Joseph Krist

Publisher

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This week we focus on unemployment as it drives most everything we comment on. There is the direct funding need generated by record initial claims, the uncertainty about the duration of social distancing practices, the potential offloading of laid off employee medical costs to Medicaid, and the costs of highly diminished transportation and its immediate impact on revenues. The lack of coherent federal strategy in response to the pressures generated by the pandemic coupled with continued wishful thinking by the White House has simply added to the difficulty in assessing the pandemics true impacts and potential long term credit effects. Anyone who tries to tell you otherwise is only fooling themselves.

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PANDEMICS, UNEMPLOYMENT, AND BUDGETS

Three weeks ago, initial unemployment claims were at about 200,000. In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982. The previous week’s level was revised up by 1,000 from 281,000 to 282,000. The 4-week moving average was 998,250, an increase of 765,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 232,250 to 232,500.

The State of New York is not only the epicenter for the virus but is also the first state to have to budget  under the terms of the new economic reality in the US. It is grappling with the fact that we are undoubtedly in a nationwide recession as well as the State’s role as the center of the financial industry. It is feared that the economic consequences of the pandemic will create a $15 billion plus hole in the State’s revenue base. With the declines in the stock market, the capital gains states of NY, NJ, CT. MA, IL, CA will see disproportionate impacts.

We already see requests from the State of California and the City of New York to identify significant potential expense reductions in the face of both an anticipated revenue decline as well as delays in revenue receipt as the result of the delay in the federal tax payment date. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. We would not be surprised to see a higher volume of cash flow borrowings.

The reality is that state and local budget makers are flying blind as there is no real visibility as to a potential time frame for the renewal of “normal” economic activity. We would anticipate lower general obligation bond ratings to decline essentially across the board. Some states are taking significant steps to marshal resources. NJ State Treasurer Elizabeth Maher announced that she is placing $920 million of appropriations into reserves. 

The Senate stimulus bill would offset some of the impacts on credits especially in the transportation sector. The bill would provide $25 billion to transit agencies, the figure they had been seeking. The money could be used to pay to put personnel on administrative leave as agencies cut service, as well as to buy protective equipment and cover other costs. New York’s Metropolitan Transportation Authority is expected to get almost $4 billion. 

Airports would see a further $10 billion in grants on the condition that they keep 90 percent of their staff employees until the end of the year. It is not clear on whether these monies would benefit contractor employees who make up a significant segment of labor at airport terminal commercial outlets.

We do not see any provisions for toll road revenue losses. This is a concern as roads are virtually empty. Credits backed by high occupancy and demand management lanes will continue to be impacted. One high profile high yield bond is being directly affected. Virgin Trains USA, the parent company of the Brightline express train, suspended all train service in South Florida and laid off 250 employees amid the corona virus concerns. 

The Senate stimulus also provides $117 billion for hospitals and veterans’ health care; $11 billion for vaccines, therapeutics, diagnostics, and other preparedness needs; $4.3 billion for the Centers for Disease Control; $16 billion for the Strategic National Stockpile; and $45 billion for FEMA disaster relief fund, among other things.  More than 80 percent of the total funding provided in the corona virus emergency supplemental appropriations division of the package will go directly to state and local governments. Health care systems would receive $130 billion, including $127 billion for a Public Health and Social Services Emergency Fund.  

NO CENSUS, NO FEELING

One of the things that we would normally be anticipating is the US census for 2020. As our industry and market have become so much more data driven, the importance of the availability of good data whether it be for trading, for analysis, or government has continued to grow. The development of good data regarding the economic, demographic, educational , and other aspects of American’s lives are central to much of the work we all do.

Among all of the issues arising from the corona virus pandemic, interruptions to the process of collecting data from residents for the 2020 Census pale beside things like ventilators and shelter orders. Nonetheless, the hurdle that various actions taken to control the pandemic across multiple states  can create for the timely and complete execution of the Census is substantial. While many can complete

their forms on line, a significant portion of the population does not have or use internet access. Some will fill out and mail a form but up to a quarter of the population may need to be contacted in person.

The US has never failed to execute a timely Census but the possibility of a delay must be considered. If it is delayed, that would raise all sorts of issues with the data. A delay in the data could also impact the state redistricting process. This has practical and political considerations for states and localities especially as they involve issues of federal funding for many projects covering many sectors.

PUERTO RICO

The financial Oversight Board is looking to the courts to postpone proceedings on existing proposals to restructure its defaulted debt. “In light of Puerto Rico’s current reality, the oversight board believes that the government and the oversight board’s sole focus should be on getting Puerto Rico through this unfortunate crisis. The board will present a motion in court to adjourn consideration of the proposed plan of adjustment’s disclosure hearing until further notice.”

There are practical considerations which support such a move. The economic impact of the corona virus pandemic will hit the Commonwealth as hard as anywhere given its weakened economic and fiscal conditions to begin with. As will be the case with the states, Puerto Rico will see significant revenue losses. These will likely be enough to force a reevaluation of many of the economic and revenue assumptions supporting the restructuring plan.

