Joseph Krist

Publisher

Publisher’s Note: The MuniCreditNews is taking a couple of weeks off for repairs to the publisher. We’ll be back in October.

________________________________________________________________

$475,000,000

Municipal Electric Authority Of Georgia

Plant Vogtle Units 3&4 Project M Bonds, Series 2019A

Moody’s: “A2” stable outlook
S&P: “A” negative outlook
Fitch: “BBB+” negative outlook

Right up front, we take the view that Fitch is right on this one. We completely understand the value that is put on the general obligation of the participants. But we see it as inconsistent that the market is so concerned  about the sanctity of special revenue bonds in a post Puerto Rico era but is wiling to hang it’s hat on the legals to support this credit.

The Votgle expansion is an economic sinkhole. Nuclear power right now is not viewed by the general public as green in terms of climate change. It is not even economic relative to its competitors. That may change but in the meantime the sunk costs of the expansion and increasing competitive forces pressuring large central utilities like MEAG will continue to weigh negatively on credits.

The reality is that MEAG management with support from politically conservative state officials were willing to bet their utilities credit that they could make nuclear power work. The issue isn’t whether nuclear is the most cost efficient (it’s not), whether its green (emission free is not the same as green), or whether it’s the best choice versus renewables or the dreaded “self-generation”. The issue is that nuclear power does not have a political constituency regardless of its technological merits.

Five pages of risk factors is a hint that this should be a credit that one should be compensated for owning. And this is where the value of the general obligation and the rating that is based on that  comes into play. If this is a revenue bond, than it should trade through its equivalent GO security. If it’s a GO than it should trade behind a revenue bond. That, however, is not what the ratings reflect.

NYC REAL ESTATE

New York is viewed as being at some sort of historic apex in its existence with a rising population and seemingly unstoppable growth in real estate values. It’s impossible to get around Manhattan without navigating a street or side walk narrowed or blocked by residential construction. It would seem to be the best of times.

A new survey has cast some light on the subject which just might alter that image.  A new analysis by the listing website StreetEasy estimates that of 16,200 condo units across 682 new buildings completed in New York City since 2013, one in four remain unsold. That’s roughly 4,100 apartments. Manhattan had the most unsold condos by far: Over 2,400 of the unsold units, about 60 percent, were in the borough, primarily in large luxury buildings.

This data comes at a time when the Manhattan retail vacancy rate has been a continuing concern. The two phenomena are not necessarily linked although efforts by developers to “manage ” their inventory make it difficult to know how much of the vacancies are due to soft demand or owners simply holding tight to their price demands.

This is all going on at a time when the City’s overall economy is still doing well.  There is some cause for concern that employment in the financial sector will soften in the fourth quarter. This will likely further hamper the recovery of the real estate market as these cuts will impact a significant target group of real estate buyers. it reflects the still significant contribution to the City economy made by the financial industry.

The data also shows how the current shape of the New York real estate market drives the issue of affordability. The study showed a number of buildings that have decent sales percentages but that also have high proportions of those units on the rental market. This makes it more likely that these owners are investors rather than buyers with long term interests in the neighborhoods and local economies which they would normally support.

Factors driving the data include the City’s “mansion tax” (up from a flat 1% on million-dollar sales up to 3.9% for sales above $25 million)on those units and the loss of the SALT deduction. The current atmosphere around immigration also impacts the desirability of the market to foreign investors who play a large role in the City’s residential property market.  

The impact from a downturn in  the real estate market directly on the City’s real estate tax base is fortunately tempered by the use of averages over time to determine taxable value. This reduces volatility of the tax base through both ups and downs. The impact of lower incomes and higher end employment would be more rapidly felt.

GM STRIKE

The last time there was a nationwide strike against one of the major US automakers was in 2007. The financial crisis hadn’t fully unfolded and GM was still a solvent entity. But that was as they say a long time ago in a galaxy far away. The industry stands at the center of the issue of transportation and technological change and faces significant choices about its direction. Now that uncertainty has spread into the realm of labor management.

That is the light in which we view the UAW announcement of a nationwide job action against GM. That would impact 46,000 GM autoworkers at 55 facilities in the United States.  In reality, the resolution of an agreement will be establishing a template for managing the impact of technological change on current jobs across the industry. A strike, if extended will be costly in terms of lost income and reduced economic activity. A UAW worker will get only $250 a week in strike wages. The union had $721 million in its strike fund in 2018 and temporarily increased dues in March this year to boost it to $850 million.

The strike is of interest because of the policy implications of what the workers ask for and achieve and how that stacks up against policy proposals from the Presidential campaign. Take health care. Research by the Ann Arbor-based Center for Automotive Research shows that an average UAW worker pays about 3% of his or her health care costs compared with 28% paid by the average U.S. worker. “Unallocated assembly plants” refers to GM’s decision announced last fall that it would indefinitely idle four of its U.S. plants. 

The resolutions reached over these issues are more than a local or state credit issue. They have real significance that will influence a variety of political actions and reactions in light of the “threat” of job losses to technology whether it be through lower overall vehicle production (one potential outcome) or shifts in production based on the adoption of electric versus internal combustion vehicles. It’s about much more than whether local sales tax bond coverages are lowering.

CYBERSECURITY GOES TO SCHOOL

The first days of class should be the most exciting of the school year as new teachers, students, and subjects get introduced to each other. In the case on one Arizona school district, events were something more than exciting.

A ransomware attack on the Flagstaff, AZ school district led officials to close school for a couple of days while they addressed issues associated with the attack. the district ultimately chose to close schools out of an abundance of caution. It wanted to verify the integrity of systems related to the district ultimately chose to close schools out of an abundance of caution. What it did not do was pay the ransom. The district manages its data and information technology on a distributed basis between itself and various third parties including Northern Arizona University   Coconino County and private vendors.

It is not clear how much but the District did have cyber security insurance. This will cover a portion of the remediation. The District is also allowed to use two of its budgeted five snow days to account for the two days the schools were closed. District management says the total financial cost will not be known for at least another month.

So hope fully there is something to learn from this school experience. We learned that the housing of data on a less concentrated basis may be safer than relying on one server or source. We learned that you can get cyber insurance. And we learned that a little financial flexibility (snow days in September) can go a long way as well. We also know that information like this does not necessarily compromise cyber security in and of itself. So why can’t investors get more of this? This incident could go a long way towards developing a disclosure template for municipal credits to follow.

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.