The Bond Buyer
Market expects SEC to narrow its disclosure proposal
PHOENIX - Muni market participants expect the Securities and Exchange Commission to narrow its proposal to add new material event notice disclosures for bank loans and other alternatives to tax-exempt bonds after receiving many critical comments that it was too broad and would be overly burdensome.
The SEC proposed the amendments to its Rule SEC 15c2-12 in March and took public comments on them until mid-May.
Dan Haar: Hartford troubles could have wide impact
The world is watching closely, and it’s watching the Gold Coast of Connecticut just as it watched towns in Michigan after the Motor City’s filing. There was some evidence of more difficulty issuing bonds, analysts say, but not much. One big help in Michigan was a governor able to assure investors there was no contagion, said Matt Fabian of Westport, a partner at Municipal Market Analytics.
This time around, the state can make no such promises, Fabian fears, as state cutbacks hit towns.
But the biggest issue is the one at the core of all economics. “If your capital city files for bankruptcy,” Fabian said, “it doesn’t make you feel good.”
Puerto Rico’s Dilemma After Hurricane María: Rebuild or Pay the Debt?
“The judge gives us the opportunity so that if one has an interest in any of the controversies and wants to be heard, a motion may be filed to that effect, so that you can participate during the hearings. Another way to participate in the hearing, but as a listener, to know what is happening, is that we can do it by phone and you have to sign up. I’m not going to appear, but I’m going to listen. The call costs $70, but you can hear the procedure as if you were in court.”
Attending in person to be heard is even more expensive, since one has to pay $300 to the Court to submit a motion of appearance.
“Individual bondholders are not really represented [in the Title III case]. It is too expensive and it takes too much time for them to get involved and try to influence a solution. It is different for institutional investors who have made bigger bets, like portions of their companies’ assets. The exception is hedge funds, bond insurers and some mutual funds, for whom it makes sense to get involved,” said Matt Fabian, a municipal bond market analyst and a partner at Municipal Market Analytics, in an interview with the CPI.
The Mutual Fund Group and the Ad Hoc Group of General Obligation bonds have conflicts of interest in the Title III case because they have several types of bonds that are in dispute with each other. For example, the Franklin mutual fund, which is part of that mutual fund group, is also in the Ad Hoc Group where it adopts the same legal strategies that characterize the vulture funds that dominate the group.
The Cofina Senior Bondholders Coalition is represented by individual and retired bondholders, but is controlled by vulture funds such as The Baupost Group, one of the biggest of the world, Canyon Partners, GoldenTree Asset Management and Tilden Park Capital Management, which require its clients a minimum of investment that fluctuates between $1 million and $5 million.
Emanuel to end scoop-and-toss borrowing one year early
Earlier this year, Chicago sold $1.16 billion in general obligation bonds, but paid a heavy price for a school financial crisis made worse by Gov. Bruce Rauner’s veto of a bill promising $215 million in pension help for CPS.
The “spread” between Chicago’s interest rate and the interest rate the city would have paid if it had a AAA bond rating ranged from 3.3 percent to 3.5 percent, according to Matt Fabian, a partner at Municipal Market Analytics.
Fabian called it the “worst spread” in recent memory on a city bond deal.
Even more surprising was the fact that the interest rate on Chicago’s general obligation bonds was a “full percentage point” higher than it was a year ago, before the City Council approved Emanuel’s plan to slap a 29.5 percent tax on water and sewer bills to save the largest of four city employee pension funds.
Christie betting that lottery can bail out troubled pensions
New Jersey Gov. Chris Christie is betting that the lottery is the ticket to shoring up one of the state's most vexing money problems: ever-growing obligations to the pensions for public employees.
The idea of linking the lottery to pensions has been around for years, but legislation backed by the Republican governor was introduced this week to make the lottery the property of the pension system for 30 years.
Analysts and advocates say the deal — an arrangement that would be unique to New Jersey — probably won't hurt, but there's not a consensus on how much it might help.
"Where it does provide tremendous relief is optically," said Lisa Washburn, managing director at Municipal Market Analytics, a firm that analyzes government bonds. "The numbers look better on a whole lot of levels. Whether or not they're truly better is questionable."
USA News Guide
What is Trump's plan for Puerto Rico?
In a tweet this spring, he described funding for Puerto Rico as a "bailout" proposed by Democrats.
On Thursday, he laid responsibility at the door of lawmakers, tweeting that it is for "Congress to decide what to spend".
