Chicago mulls $10 billion debt sale to fill pension funding hole -- here's why it's a bad idea
Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California's San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.
The Bond Buyer
In unusual move, Fifth + Broadway developer seeks $25M in tax-exempt bonds from MDHA
"This development is so important to Nashville for a number of reasons, including the fact that it's the future home of the National Museum of African American Music, so we wanted to at least consider the developer’s options," said MDHA's Jamie Berry.
But a municipal finance expert said the move may portend problems for the developer.
“It could be that the tax-exempt market is cheaper,” said Matt Fabian, a partner at Massachusetts-based Municipal Market Analytics. "But that may not be the whole story.
“The developer may be struggling," Fabian said. "You have to be concerned that the developer has tried and failed to get financing on their own. Either they can’t get it, or it’s coming in at a very high rate."
The Chicago Tribune
Why MMA says Chicago should avoid selling pension bonds
“In the short-run, the shift of the pension liability to bonded debt may enable the city to realize some budgetary relief,” MMA writes in its weekly outlook. “But in the long-run we suspect that this would—as with most pension obligation-using governments before them—cost taxpayers more money and could weaken the city’s fiscal position despite a ‘savings’ claimed at issuance.”
Borrowing billions to lower Chicago's pension debt? Emanuel's finance team is considering it.
Another bond analyst, Matt Fabian, frowned on the whole idea.
“There is no best practice for pension obligation bonds,” Fabian, a partner at Municipal Market Analytics, said in an email response to Tribune questions. “When you invest borrowed money, you lose twice if the stocks you buy decline in price.
“The ‘hysteria’ about pensions is very effective in marshaling fiscal discipline,” Fabian added. “Would be a shame to lose that.”
The Chicago Tribune
Puerto Rico Power Utility Bonds Soar on Restructuring Deal
(Bloomberg) -- The Puerto Rico electric company’s bonds surged after it struck a preliminary agreement with bondholders to restructure its crippling debts, marking a major advance in the government-owned utility’s efforts to emerge from bankruptcy.
The pact -- reached by the island’s government, the territory’s federal oversight board and a key group of investors -- would slash the debt service bills of the Puerto Rico Electric Power Authority more deeply than an agreement the board rejected a year ago. The board said in a statement Monday that it’s working to finalize the deal for the power company known as Prepa.
The company’s bonds were the most actively traded municipal securities Tuesday, when investors pushed up the price of some of them by nearly 40 percent. Debt due in 2040 jumped to an average of 60.2 cents on the dollar from 43.4 cents Monday, according to data compiled by Bloomberg.
Reducing the utility’s $9 billion of debt may push the utility closer to privatization because investors would be cautious about lending needed money to the company if it continues to be run entirely by a government that steered it into collapse, said Matt Fabian, partner at Municipal Market Analytics. Puerto Rico is seeking to sell some of the utility’s assets or enter into long-term concession agreements with private operators.
“The board likes this deal because it’s going to force the issue of privatizing Prepa,” Fabian said. “Investors will always be more careful in lending a Prepa successor money.”
Crain's Detroit Business
Feds started probing source of $6M used to fund Harvey library expansion mere weeks after 2015 groundbreaking
The deal set the purchase price at $6,733,740 with a 7.1 percent interest rate, also known as the coupon rate. The library district received more than the $6 million face value of its bond because it issued the security at a premium, meaning it got more money up front, but would have to pay a higher interest rate to investors over time. The 7.1 percent coupon was the highest coupon on any comparable municipal security issued in Illinois that year, according to Bloomberg L.P.
“Having such a high coupon would indicate it’s an outlier in a bad way,” said Matt Fabian, a partner at the municipal bond research firm Municipal Market Analytics. “Sometimes (issuers) will use a high coupon to entice buyers, but that usually stops around 5 percent.”
Lisa Washburn, managing director for Municipal Market Analytics, said that while the bond’s peculiarities raise concerns for her as a credit analyst, there could also be legitimate explanations for its unusual structuring — like Harvey’s reputation.
“The name ‘Harvey’ could mean that buyers demand more yield on that,” she said. ”There could be reasons for all of this.”
In addition to its structuring, the bond’s initial trading activity also may have attracted federal investigators’ attention, Fabian said.
