Joseph Krist
Publisher
BATTERIES POWER UP MANUFACTURING
This week, Ford announced that it planned to build a $3.5 billion electric-vehicle battery factory in Michigan, in Marshall, a rural town about 100 miles west of Detroit. The plant is expected to begin operations in 2026 and employ some 2,500 workers after construction. Ford is already is building two battery plants in Kentucky and a third in Tennessee with a South Korean partner. The plant in Michigan will be 100% owned by Ford.
G.M. recently started production at a battery plant in Ohio that it jointly owns with another South Korean partner. It is also building two more plants, in Tennessee and Michigan under co-ownership. Hyundai is working to develop a $5.5 billion EV plant in Bryan County, Georgia, creating 8,100 new jobs. The location of these manufacturing facilities in the U.S. reflects the benefits of the IRA as it favors electric cars and their components manufactured in the U.S.
Ford said its plant would be able to produce enough batteries for 400,000 electric vehicles a year. Ford is the second-largest seller of EVs in the U.S. after Tesla.
DE SANTIS LAND
The effort by Florida Governor Ron DeSantis to gain control over the municipality created to support Disneyworld concluded as we went to press last week. Legislation passed which replaces the Reedy Creek Improvement District with the Central Florida Tourism Oversight District. The important change is that the board of the new district will be appointed by the Governor. Disney no longer has the ability to nominate and/or appoint directors.
The state is going out of its way to state that there should be no impact on the payment of debt service. We are not concerned about the bonds. We reiterate our view that the Governor put bondholders in the middle of an ideological fight.
MBTA
The latest example of a big city transit system facing the lower number of passengers post-pandemic is in Boston. Fare revenues for the MBTA over the first two quarters of the current fiscal year came in at $183.6 million — 22 percent lower than the expected $234.7 million. In the second quarter alone, the MBTA collected $94.3 million in fare revenue — far below the $179.4 million generated during the same period in fiscal year 2020 for a total difference of $85 million.
Non-operating revenues (federal aid) and state sales taxes have grown enough to result in an estimated 2% increase in total revenue above pre-pandemic levels. That is likely not sustainable. So, the farebox matters even if not to the extent that fares matter in New York. “We’re very far away from pre-pandemic levels for fare revenue, and you can see that factor by reviewing the fare recovery ratio at 23% compared to fiscal year ’20 of 42%. This means fare revenue is now supporting less than one quarter of operating expenses today.” – MBTA Chief Financial Officer Mary Ann O’Hara.
WHERE IS EVERYBODY
The U.S. Census Bureau has released annual population change estimates. The data showed that the largest losers in the population race are New York and Illinois. The join West Virginia, Puerto Rico, and Louisiana in the group of states losing the most population (Half of one percent or more decline. The decrease in New York was some 185,000.
States losing population are spread through all regions of the country. California and Oregon saw declines on the West Coast along with Alaska and Hawaii. New Mexico and Kansas were the only states in the center of the U.S. to see declines. In the southeast, Mississippi was the only other state to see declines. The rest of the decline is unsurprisingly in the Northeast. New Jersey, Maryland, Pennsylvania, Ohio, Michigan, Rhode Island, and Massachusetts all saw population drops.
The southeast and the mountain West continue to see significant annual increase of over 1%. Florida saw a 1.9 percent population increase from 2021 to 2022 making it the fastest growing state.
RATINGS DEBATE
The Village of Bolingbrook, IL in the far southwestern suburbs of Chicago recently default on a series of nonrecourse sales tax revenue bonds backed by a narrow and specific area of its tax base. The source of payment was a pledge of the sales tax revenues generated by retailers in the specific project area. In this case, the anchor was a Bass Pro Shops location. Given the restrictions of the pandemic and changes in demand and prices for specific products, a shortfall in economic activity to generate sales taxes is not surprising.
The risk inherent in this deal has been inherent in many similar transactions across the country which financed infrastructure to support economic activity. As is usually the case, the limited offering memorandum for this specific issue of unrated bonds explicitly warns that the bonds are payable solely and only from the sales taxes on a concentrated, small retail area. The offering statement made it clear (as they usually do) that the bonds are not general obligations and offered investors “neither the full faith and credit nor the general taxing power” of the municipality as security.
Now, S&P has taken a rating action against the general obligation credit of Bolingbrook. Even though the Village has asserted its continued willingness to pay its GO dent service, S&P nonetheless lowered the GO rating seven notches from its prior AA status to BBB-. They made it clear that the rating going forward will reflect whether the City pays the debt service on bonds for which it has no legal or assumed moral obligation. An upgrade is offered as a “carrot” to motivate the assumption of responsibility for the debt service.
Fitch took the unusual step of issuing a statement in response to S&P’s action. It differentiated its approach to credit structures like this and indicated that this sort of default would not alter its opinion of general obligation debt from an issuer. Fitch does not rate the Village but Moody’s does and held it’s a rating on GO debt from Bolingbrook at A2.
In the end, the situation serves as yet another reminder of the value of good old-fashioned analysis. The legal security structure was clear, it inherently shifted all of the risk to the investor and that is why the deal was distributed to “sophisticated institutional investors. The complaints of one fund manager that he had “retail mom and pop” clients in funds that held the defaulted bonds is more of a commentary of the fund business than it is on an issuer.
The experience of the high yield market through events like the mortgage meltdown and the default of Puerto Rico highlighted the need for individual fund investors to ask more questions about what their money is in. Whether it’s geographic concentration, industry concentration or duration risk, investors need to ask questions.
