Joseph Krist

Publisher

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ISSUE OF THE WEEK

$1,306,200,000

SALES TAX SECURITIZATION CORPORATION

Chicago will sell this issue which is designed to appeal to a very wide range of investors both domestic and international. Nearly $400 million of the issue will come in the form of taxable debt. The deal is structured with many of the features which appeal to taxable investors. As a securitized deal, the structure offers a security and redemption package with which those investors are familiar. They include make whole call provisions. In a number of discussions and presentations, these are the sort of relatively mundane issues which are raised as possible impediments to a fuller expansion of the municipal bond market beyond its traditional buyers.

This type of flexibility will be of enormous importance as the municipal market undertakes to shoulder a greater portion of the nation’s financing burden for infrastructure. With tax policy at the federal level effectively diminishing the attractiveness of municipal bonds to traditional buyers, the ability of the municipal market to innovate and adapt to a changing investment environment will be tested as never before.

The bonds are rated AA- by S&P and AAA by Kroll based on the strength of the lien securing the revenues for the benefit of bondholders. The Act and the City’s home rule powers provided the legal mechanisms by which the City: created the Corporation; assigned and effectively accomplished a “true sale” of the pledged Sales Tax Revenues; and irrevocably directed the State to distribute the pledged revenues directly to an account of the Trustee for these Bonds. Further, the Act provides covenants by the State to refrain from impairing these mechanisms or altering the basis upon which the City’s share of transferred revenues is derived. The Act also provides that Bonds issued by the Corporation are secured by a “statutory lien” on those transferred revenues, providing additional protection to bondholders in the unlikely event of a City bankruptcy.

The issue also takes advantage of the relatively calmer perception of the credit position of the State which has had benefits for the City as well. Whether that perception is well founded – the ship may not be taking on any more water but it’s not as if the water is not still deep – remains to be seen.

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ECONOMIC DATA SENDS MIXED SIGNALS

The recent GDP report indicated that growth is still strong at 3.5% but there are signs of slowdown in the economy. Growth in the second quarter was over 4% but that was before the full implementation of tariffs. Now there are signs that those tariffs are having a negative effect on incomes across the economy, especially in the farm belt.

Based on many reports we have seen, even ardent supporters of the tariff based trade policies acknowledge that they will cause short term pain for the agricultural sector. prices for crops are lower and the Administration’s $12 billion farm bailout is not replacing even half of the income lost to tariffs. Now it appears that the woes of the agricultural sector are impacting the broader economy especially for manufacturers who sell to farmers.

The latest example is Caterpillar. It’s third quarter earnings release indicated that Cat sees tariffs negatively impacting its bottom line. The company specifically cited the rising cost of basic steel and aluminum inputs as dampening demand and expected profits. “Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs,” the company says.

The company said the impact of tariffs for third-quarter material costs was about $40 million. “For the full year of 2018, we expect the impact of recently imposed tariffs will be at the low end of the previously provided range of $100 million to $200 million,” the company said. Cat will raise prices having informed its dealers in the third quarter of an upcoming price action of 1 to 4% worldwide on machines and engines with certain exceptions. The new, higher prices will take effect in January 2019.

Over the past year, a 36% rise in the price of hot rolled steel has impacted heavy machinery producers. We will monitor the impact of the tariffs on state budgets from those states with significant agricultural components to their economies.

MEDICARE PROVIDER SEES WEAKENED CREDIT

Temple University Health System (TUHS) is the largest Medicaid provider in the Commonwealth of Pennsylvania. Located in Philadelphia, the system’s finances have always been precarious reflecting the ebbs and flows of the Philadelphia economy. With the vast array of changes challenging hospital credits, weaker players have less flexibility to deal with them and less financial resilience. TUHS is a $1.8 billion academic health system anchored in northern Philadelphia. The Health System consists of TUH-Main Campus; TUH-Episcopal Campus; TUH-Northeastern Campus; Fox Chase Cancer Center, an NCI designated comprehensive cancer center; and Jeanes Hospital a community-based hospital offering medical, surgical and emergency services. TUHS also has a network of community-based specialty and primary-care physician practices. TUHS is affiliated with the Lewis Katz School of Medicine at TU.