One-fourth of Monroe’s revenue in tax fight with DTE Energy
An overdependence on one industry has proven a pitfall for other U.S. municipalities. Detroit collapsed into bankruptcy after decades of seeing its population dwindle as auto-industry jobs disappeared. Atlantic City had to be rescued by New Jersey as some casinos shuttered and others appealed their tax bills. Wayne, New Jersey, could be in trouble now that its third-largest taxpayer, Toys 'R' Us, is out of business.
"A concentrated tax base is a principal credit risk in a small government," said Matt Fabian, managing director and senior analyst at Municipal Market Analytics Inc. "Their reliance on a single industry or company creates potential volatility and that could be hard for a small government to manage."
The Bond Buyer
Public Schools Scramble To Absorb Hurricane Maria Evacuees, Hoping Money Will Follow
“For the most part, it’s a net positive for the states that are receiving Puerto Ricans. It will add to the economic growth where they’re residing,” said Matt Fabian, partner at Municipal Market Analytics. “They’ll buy things and pay rent and taxes, get jobs, which all add to the local economy.”
In addition, many Puerto Ricans have the ability to seamlessly slide into the economy: they already have citizenship and many are bilingual.
The Bond Buyer
Politically driven cancellation of Maine deal may cost the state next time
Municipal Market Analytics partner Matt Fabian said a governor not allowing a previously priced bond transaction to proceed just for closing is “not typical” and that the circumstances behind the cancellation may impact Maine’s future borrowing capabilities.
“If it’s just a mistake, then mistakes happen and there wouldn’t likely be any credit harm,” said Fabian. “But if it’s concerted effort to hurt the deal then bonds will have to come cheaper to make it up to investors.”
Rise in single-rated municipal bonds spurs investor concerns
A trend toward single-rated municipal bonds has accelerated this year, raising concern among investors who were accustomed to two or three rating agency opinions to support their purchasing decisions.
Single-rating transactions represent about a quarter of new sales by par value so far this year, a 17.5% increase from the rate in all of 2017, according to a report this month from independent research firm Municipal Market Analytics.
The Bond Buyer
The Week in Public Finance: For an Increasing Number of Governments, One Credit Rating Is Plenty
For years, governments paid for the extra cost of getting multiple credit ratings when they sold bonds, mainly to appease the investors who bought them. But now, more and more governments are forgoing multiple ratings in favor of just one -- and 2018 is shaping up to be the biggest year yet for the trend.
Through the first five months of this year, 25 percent of bond sales have involved just one credit rating, according to data analyzed by the research firm Municipal Market Analytics. That’s far higher than the 13 percent rate a decade ago and the 20 percent average over the past few years.
Lisa Washburn, a managing partner at Municipal Market Analytics, says she expects the trend to continue, especially since issuances with just one rating don’t appear to be penalized with higher interest rates.
The Bond Buyer
Illinois Proposal to Let Treasurer Buy Unpaid Bills Likened to a 'Shell Game'
CHICAGO -- One analyst says legislation to empower the Illinois state treasurer to provide state funds to buy up overdue bill vouchers could add to future fiscal problems.
"When governments start to think creatively about debt structure and repayment, we get a bit nervous," Lisa Washburn, a managing director at Municipal Market Analytics, wrote in the firm's weekly outlook commentary. "Any short-term fiscal relief from the legislation (if passed) is likely to be outweighed by the longer-term consequences of failing to substantively address the state's financial challenges."
Backers say the legislation will lower the state's interest costs and speed up bill payments to vendors in need of what they are owed.
But another buyside analyst said the vouchers are for a bad investment for the state.
According to Washburn, "the transaction could optically lower the state's headline-producing bill backlog" and "could reduce interest costs," but longer term "it also could be the start of a shell game that saddles the treasurer with less liquid, politically charged investments, defers real progress on addressing the bill-backlog, and could amplify Illinois' fiscal woes if its finances continue to deteriorate
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How the financial crisis changed the muni market
CORONADO, CALIF. – The 2008 financial crisis wrought radical changes in the municipal market, but those changes may not have prepared the market for its next challenge, analysts said Thursday.
The legacy of the calamitous financial meltdown of 10 years ago was the subject of a panel discussion at the National Federation of Municipal Analysts’ annual conference. The wide-ranging conversation touched on the changes in market conditions, the technological advancements in the industry, and the regulatory changes born from the reaction to the crisis. Tom Doe, president of Municipal Market Analytics, said that although the marketplace has access to far…
Cannibalization of Georgia City Means Credit Risks for Other Municipalities
Neither bill apportions Stockbridge's outstanding, unrated debt, which would leave a smaller Stockbridge to pay all of the debt service if Eagle's Landing residents vote to incorporate as a new city.