Meanwhile, the US District Court for the First Circuit ruled against holders of debt issued to fund pensions in their request to have the assets of the pension fund taken from the general government and given to bondholders. The Puerto Rico government as part of its restructuring largely abolished the pension system. It then, ordered that the assets be transferred over to the general government funds with the general fund assuming its obligation to pay pensions.

The bondholders’ primary argument on appeal was that the federal court didn’t apply standard commercial bankruptcy principles. The justices said the federal judge could consider that this was a governmental bankruptcy and different interests were involved.  The Court reasoned that “The bankruptcy of a public entity … is very different from that of a private person or concern”. A commercial bankruptcy is designed to “balance the rights of creditors and debtors,” whereas governmental bankruptcies are intended to allow governments “the opportunity to continue operations while adjusting or refinancing their creditor obligations.”

We see it as positive that the Court ruled that the nature of municipal versus corporate bankruptcies is different. The role of investors who traffic in distressed situations in the municipal market has been evolving leading to a debate over the role of distressed institutional investors. I believe that they have a role and often provide a needed source of liquidity for holders without the ability to ride out bankruptcies. At the same time their efforts to jam the round peg of a governmental entity into the square hole of corporate bankruptcy practices often bring unnecessary delay to the process of restructuring a municipal entity.

The bondholders still have a separate case pending in the U.S. Court of Federal Claims in which they are arguing that the asset transfer amounted to a “taking” in violation of the Fifth Amendment. The First Circuit suggested that the plaintiffs “avoid a proliferation of actions seeking essentially the same remedy. Each such proceeding potentially drains assets which could be put to other uses.” We agree.

RATING AGENCIES AGREE WITH US

Fitch placed the ratings of five large U.S. public transit agencies on rating watch negative. They are the Metropolitan Transportation Authority in New York, the San Francisco Bay Area Rapid Transit District, the Washington Metropolitan Area Transit Authority, the Metropolitan Atlanta Rapid Transit Authority, and Colorado’s Regional Transportation District. S&P has lowered its outlook on the Metropolitan Atlanta Rapid Transit Authority’s (MARTA) sales tax revenue bonds to negative from stable. It also lowered its long-term rating and underlying rating to ‘A-‘ from ‘A’ on the Metropolitan Transportation Authority (MTA, or the MTA), N.Y.’s transportation revenue bonds (TRBs) outstanding.

Moody’s revised its outlook  to negative on the Aa3 and A2 ratings of the New York Convention Center Development Center’s (NYCCDC) Senior Lien and Subordinate Lien Revenue Bonds including the Aa3 rating on SONYMA bonds that are subordinated to the Senior Lien Revenue Bonds and the A2 rating on SONYMA bonds that are included in the Subordinated Lien Revenue Bonds. The bonds is secured by a $1.50 per-night unit fee on occupied hotel rooms in New York City; a revenue account minimum balance requirement of 80% of MADS; a debt service reserve funded at maximum annual debt service ($43.4 million for the senior lien and $24.5 million for the subordinate lien); and (iv) a credit support agreement with SONYMA that establishes a dedicated account that may be used to pay up to one-third of debt service each year, after tapping the corporation’s other reserves.

S&P Global Ratings placed Queens Ballpark Co. LLC (Citi Field) and Yankee Stadium LLC — the respective homes of the Mets and Yankees — and Louisville Arena Authority LLC on credit watch with negative implications. S&P rates both New York ballpark bonds BBB. “Stadiums and arenas are already facing canceled events and suspended sports seasons due to the corona virus outbreak,” S&P said. “As a result, cash flows in the related project financings are under pressure.” S&P also revised its outlook on toll roads as well as the airport and parking facilities sectors to negative. Moody’s Investors Service revised its sector outlook for toll roads to negative from stable.

Fitch has downgraded Suffolk County, NY to ‘BBB+’ from ‘A-‘. “Current economic conditions, triggered by the corona virus pandemic, are expected to place significant additional pressure on the county’s revenues and cash position in the near term.” Fitch noted that the county’s financial resilience is limited with no general fund reserves to address fiscal pressures that will arise from the current economic slowdown. The majority of the county’s budgeted operating revenues for 2020, including the general fund and police district fund, come from sales and use tax collections (approximately 47%) and property taxes (approximately 22%).

Fitch highlighted the fact that it does not expect the county to come close to budgeted sales tax assumptions due to the recent declines in oil and gas prices, the temporary closure of the major shopping malls, restaurants and the casino, and other economic pressures associated with the corona virus pandemic. Budget balancing is likely to require drastic spending cuts or increased borrowing.

Port credits began to feel the pressure. Moody’s revised its outlook to negative on port credits in Port Canaveral and Miami-Dade due to unprecedented Corona virus (COVID-19) restrictions globally that led to the halt of cruise operations at PortMiami and other cruise ports in the US for a 30-day period since March 13, 2020.

CA LIFORNIA WILDFIRE AGREEMENT

Pacific Gas & Electric reached an agreement with Gov. Gavin Newsom. It pledged billions of dollars to help wildfire victims, improve safety and make other changes. Half of the company’s $13.5 billion payment to wildfire victims will be in the form of PG&E stock under a previously reached agreement. 

