Joseph Krist
Publisher
This week we highlight several of the sectors which we think will be of significant interest to municipal bond investors in the coming year. The pandemic may be “over” but its effects linger on. Whether it is the impact of remote work, the pressure on demand in sectors like senior living and hospitals, school enrollments, retail commerce or mass transit – the footprints of the pandemic continue to be trackable. The impact of inflation continues. The budget season will be more difficult as intergovernmental aid for the pandemic is effectively over.
So, with that backdrop, we’re off and running for 2024.
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ALTERNATIVE TRANSIT HITS POTHOLES
Just before Christmas, Electric scooter maker Bird Global filed for bankruptcy protection. The company operates a short-term scooter rental business in more than 350 cities. Its operations in the US are the subject of the filing. The increasing incidences of injuries through operation as well as restrictions on and concerns with the batteries powering scooters and bicycles have reduced demand.
This followed the November announcement that Revel would pull its mopeds out of New York and shut down the moped service in San Francisco after previously ending it in other cities. While the company had faced claims related to injuries and complaints about inadequately trained users. During the pandemic it was a way to avoid public transit especially for remote workers. Revel’s monthly ridership soared to a high of 582,159 rides in July 2020.
Revel’s moped ridership in New York fell to 136,802 rides in July, a 30 percent drop from 194,278 rides in July 2022. The drop coincided with a more popular e bike program through Citi Bikes and e bike ownership has grown significantly. In New York, there were five deaths involving Revel mopeds — four were Revel riders and one was a pedestrian struck by a Revel rider — between 2019 and 2021, according to city records.
KAISER PERMANENTE LAYOFFS JUST A SIGN
In October, employees at Kaiser Permanente facilities struck to achieve a new contract. The primary issue was wages especially in the wake of the pandemic. An agreement was reached but its impact has cut both ways. Now Kaiser has announced administrative layoffs in a move which mimics those being undertaken currently across the country.
The impact is subtle. Individual check-in sites have been replaced by central check-ins which effectively reduce that administrative headcount. The cuts are going on at facilities and systems large and small. The slower than expected recovery of utilization levels on both an inpatient and outpatient utilization continues to pressure operating results.
A glaring example is the projected closing of the last acute care hospital below 23rd Street in Manhattan. Mount Sinai (NY) announced the closing of the facility to take place this July. Various interests are trying to bring pressure on the money-losing facility to stay open. The facility’s increasing reliance on government payors has stressed operations for some time. Plans for a replacement with a heavy emphasis on outpatient care have not come to fruition.
The other way to deal with these pressures is further consolidation. Whether proposed mergers like that between Henry Ford Health and Ascension Health in Michigan will pass muster with an activist Federal Trade Commission is yet to be seen. Concerns about rural facility closings will continue and generate pressure in an election year. The Biden Administration continues to pressure small rural facilities to reduce themselves to clinics to feed distant acute care facilities.
RURAL HOSPITAL RECOVERY
The trend in recent years in the small rural healthcare sector has been towards downsizing and actual closures. The same pressures which drove those decisions have also made it hard to find viable financial recovery solutions. One facility in California however is showing that it is possible for these facilities to maintain themselves and survive.
A private operator had run Watsonville Community Hospital in California for years. The facility saw multiple management teams, declining results, and the apparently the theft of funds under the private management. The trends were so negative that a bankruptcy seemed like the option. In this case, the community seemed better prepared than most to deal with the issues.
In 2021, the Pajaro Valley Health Care District was created in anticipation of a Chapter 11 filing by the hospital. The District currently leases the facility. New management has succeeded in improving operating results. Now, the District hopes to get voter approval on March 5 for a $116 million bond issue. Proceeds would finance the purchase of the hospital and fund capital improvements. The district needs more than two-thirds of its voters to vote yes.
CALIFORNIA – NET METERING; WATER; GOVERNORS BUDGET
California regulators approved new rules to let water agencies recycle wastewater. California has been using recycled wastewater for decades. The prior uses were commercial. The Ontario Reign minor league hockey team has used it to make ice for its rink in Southern California. Soda Springs Ski Resort near Lake Tahoe has used it to make snow. And farmers in the Central Valley, where much of the nation’s vegetables, fruits and nuts are grown, use it to water their crops.
Orange County operates a large water purification system that recycles wastewater and then uses it to refill underground aquifers. The Metropolitan Water District of Southern California, which serves 19 million people, aims to produce up to 150 million gallons (nearly 570 million liters) per day of both direct and indirect recycled water. A project in San Diego is aiming to account for nearly half of the city’s water by 2035.
The new rules require the wastewater be treated for all pathogens and viruses, even if the pathogens and viruses aren’t in the wastewater. That’s different from regular water treatment rules, which only require treatment for known pathogens. In San Jose, the Santa Clara Valley Water District recycles water and uses it irrigating parks and playing fields.
These sorts of efforts may once again get support as the volatile nature of California’s water supplies become apparent again. After a winter of multiple precipitation rivers and record high snowpack, a level of muted optimism about the short-term water outlook arose. Now, just a year later, the headlines are about record low snowpack and probable diminishment of hydropower capacity.