Now, Moody’s Investors Service has revised its outlook on THUS’ Ba1 rated credit from stable to negative.

Moody’s cites ” elevated execution risks as TUHS pursues major changes to its corporate structure and business model during a period of weak margins and growing competition. Despite some recent improvement, expectations of continued deep operating deficits in the absence of one-time favorable events, will continue to foster TUHS’ heavy reliance on Commonwealth supplemental funding. Though Temple University (TU) engaged consultants and has appointed a Chief Restructuring Officer to improve operations, adjust the system’s business model and right size operations, efficiencies will be difficult to realize as industry headwinds grow and consolidation in the Philadelphia market further disadvantage TUHS.”

THUS isn’t going anywhere due to the unique socioeconomic profile of its patient base. moody’s notes that It is also anticipated that TUHS will be challenged to grow revenues due to disproportionately high exposure to governmental payers at nearly 75% of gross revenues. Without significant operating improvement, capital spending will be constrained and/or liquidity will likely decline over time. So the rating is maintained at its current level.

The membership of the obligated group reflects the high level of change which has been a constant feature of the Philadelphia health landscape over the last two to three decades. The obligated group consists of Temple University Hospital, Inc.(TUH), TUHS, Jeanes Hospital, the Fox Chase Entities, Temple Health System Transport Team, Inc. and Temple Physicians, Inc. Each member of the obligated group is jointly and severally liable for all obligations issued under or secured by the Loan and Trust Agreement.

Each member of the obligated group has pledged its respective gross receipts as security for the obligated group’s obligations .

PUERTO RICO ECONOMY SLOWS

The Economic Development Bank for Puerto Rico (EDB) published the Economic Activity Index (EAI) for August, which remained above the threshold of 100, indicating expansion, and remained virtually unchanged when compared with July and August 2017.

The EDB-EAI is made up of four indicators: Total Payroll Employment (Establishment Survey/ Thousands of employees). The establishment survey provides employment, hours, and earnings estimates based on payroll records of business establishments in Puerto Rico. Total Electric Power Generation (Millions of kWh). This indicator includes the electric power generation produced by petroleum, natural gas, coal and renewable energy sources. Cement Sales (Millions of 94-pound bags) and Gas Consumption (Millions of gallons) round out the data set. The bank says that the index “is highly correlated to Puerto Rico’s real GNP [gross national product] in both level and annual growth rates,”

Average nonfarm payroll employment for August 2018 was 859,900 employees, an increase of 0.2% over the month of July 2018 and a reduction of 2% when compared with August 2017. The preliminary estimate for gasoline consumption in August was 75.7 million gallons, or 9.2% less than in July and a 4.9% reduction from August 2017. Power generation was of 1.52 billion kWh in August, or 2.2% less than in July and 10.9% less than in August last year.

SANCTUARY CITIES

With all of the attention on the immigration front focused on family separations and the “caravans” moving toward the border, the ongoing issue of sanctuary cities and the Administration’s effort to thwart their goals can recede into the background. A federal court has ruled against the Trump administration in a lawsuit over funding for the cities of Seattle and Portland, the two plaintiffs named in the lawsuit.

The decision found that part of President Trump’s executive order to end federal grant funding for sanctuary cities is unconstitutional. Seattle filed its lawsuit in March 2017 seeking to clarify Trump’s executive order. The order gave the Justice Department and Department of Homeland Security the power to withhold federal grants to cities that did not comply with federal immigration law.

“Because Section 9(a) of Executive Order 13,768 directs Executive Branch administrative agencies to withhold funding that Congress has not tied to compliance with 8 U.S.C. § 1373, it would be unconstitutional for Executive Branch agencies to withhold appropriated funds from plaintiffs Cities of Seattle and Portland pursuant to Section 9(a) of the Executive Order.”

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