Muni Credit News Week of December 11, 2017

Joseph Krist

Publisher

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ISSUE OF THE WEEK

Trinity Health is one of the largest not-for-profit healthcare systems in the U.S. and represents the May 2013 merger of Trinity Health and Catholic Health East. The system operates over 90 hospitals in 22 states across the U.S. and is headquartered in Livonia, Michigan; the number of states will decline to 21 following the planned divestiture of its New Jersey hospitals. All debt of the legacy organizations are secured on parity through Master Trust Indenture dated October 3, 2013. Trinity Health may not withdraw from the Obligated Group.

The Credit Group consists of Members of the Obligated Group and the Designated Affiliates. The Designated Affiliates include the majority of the hospitals except for the New York facilities and Mercy Chicago. The Obligated Group pledges to cause the Designated Affiliates to pay, loan or otherwise transfer to the Obligated Group such moneys as are necessary to pay amounts due on the bonds. Pledge of revenue derived from the operation of all facilities of the majority of the Designated Affiliates, including rights to receivable accounts and health care insurance receivables.

Like many large hospital systems in the Affordable Care Act environment, Trinity has used a strategy of expansion and consolidation to amass a diverse stream of revenues from a multiplicity of jurisdictions and reimbursement environments. This has allowed Trinity to achieve higher margins and absorb the costs of integration as well as strategic divestitures from less favorable markets like New Jersey.

Now Trinity is taking advantage of what is apparently the last available window to restructure some of its significant municipal bond debt on a tax exempt basis. The system will issue some $1 billion of bonds through four state agencies with a significant portion of the proceeds being applied to refinancing. The issue serves as one of the prime examples of issuance driven at this time by impending tax reform legislation rather than the absolute best case savings which could drive such a transaction.

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TAX REFORM DRIVING SOME FAMILIAR NAMES TO MARKET FOR ONE LAST SHOT

The provisions in tax reform which would limit advance refundings are driving all manner of historically familiar names to the market for one last ride into the refunding sunset.  The Successor Agency to the Redevelopment Agency of the City of San Jose (CA) will refund some $1.6 billion of its debt. Those who have ridden through the various ups and downs of this credit from its growth in the 90’s and early oughts right through the crisis years after the financial crisis will see their patience rewarded. A non investment grade senior living project in Massachusetts (New Bridge on the Charles) will refund nearly $240 million of debt. Kentucky’s Louisville Arena Project  checks off two boxes as it refunds an arena deal.

More standard names in terms of investment grade credit quality pursuing refundings include transportation offerings like the PA Turnpike Commission, the Tampa Hillsborough Highway Authority, and the Central Florida Expressway Authority. The electric utility sector will see the Sacramento Municipal Utility District, and the Omaha Public Power District all bring refunding offerings to market.

In addition to refundings, a number of sectors to be restricted under proposed tax reform will rush to market. They include several senior living projects, privatized student housing in Chicago, multifamily housing, and private university and charter school financings. It is a measure of the impact on financing options that such a diverse range of issuers is rushing to meet the end of year deadline.

INFORMATION IS STILL A PROBLEM IN PUERTO RICO

Timely information on the Commonwealth’s revenue collections has always been a problem for investors and guarantors. Even the pressure to restructure however, has not seemed to have altered this unfortunate characteristic. Ambac Assurance Corp., which insures some $1.35 billion in Puerto Rico Sales Tax Financing Corp. (Cofina) bonds, has asked the U.S. District Court to allow it to examine the collection of the sales and use tax (IVU buy its Spanish acronym) under Bankruptcy Rule 2004 so it can evaluate restructuring proposals for the in-court bankruptcy process underway.

In a recent filing Ambac said “Without the information sought, Ambac cannot participate meaningfully in the process of advancing these Title III cases towards successful plans of adjustment,” the insurer said. “Ambac accordingly seeks an order from this Court compelling the [Financial] Oversight Board, AAFAF [Spanish acronym for Fiscal Agency and Financial Advisory Authority], the Commonwealth, and Cofina to produce this information.” The Federal Rule of Bankruptcy Procedure 2004 states that the court may order the examination of any entity.

A Federal Magistrate has scheduled a hearing for Dec. 14 to determine whether the Ad Hoc Committee of General Obligation Bondholders and bond insurers are allowed a discovery process into the state of the government’s finances. Their request had previously been denied without explanation, but after new urgent motions were filed, the judge chose to schedule a hearing. In addition to the Ad Hoc Group, insurers Ambac Assurance Corp., Assured Guaranty Corp., Assured Guaranty Municipal Corp., the Mutual Fund Group and the National Public Finance Guarantee Corp. are requesting discovery.