The first snow survey of the season found the snowpack at 30% of average for the date, and 12% of the average for April 1, when snowpack is typically at its deepest. Data from electronic readings from 130 stations across California indicate the snow water content statewide is just 2.5 inches, or 25% of average for the date, compared with 185% at the same time last year.
Rainfall directly on reservoirs has offset a bit of the loss. California’s two largest reservoirs, Lake Shasta and Lake Oroville, are at 69% and 68% capacity, respectively. California’s water year runs from Oct. 1 through Sept. 30, with the majority of the state’s precipitation typically falling in January, February and March.
California’s NEM 3.0 net billing tariff was approved by state regulators at the end of 2022, and came into effect for distributed solar interconnection applications submitted on or after April 15. A survey from the California Solar and Storage Association reported that rooftop solar sales were down between 66% and 83% compared to the same time in 2022. Industry analysts are predicting a 40% decrease in new residential solar in the state.
Efforts to get the new net metering regime overturned in the courts were dismissed at year end.
This week, the Governor will deliver his preliminary budget proposals. The backdrop is the recent Legislative Analyst Office estimate that the budget gap facing the State could be as high as $68 billion.
CARBON CAPTURE – DECISIONS LOOM
The ongoing efforts by Summit Carbon Solutions to construct a multi-state pipeline to take carbon produced at ethanol plants and inject it underground continue. The main battleground is in Iowa where a decision of whether to permit the project or not is pending before the Iowa Utilities Board (IUB). Two other companies have either abandoned their projects or withdrawn approval applications.
While that process unfolds, Summit continues its legal effort to eliminate local control over the regulation of its project. It recently filed suit against a fourth county in Iowa over the enactment of zoning regulations which would make it harder to build pipelines close to population centers. In other litigation by Summit, permanent injunctions against Shelby and Story counties that bar them from enforcing their ordinances were handed down by a federal District Court judge. Those counties recently appealed the judge’s decisions.
A third suit is pending. Summit also filed suit against a fourth county this week to overturn adopted County ordinances.
The Iowa House of Representatives approved a bill last year that would restrict the companies’ ability to use eminent domain to gain land easements until they obtained voluntary easements for 90% of their routes. The Iowa Senate did not consider the bill, but it could during the upcoming legislative session, which starts next week.
COMMERCIAL VALUATIONS
One of the concerns arising from the pandemic is the potential impact of WFH on the office real estate market. A couple of office building transactions in large cities have been sold at significant discounts to purchase price. The fear is that this is the start of a trend. The third-tallest tower in Los Angeles, has sold for $147.8 million — about 45% less than its last purchase price in 2014. One estimate says that 30% of downtown LA office space was available for lease or sublease in the third quarter. In Chicago, a smaller older building sold at an 89% discount to its last purchase price. With vacancies high and rents being discounted, newer stock is much more attractive than so-called Class B buildings.
WIND
The Vineyard Wind project off the island of Nantucket was one of the first approved for the New England coast. It had been anticipated that it would be the first to operate but that was not to be. Vineyard Wind instead is the nation’s second utility-scale offshore wind farm to start generating electricity having been beaten to the punch by the South Fork Wind off the Long Island coast. At present, Vineyard supplies 5 MW from one turbine. Ultimately, the project is designed for 62 turbines.
The short-term outlook for ocean wind power at scale is weak. A contract with New York to sell the state electricity from Empire Wind 2, a proposed 1,260-megawatt offshore wind farm that would be located southeast of Long Island was terminated. The same factors impacting this project are reflected throughout the industry – interest rates, inflation, supply shortages.
These pressures are changing the approach of some utilities to a wind based future. Vineyard is sponsored by Avingrid, a Spanish utility which owns CMP in Maine and NYSEG in New York. Avingrid had hoped to own significant distribution capability to use power from wind projects. Those efforts distracted from basic power supply and created widespread animosity towards Avingrid from both its Maine and New York customers.
That experience generated significant opposition to Avingrid’s acquisition of Public Service of New Mexico. After an intense and drawn out regulatory process, Avingrid threw in the towel on its efforts to acquire PSNM.
SENIOR LIVING
The facilities are in Michigan and Ohio. The management of the facilities is based in Louisiana. The conduit bond issuer is in Arizona. What could possibly go wrong? We are about to find out as the Great Lakes Senior Living Communities LLC is poised to default on its debt. Some $376.2 million of bonds were issued in 2019 and were outstanding as of Dec. 31, 2022, plus $19.5 million in fourth- and fifth-tier parity bonds issued in 2021 to fund additional capital needs on the project. The timing could not have been worse. With nursing homes at the center of the pandemic, it was effectively impossible for the projects to t projections.
The debt was downgraded in 2020 and results continued to be significantly below budget. The trend has continued and debt service reserves had to be tapped to cover debt service. Now, S&P has lowered its ratings to CCC and expects that a debt service payment may be missed. The project is already operating under forbearance agreements and debtholder control over its budget. Given the rise in interest rates, a refinancing would be more difficult given the operating position of the facilities.
The deal is just another example of the pitfalls of conduit financings. Like its counterpart agency in Wisconsin, the Arizona issuer has been involved in several other default situations. We have long considered the participation of conduits in already speculative credits to be problematic. It won’t be the last issue like this to run into problems in 2024.
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