Muni Credit News October 31, 2014


So now the hearings have ended and a decision will be announced on November 7 as to whether or not the City’s Plan of Remediation will be accepted. Regardless of the actual finding, it seems appropriate to consider what it is that the City actually accomplished and what the implications are for the municipal market in the long term.

Some of the conclusions are obvious and immediate while some are more subtle. Obviously, the strength of the general obligation pledge has been forever diminished. In the end, the City was effectively allowed to abdicate its responsibility to the bondholder to take all means necessary within the context of its sovereign immunity and police powers. While the immediate circumstances in Detroit may provide a stronger case for such an abdication than in some others, the fact that the City systematically failed to exercise its responsibilities over decades makes absolution a less acceptable concept.

The real triumph in this case belongs to lead bankruptcy counsel. The resolution of this case on essentially the City’s terms represents the culmination of a two decade effort on counsel’s part to weaken and permanently diminish the value of the GO pledge. 20 years and two multi-billion dollar defaults later, victory in this quest is almost within grasp. Academically and legally a success perhaps but definitely a failure for the bond market and the faith of the individual investor in it.

In the case of the City, the result is at best a very qualified win. The improvement in the City’s position is purely on the liability side of the balance sheet. The City still has overwhelming infrastructure needs, a limited economy and tax base, and a significantly weakened political base. Individually, each is a major credit negative. In combination, they create what is at best a highly speculative investing environment. Raising the revenue necessary to support the kind of capital and operating expense required over the foreseeable future remains a formidable challenge. The school system is still very poor, the jobs base for an undereducated core population remains insufficient, and the environment for raising taxes and state aid remains hostile.

So in many ways the City’s victory appears to be Pyrrhic at best given the damage done to such a significant sector of the municipal bond market. Hopefully, no one considers this to be mission accomplished.




The ongoing nature of the challenges facing Puerto Rico were reemphasized through the release of more negative economic data and additional cautionary commentary from Moody’s about the ongoing liquidity weaknesses of the GDB. The GDB released a  revised liquidity projection earlier this month. It projected that its quarter-ending available cash  might be as much as 22 % under previously forecast amounts unless a bond issue could be floated to refinance debt owed by the Highway & Transportation Authority (HTA).

The GBD’s forecast, an update from its last projection made in March, projected that available cash will stay close to $2 billion through the fiscal year ending June 30, 2015. This is contingent on the receipt by the bank of at least  $1 billion or more from a proposed bond financing to repay some of HTA’s outstanding $2 billion in loans made to the Authority from the GDB. If Puerto Rico fails to refinance any of the loans, GDB’s available reserves would fall to $819 million at the end of March 2015, versus some $1.05 billion using GDB’s prior forecast.

Puerto Rico is expected to announce details of the planned financing, which Moody’s speculated would involve a pledge of new petroleum products tax revenues, subject to authorizing legislation, during a GDB investor webcast on Wednesday. The plan would be for the transaction to occur before year-end 2014, according to the liquidity projection. The  GDB has maturing note principal totaling $481 million in fiscal 2015, and to $876 million in fiscal 2016.

Moody’s said, “depletion of GDB’s cash position, which serves as a proxy for that of the commonwealth, could lead the commonwealth and GDB to resort to budgetary payment deferrals and other cash management tools in order to pay debt service, which would increase the risk of default and place negative pressure on the rating of the commonwealth and its related entities. While such a scenario, with heightened default probabilities, would indicate growing credit pressure on the ratings of the commonwealth and related entities, we believe it is unlikely.”

If the proposed transaction occurs, a $1 billion infusion to GDB would result and quarter-end liquidity would rise about 72 percent above previously projected sums, reaching almost $2 billion on June 30, compared with $1.1 billion under the March forecast.

GDB reported that its net liquidity as of September 30 was $1.4 billion — $1.7 billion less than on June 30. Withdrawals of funds by the commonwealth and its corporations have reduced GDB liquidity in the intervening months. The Puerto Rico Electric Power Authority withdrew $40 million for debt service from its GDB accounts, and the commonwealth withdrew $700 million in the form of a Tax and Revenue Anticipation Note (TRAN) as well as another $700 million from its own debt service accounts for general obligation bond debt service, according to GDB’s liquidity report. An external TRAN financing subsequently allowed the commonwealth to repay $400 million to GDB.

On the economic front, The Puerto Rico Labor Department reported this week that 981,000 people were employed in September, 35,000 below the same month a year ago and 7,000 less than August. The September unemployment rate was 14.1 percent, up from 13.5 percent in August. This was however below the 14.6 percent rate in September 2013. There were 161,000 people officially unemployed in September, 12,000 less than a year ago. In August there were 154,000 people actively seeking work and collecting jobless benefits through the Labor Department.

Nearly 43 percent had been unemployed for less than five weeks; 26.7 percent for between five and 14 weeks; and 30.5 percent for at least 15 weeks. More than 51 percent of those listed as unemployed in September said they were laid off involuntarily and did not expect to be called back. In August there were 154,000 people actively seeking work and collecting jobless benefits through the Labor Department. Puerto Rico’s labor participation rate dropped back below 40 percent in September, settling at 39.6 percent, down from 40.9 percent in September 2013 and 40.1 percent in August. Agriculture employment in September dropped 2,000 jobs to 21,000 on a year-over-year basis.


Philadelphia City Council President Darrell Clarke said Monady that the risksof selling Philadelphia Gas Works Co., the  largest municipally owned gas utility in the U.S., outweigh the benefits. “While Council concludes that the terms of this sale proposal are insufficiently favorable for Philadelphians and pose an unacceptable degree of risk to consumers, we readily acknowledge opportunities for the enhancement and possible expansion of PGW’s operations,” Clarke said. The deal, which was struck in March, was then estimated by Mayor Michael Nutter to enable the City to apply at least $424 million into the city’s retirement system, which is 47 percent funded. UIL Holdings, the proposed buyer had promised to fund replacement of much of the system’s aging cast-iron pipe. While the Council debated the issue internally, it never held public hearings on the proposed sale.  The Council President said that a report from its consultant, Concentric Energy Advisors, showed that losing PGW’s annual $18 million payment to the city dropped the value of the proposal and that there were no commitments to keep bill increases “at reasonably affordable levels” after three years of UIL ownership. The council didn’tpropose another solution to shore up the pension system, while cutting services and raising taxes to pay for pensions aren’t “particularly viable options,” according to Mayor Michael Nutter. In the interim, the S&P rating for outstanding PGW revenue bonds was upgraded to A- from BBB- on October 21.

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