Matt Fabian, a partner at the research firm Municipal Market Analytics, said he doesn't see appetite for major rebuilding funds for Puerto Rico, especially given constraints created by the Republican push for major tax cuts.
"This is not the Congress that is going to provide large unfettered aid for Puerto Rico," he said.
6 reasоns whу Puertо Ricо slid intо financial crisis
Puerto Rico’s bankruptcу case has been moving at a snail’s pace compared to tуpical bankruptcies. That leaves open the possibilitу for federal action.
“Theу were in the verу earlу stages and it hasn’t even been established уet if Puerto Rico is eligible to enter the bankruptcу process or if the bankruptcу process created bу Congress is legal,” Municipal Market Analуtics partner Matt Fabian said.
Aid to help ease Puerto Rico’s financial crisis could take the form of a change to the federal law governing the case to make it easier for the island to restructure, Fabian said. It could also take the form of federal guarantees on loans to the island, he said.
But “уou alwaуs have to bet on inaction being the most likelу scenario bу Congress,” he said.
Trump Wants Puerto Rico Debt Handled in Court, Not Wiped Out
Trump’s statement may have been a needed jolt for Puerto Rico’s bond market, said Matt Fabian, a partner with Municipal Market Analytics.
“Prices should have gone lower after the hurricane than they did, so the president’s statement, however ill-tempered, maybe did help,” Fabian said. “Maybe this is helping the market wake up to the fact that prospects are diminished post-storm.”
The island began a bankruptcy-like proceeding in May to restructure its debt, the largest such process in this history of the U.S. municipal bond market. The island’s debt service payments have been on hold while it restructures its obligations in court.
'Wipe out' Puerto Rico debt? Hedge funds, residents at risk of losses
Bond insurance may cover some of those losses, but anyone who bet their portfolio on Puerto Rico should be nervous. Bond insurers Ambac, MBIA and Assured are on the hook for $9.6 billion, $8.4 billion and $8.2 billion in Puerto Rico debt, respectively, according to Credit Sights.
Puerto Rico’s debt is simply “unpayable” in full, Municipal Market Analytics partner Matt Fabian said.
"While there are regular mainland investors, there are also a lot of Puerto Ricans that are swept up in this too," Fabian said.
With Little Cash, How Will Puerto Rico and the Virgin Islands Rebuild?
Puerto Rico and the U.S. Virgin Islands also aren't likely to have the ability to raise taxes or fees -- even temporarily -- to quicken the pace of the rebuilding. Meanwhile, some of their largest income sources are likely decimated. For Puerto Rico, those sources are utilities and income taxes; for the Virgin Islands, it's tourism-related taxes.
"They're out of money," says Matt Fabian, who is a principal at Municipal Market Analytics. "They didn't have much money to begin with. Any collections they did have will be going to zero."
So, Crow says, the territories "are stuck with this process where you do one or a few projects at a time because it's your money upfront. It does slow it down an awful lot."
What GOP Tax Outline Means for Advisors and Clients
New Jersey taxpayers could be especially affected by this change because it, like other high-tax states, would have difficulty raising taxes, and the Garden State is currently operating with a budget that is “deeply out of whack,” says Matt Fabian, partner of Municipal Market Analytics. (Moody’s has downgraded New Jersey’s debt 11 times since Chris Christie became governor in 2010).
Puerto Rico Bondholders Face Bigger Loss as Hurricane Toll Grows
One key issue is how general-obligation bonds -- which the island’s constitution says must be repaid before other expenses -- will fare against sales-tax debt that’s repaid by a dedicated share of that revenue.
“No one has any idea of what’s a good value, especially now,” said Matt Fabian, a partner with Municipal Market Analytics.
The commonwealth’s fiscal plan, which the federal board approved in March, allocated $8 billion for debt payments between now and 2026, far short of the $33.4 billion that’s owed.
The island is now even more desperate for cash. This week, Puerto Rico’s federal overseers approved using as much as $1 billion of this year’s budget to cover emergency spending. And with the storm paralyzing the economy, its revenue will likely be further squeezed in the months ahead.
The Bond Buyer
Storm Claims Could Top $100 Billion; for Puerto Rico, 'Maria Changes Everything'
Puerto Rico’s population, already down more than 10 percent in the last decade, faces deeper declines. Islanders left destitute by Maria and the weak local factory, tourist and farm economy will likely evacuate to Florida, New York and other states, sending the Puerto Rico census count below 3 million for the first time since the 1970s, writes Matt Fabian, who has followed the island’s previous fiscal and government challenges as publisher of the Municipal Market Analytics daily letter.