PENN STATION – TIMING IS EVERYTHING
The plan to develop 10 new office buildings in and around New York City’s Penn Station is taking a step back. Vornado Realty Trust, the developer has said that the plan could be delayed some 2 to 3 years as the demand for office space continues to be highly uncertain. The specific cause for the delay was cited as the prospect of new construction being “almost impossible” because of tight lending.
In the first week of February, office occupancy was under 49 percent of pre-pandemic levels. Vornado said that it is likely that a three-day workweek in office would be the new norm going forward. That is a problem for a project that is based on office development. There is a residential component designed to generate affordable housing and some retail and hotel space is expected.
The move to delay the project reflects trends seen not just locally but nationally. This week Salesforce announced that it is moving the headquarters operations of its Slack subsidiary to vacant space in the Salesforce headquarters building. That space reflects the very slow return to the office plaguing San Francisco.
MEMPHIS AND THE TVA
The latest twist and turn in the ongoing saga that is the process the Memphis Light, Gas and Water utilities is undertaking for execution of a long-term electric power supply contract occurred this week. An independent analysis of Memphis Light, Gas and Water Division’s bidding on its power supply found the inflationary environment in 2022 presented a terrible time for the city-owned utility to price how much energy would cost if it left TVA and purchased power elsewhere.
The report said it disagreed with MLGW’s assessment of the bidding and did not agree that signing a long-term, perpetual agreement with TVA was the most economical option. There is no requirement that Memphis execute a long-term deal now as it operates under an effective “evergreen” contract with TVA. That allows Memphis to delay a decision on a long-term contract. Memphis remains the largest single customer of TVA.
MORE VOTGLE DELAYS
Georgia Power has announced more delays and cost overruns at its Votgle nuclear plant expansion project. Georgia Power says Unit 3 could now begin commercial operation in May or June, an extension from the most recent deadline of the end of April. The company also now says Unit 4 will begin commercial operation sometime between this November and March 2024. The company previously has promised commercial operation of Unit 4 by the end of 2023 at the latest.
Georgia Power also announced an additional $200 million write off associated with the delays. The total cost of the project to build a third and fourth reactor at Vogtle has no grown to more than $30 billion. Georgia Power owns 45.7% of the project, while Oglethorpe Power Corp. owns 30%, the Municipal Electric Authority of Georgia owns 22.7% and the city of Dalton owns 1.6%. Georgia Power has settled its lawsuit with MEAG, but the suits with Oglethorpe and Dalton are still ongoing. The company warned it could have to pay those two co-owners another $345 million in the dispute. That would add to the $400 million of overrun costs which Georgia Power has assumed from the co-owners.
Just a reminder that the two were approved for construction at Vogtle by the Georgia Public Service Commission in 2009, and the third reactor was supposed to start generating power in 2016. The cost of the third and fourth reactors was originally supposed to be $14 billion.
WESTERN WATER
The January storms which blanketed California with flooding may have led some to believe that the drought had been broken, February has been especially dry so that belief has been weakened. Now more evidence of the impact of the drought across the entire West is here. Water levels in Lake Powell dropped to a new record low, 3,522.16 feet above sea level, just below the previous record set in April 2022. The reservoir is currently about 22% full.
That puts the water level only some 32 feet above minimum power pool levels. At 3,490 feet, a level referred to as “minimum power pool,” the bureau may be unable to generate hydropower for 5 million people across seven states. At 3,370 feet, the reservoir hits “dead pool,” at which point water can no longer pass through the dam by the power of gravity.
The situation is raising the specter of an inability to send enough water downriver to meet existing river compact requirements. That raises the likelihood of a more draconian solution to the current negotiations over allocations of the ever declining Colorado River supplies. In any event, power and water will continue to be in short supply at the Bureau of Reclamation dams on the Colorado. The lack of water is already limiting development. Current trends do not bode well for the situation.
HOSPITALS
The hospital sector continues to live down to our expectations for the sector. We are especially concerned about smaller institutions with limited geographic diversity in the revenue and demand base. This week, we saw a couple of examples of the trend of declining credit.
Moody’s Investors Service has placed Butler Health System’s (PA) Baa2 issuer and revenue bond ratings under review for downgrade. Butler Health System owns and operates a regional health care delivery system located in Butler, Pennsylvania, approximately 40 miles north of Pittsburgh. Butler Health is comprised of a 326 staffed bed hospital in Butler County, 72 ambulatory locations serving an eight county region with primary care, laboratory, imaging, health screening, occupational medicine and urgent care services, and an integrated multi-specialty physician medical group of about 250 providers.
Moody’s believes that Butler will breach its debt service coverage test under its bank debt for December 31, 2022 given the calculation is based on a rolling four quarter basis and the system has had negative operating cash flow in almost every month from January through September 2022. Failure to clear financial covenants could trigger an event of default and immediate acceleration at the discretion of the bank. Bonds under the MTI are subject to cross-default provisions which could result in immediate acceleration of all of the system’s debt.
Moody’s Investors Service has affirmed the A1 assigned to John Muir Health’s (CA) revenue bonds and revised the outlook to negative from stable. The organization has approximately $770 million of debt outstanding. John Muir Health is a two hospital system headquartered in Walnut Creek, CA. Revision of the outlook to negative reflects Moody’s expectation that it will take 12 – 18 months for JMH to restore margins to a level that generates sufficient cash to cover capital spending while maintaining a stable days cash position.
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