Diverting half of Stockbridge's tax base without allocating the debt presents a "dangerous risk" for bondholders investing in general obligation bonds issued by Georgia's local governments, Matt Fabian, a partner at Municipal Market Analytics, said in Monday's Weekly Outlook.
"In a more conservatively spread bond market, borrowing for all Georgia local governments would rise sharply," said Fabian.
Stockbridge’s Bond Rating Hinges On Eagle’s Landing Creation
The city of Stockbridge’s bond rating could be negatively affected by the Eagle’s Landing legislation.
The legislation, signed last week by Gov. Nathan Deal, will let voters decide on creating the new city of Eagle’s Landing. Part of its land would come from Stockbridge.
As a result, Stockbridge would also lose millions in tax revenue. It would still be responsible for all its debt, which, according to Moody’s Investment Service, would bring down its bond rating.
Lisa Washburn, with research firm Municipal Market Analytics, says that sets a bad precedent for other cities.
“It introduces a level of risk to a municipal security pledge that was not thought to be there in the past,” Washburn says.
She said it could make it more expensive for cities to borrow money.
“It can be detrimental to bond holders, in which case, they’ll either demand a higher interest rate, so they’ll want to get compensated because there’s a greater risk there,” Washburn says, “or they may not want to take on that risk at all.”
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Puerto Rico Bonds Rally as Rival Creditors Float Settlement
The island’s government and general-obligation bondholders have been allied against Cofina bondholders, who say sales-tax revenue should be used to repay them before it’s spent for other purposes. The commonwealth and the general-obligation owners want U.S. District Court Judge Laura Taylor Swain to throw out a law that transfers the sales taxes to a governmental agency, known as Cofina, whose only responsibility is to use the cash to pay its bondholders.
"Any kind of progress toward resolutions should translate into prices in some way," said Matt Fabian, a partner at Municipal Market Analytics Inc. "It at least gives a theoretical anchor at which bond prices can trade."
A city in Virginia stands behind its unwillingness to repay bonds
Buena Vista’s “selective payment default on its $9.2 million ACA-wrapped lease-revenue bonds is perhaps a worst-in-class example of erosion in issuer willingness to pay bondholders,” municipal analyst Matt Fabian, a partner at Municipal Market Analytics, said in his March 5 Weekly Outlook column.
“Buena Vista’s default can no longer be blamed on weak local budget or economic conditions,” Fabian said. “Rather, the city is currently choosing neither to pay nor negotiate with bondholders because the pledged appropriation security permits this to occur.”
The decision sets the stage for an unnecessary confrontation with lenders, he added.
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California’s Governor Race Has Bond Investors Worried
Should Cox advance, he’d likely face a serious challenge going against Newsom or Villaraigosa in the general election, considering that 45 percent of California’s voters are registered Democrats and only 25 percent are Republicans. The other likely pairing is Newsom versus Villaraigosa, and both have yet to show the same level of fiscal discipline as Brown, said Matt Fabian, a partner with research firm Municipal Market Analytics.
“Investors in California have to assume that credit quality could erode,” he said.
Michigan relinquishes Detroit oversight, allowing city to forge its fiscal path
The end to Michigan's direct oversight of Detroit's finances is a milestone in the city's recovery from bankruptcy, giving it autonomy to manage fiscal fortunes that remain pressured by debt, pension, and economic development challenges.
With the city having met the requirement of posting three balanced budgets, the state's Detroit Financial Review Commission unanimously voted Monday to waive active oversight of the city. Lisa Washburn, an analyst at Municipal Market Analytics, said Detroit has yet to test its resilience.
Muni Bond Markups: Soon No Longer a Secret for Some Trades
The revelation could accelerate a shift toward mutual funds and other fee-based accounts by individual investors who own about $1.6 trillion, or 40 percent, of the outstanding municipal securities, more than any other group. That’s because the fees they charge will look cheap compared with what it costs for individuals to trade on their own.
“Why pay a point to buy bonds when you can pay a few basis points a year to a mutual-fund provider and you get diversification and you don’t have to worry about a singular credit risk that comes with munis,” said Matt Fabian, a managing director at Municipal Market Analytics.
The new regulation from the Municipal Securities Rulemaking Board is the result of a push to inject more transparency into the state and local market, a haven for individuals seeking a safe source of tax-exempt income.