WHILE ECONOMIC ACTIVITY REMAINS IN DECLINE

The Fiscal Agency and Financial Advisory Authority  and the Government Development Bank (GDB) published its Economic Activity Index (EIA) for August, which reflects a 1.9 % drop when compared with the same month last year. It highlights the hurdles Puerto Rico faced before it was ravaged by Hurricane Maria. The latest numbers have August ending with an EIA of 121, while for the same month last year, the indicator was at 123.4. The last time the index saw an uptick compared with the prior year was in December 2013.

The four main indicators that make up the EAI are the total non-farm payroll employment, cement sales, gasoline consumption and electric power generation. Total non-farm payroll employment for August averaged 868,000, a 1.2% decrease compared with August 2016. The preliminary estimate of gasoline consumption for August was 81.3 million gallons, for an annual decrease of 2.9%. Electric power generation for August averaged 1,862.7 million kilowatt-hours (kWh), an annual reduction of 1.1%. The indicator includes petroleum, natural gas, coal and renewable energy sources supplied by utility-scale solar photovoltaic generating capacity, two wind farms and landfill gases sources.

The only positive number was for cement sales which for August totaled 1.02 million bags, an annual increase of 0.5%.

DAN GILBERT EXTENDS HIS INFLUENCE IN DETROIT REVIVAL

He has become the single largest commercial property owner in downtown Detroit and along with the Illitch family has been among the most prominent drivers of downtown Detroit’s recovery. Now Mr. Gilbert is participating in a land swap deal which is seen as facilitating development while helping Wayne County realize its long held goal of a new criminal justice complex. The county and Gilbert are moving closer to an agreement on building a new criminal justice center in exchange for the unfinished jail site on Gratiot near Interstate 375 in the city’s Greektown district.

The announcement came about 10 days after Detroit’s City Council approved a land swap deal with Wayne County that will enable Rock Ventures to build a $520 million criminal justice complex on city-owned land near I-75 and Warren in exchange for the existing jail site. The county announced it had reached an agreement with Rock Ventures on the land swap in October. The land swap still requires approval from the 15-member Wayne County Commission and the Wayne County Land Bank Board, which owns the property for the new proposed jail site. In addition, the county needs to get approval from Internal Revenue Service to use bonds for the jail at another site.

Gilbert submitted to Wayne County a plan to build a criminal justice complex for the county with a 2,280-bed jail that will cost at least $520 million at the other site. Gilbert and Detroit Pistons owner Tom Gores have announced their desire to build a 25,000-seat Major League Soccer stadium on the jail site as well as retail and residential units, a hotel, covered parking and plazas.

ARE OPIODS THE NEXT TOBACCO FOR THE STATES ?

Purdue Pharma LP has acknowledged in writing that the maker of the opioid painkiller Oxycontin is in “negotiations’’ with state attorneys general over lawsuits accusing the company of creating a public-health crisis with its mishandling of the drug.  A letter was written to Ohio’s Attorney General in response to his decision to withdraw from a multistate probe of the drug maker by 41 of his fellow attorneys general. It is the first time an opioid maker has disclosed negotiations with state attorneys general who are seeking a big tobacco-style multibillion-dollar payout to cover the costs of drug epidemics in their states.

The Ohio Attorney General has executed an agreement that he says preserves his state’s legal claims while the investigation and negotiations were conducted. A report by the Council of Economic Advisers, or CEA says that The epidemic cost the American economy $504 billion in 2015, which was the equivalent of 2.8 percent of gross domestic product that year.

The Purdue letter to the Ohio AG says “As you know, we have been working on an expedited basis with more than 30 state attorneys general as part of a bipartisan multistate process to resolve serious issues.’’ It states further that “It is uncontroversial that the multistate process is the best and fastest way for states to get resources to address this crisis.’’  Opioid manufacturers are facing an estimated 60 lawsuits filed so far in federal courts across the country from cities and counties. Purdue Pharma LP is proposing a global settlement in an attempt to end state investigations and lawsuits over the U.S. opioid epidemic.

Purdue’s lawyers raised the prospect with several southern-state attorneys general who haven’t sued the company. Not every state participated in the Master Settlement Agreement with the tobacco industry which produced a $245 billion payout and led to the massive tobacco securitization sector in the municipal bond market.  Opioid makers argue in court filings that states and local governments are barred from suing because opioids are regulated by the FDA. The FDA regulates efficacy but does rule on the overall marketing strategies of manufacturers.

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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