December, but the Clerk pushed that deadline back to May 2 for Harvey. With the deadline looming, and no budging from the anti-mayor group, the Mayor and his supporters said the ordinance was introduced at Monday’s council meeting — during which two anti-tax aldermen had already walked out of the meeting in protest and a shouting citizen was removed out of the council chambers by police.

Two aldermen voted for the levy, they said. The mayor said the final two anti-tax aldermen were present for the vote but didn’t respond, allowing their votes to count as no votes and the Mayor to cast the tie-breaking yes vote. The clerk’s office initially told Harvey officials Wednesday the vote was invalid because — in a city of a mayor and six aldermen — at least four of them needed to vote yes. But the Mayor responded that Harvey had home-rule powers, under which the city had adopted different rules that would allow such a vote to count. In a letter Friday, the Clerk’s office said based on what Kellogg sent, the levy appears to be valid. The Harvey city clerk “attested” to the fact two of the anti-Kellogg aldermen were there, and he said the office has only an “administrative rather than an investigative role” in the tax levy process.

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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