“Maria changes everything,” Fabian writes. “The combination of tens of thousands of destroyed homes, 94-degree heat and humidity, persistent rain, an exploding post-flood mosquito population, no water or air-conditioning, closed hospitals, wrecked bridges, mud slides” will kill more than the dozen dead from the storm if U.S. and local authorities don’t quickly reopen hospitals and get water, phones and power back.
Humanitarian crisis takes precedence over Puerto Rico fiscal recovery, debt restructuring
WASHINGTON – Hurricane Maria's and Irma's devastation of Puerto Rico and the resulting humanitarian crisis will wreak havoc with the Commonwealth's fiscal recovery and attempts to restructure its massive debt load, experts said this week.
Given the breadth of the destruction in Puerto Rico, bondholders should expect their interests to be put onto “a deep back burner,’’ said Matt Fabian of Municipal Market Analytics.
“I think that speaking too pointedly about bondholder concerns at this point is probably in poor taste,’’ he added.
Assured Guaranty : As Hartford Mulls Bankruptcy, Bond Insurer Offers to Help Postpone Payments -- Update
It is common for states to issue bonds as a way of refunding old debt, both to take advantage of low interest rates and to put off debt payments. But Hartford, which is rated deep in junk status and has hired restructuring advisers, would likely be unable to complete such a deal without insurance.
"Once you hire restructuring advisers, investors steer clear," said Matt Fabian, partner at Municipal Market Analytics, a municipal bond research firm.
Of cities rated by Moody's Investors Service, only Stockton, Calif., which emerged from bankruptcy protection two years ago, and Atlantic City, N.J., which narrowly avoided it, have lower ratings than Hartford.
Is Connecticut to Blame for Hartford's Looming Bankruptcy?
State lawmakers are acutely aware of Hartford's status, but they're more interested in talking about a financial takeover than the kind of economic partnership Bronin wants, which includes giving Hartford more revenue-raising power, continued support in local economic development projects and fully funding the city's PILOT. Bronin says that any solution to Hartford's structural budget issues would also have to involve renegotiated union contracts and negotiations with bondholders -- two things that are typically difficult to achieve outside of bankruptcy.
Bronin's statements have triggered warning sirens in the municipal bond market. Last week, Municipal Market Analytics added Hartford to its database of defaulted and impaired municipal bonds, calling Bronin a "mayor seemingly devoted to bankruptcy." The city also received "super downgrades" into deep junk status from Moody's Investors Service and S&P Global Ratings because of its impending cash flow crisis.
"In other words," wrote Municipal Market Analytics Analyst Matt Fabian, "it's on."
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So. What's a credit downgrade to your state government mean, anyway?
That lower credit rating generally means that the market of prospective buyers for Pennsylvania's bonds will now be a little softer, requiring the bonds themselves to carry slightly higher interest rates to be sold.
Matt Fabian, a public-sector bonds expert for Municipal Market Analytics Inc., said Wednesday as a practical matter that will cost the state and its taxpayers an added $2.5 million to $5 million in annual debt service for every $1 billion borrowed.
Gov. Tom Wolf's office said Wednesday that the state had planned $2.25 billion in new borrowing in this fiscal year.
It's not clear if the credit downgrade would affect all of that borrowing, however, as part of it is the anticipated advance on the state's future tobacco settlement payments.
Pennsylvania on edge of missing payments in budget stalemate
In any case, the public finance community takes a dim view of deficit financing, whether it is called "borrowing" or not.
"It's not as uncommon as we'd like," said Matt Fabian, of Municipal Market Analytics in Concord, Massachusetts. "But it's usually only distressed governments, Puerto Rico and states trying to balance their budgets with gimmicks (that) do this."
Muni bonds' tax break looks safe for now
We're not pricing in any scenario for the tax exemption to go away or be limited," said Matt Fabian, a partner at Municipal Market Analytics. "The statements out of the administration have been favorable."
Bankrupt Puerto Rico Set for Fresh Hit From Hurricane Irma
“After 10 years of a recession, the island is not at all prepared for a disaster like Irma,” Fabian said. “And Irma may permanently shrink Puerto Rico and push the island even deeper into poverty.”