Now, PG&E has agreed to a plea bargain in state court to settle pending criminal charges against the company. The plea agreement requires PG&E to accepted a maximum penalty of $3.5 million. In exchange, “no other or additional sentence will be imposed on the utility in the criminal action in connection with the 2018 Camp Fire.” The company will also pay the district attorney’s office $500,000 to cover the cost of its investigation. The plea  must be approved by a state court, which is scheduled to consider it on April 24, and the bankruptcy court.

The agreement should allow the utility to exit bankruptcy by June 30, a state-mandated deadline for it to take part in the fund designed to help utilities pay claims from future wildfires. PG&E must receive approval of its plan by state regulators and the bankruptcy judge by June 30 and have its financing in place by Sept. 30. Failure to do so will set off the sale of the company.

The agreements will keep PG&E as an investor owned entity after it was threatened with an effective takeover by a state created entity. It will not necessarily be able to maintain itself as a sound entity even after this second bankruptcy is concluded. It will be a heavily leveraged entity as it finances capital needs and will likely face a constricted ratemaking environment.

HOSPITALS AND INSURANCE

California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont and Washington run their own health insurance exchanges under the Affordable Care Act. These states have opened up enrollment under the Affordable Care Act to allow laid-off workers to get subsidized health insurance. Under the Affordable Care Act, people who lose insurance coverage when they lose their job are already allowed to buy their own insurance.  The newly announced changes will anyone without comprehensive insurance could simply sign up for a health plan, without having to prove such special conditions. 

The potential for large surges in demand through emergency departments especially by those without health insurance created huge risks for hospitals who could see their uninsured charity caseloads skyrocket without knowing how those costs would be covered. The Kaiser Family Foundation estimates that 17 million people already uninsured are eligible for marketplace coverage. More than a quarter of those people were eligible for a bronze plan that would cost them nothing in premiums after federal subsidies were applied (they would still have a high deductible). 

The question remains what the 32 states which operate through the federal marketplace will be able to do. They cannot expand their programs without federal approval. Whether that approval will come while the Administration is fighting to have the ACA declared unconstitutional is unclear. 36 states expanded their Medicaid programs under the Affordable Care Act, and in those states anyone now earning less than 138% of the federal poverty level — about $17,000 for a single person and $35,500 for a family of four, annually — can qualify for coverage right away. 

There has been some effort to support the states from the federal government. The Centers for Medicare & Medicaid Services (CMS) approved an additional 11 state Medicaid waiver requests under Section 1135 of the Social Security Act (Act), bringing the total number of approved Section 1135 waivers for states to 13. The waivers are designed to facilitate relief from administrative requirements, such as prior authorization and provider enrollment requirements, suspending certain nursing home pre-admission reviews, and facilitating reimbursement to providers for care delivered in alternative settings due to facility evacuations.  This will facilitate funding for the states during this crucial period.

The expansion of coverage would be positive for hospitals in that it would reduce charity care burdens and provide more certainty about how they would be reimbursed. The need for increased coverage is highlighted by the plight of rural hospitals. While many of the financially distressed hospitals in this cohort have been smaller, the pressure on the rural hospital sector is impacting larger rural facilities.

Two 200+ bed facilities saw their ratings downgraded . Southeast Hospital, d/b/a SoutheastHEALTH is a not-for-profit 501(c)(3) health system located in Missouri. The system operates a flagship hospital of 245 licensed beds in Cape Girardeau, a rural community hospital in Dexter, and numerous outpatient clinics. It saw its Moody’s rating lowered to Ba1 from Baa3, affecting approximately $127 million of rated debt. The outlook is revised to negative from stable. Moody’s also downgraded Hutchinson Regional Medical Center, Inc. (HRMC) in Kansas to Ba1 from Baa3, affecting approximately $35 million of rated debt. Both hospitals had underlying credit problems but now are facing increased pressure as the result of the pandemic.

For hospitals whose financial position was marginal going into the pandemic, there will be further ratings pressures. These are just two of the latest examples.

BORDER RESTRICTIONS AND LOCAL CREDITS

On the US Mexican border, several credits will be impacted by the closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until 20 April closure of the US-Mexico border to nonessential travel to slow the spread of the corona virus until  April.20. The reduced toll revenue is also negative for US-Mexico border cities which rely on transfers from their international bridge funds to support general funds. Lower bridge revenue flowing to border cities’ general funds increases the credit-negative effects of reduced sales tax revenue.

Take Laredo, TX where up to 50% of bridge toll revenue is transferred to the general fund. The Laredo International Toll Bridge System consists of four bridges at the intersection of major rail lines and highways. Bridge transfers provided 17% ($34 million) of general fund revenue in fiscal 2018, which ended 30 September 2018, while sales taxes accounted for 16%.  The impact on retail sales in border cities will be replicated at the many other communities which serve as ports of entry. The free flow of goods and people across the border has supported the emergence of commerce based economies with facilities such as warehouses becoming significant sources of property value growth, taxes, and jobs.

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.