Farewell to MuniLand

Readers, this is my last column. I wanted to thank my readers and the team at Reuters for a truly great ride. I’ve been covering municipal securities, market structure, pensions and bankruptcy for over three years. There have been a lot of big changes in America as the country seeks to recover from the global financial crisis. The crisis affected state and local governments by slowing revenues and investment in infrastructure. I don’t see this changing in the near term.

Our country is still wealthy according to global standards. We have the resources to make an equitable economy and protect the most vulnerable. But reform is necessary through all levels of government. As citizens and taxpayers, we all should demand this.

I’ve written about seven municipal bankruptcies. The biggest and most complex is beginning now in Puerto Rico. In March 2012 I first wrote that the Puerto Rico government would have solvency issues. Now this has come to pass. I wrote 76 columns about Puerto Rico, 74 of which were negative. The last two I wrote were somewhat positive because the government is beginning to take the hard steps of rationalizing its debt structure, reform spending and reduce the level of government employment. Puerto Rico is beginning a vital transformation process.

Puerto Rico has over $85 billion of debt outstanding. I’ve launched a research service for bondholders, Puerto Rico Clearinghouse, with attorney John Mudd to track the legal and legislative battles that will take place to restructure this debt.

Thanks to everyone for this great experience. The finances and borrowings of our government are critical matters. It’s been an honor to have this space to comment on them.

Best of muniland on Twitter

Here are the best tweets with the #muniland hashtag for July 21, 2014:

Government cash flows:

Muni calendar:


Market conditions:

New austerity and confidence in Puerto Rico


Five months after Puerto Rico officials talked publicly to market participants, they held an investor call on Thursday with over 2,000 people. The call was captured by Storify. Puerto Rico’s previous call in February rallied market enthusiasm for a $3.5 billion general obligation bond offering that was priced on March 8. The March deal, the largest speculative grade bond deal ever done in muniland, replenished the coffers of the fiscally debilitated island.

Now the government is hoarding that cash and taking “swift and decisive” actions to clean up its internal capital structure. It is paying back internal loans between the central government, the Government Development Bank (GDB) and public corporations. Officials said that they had eliminated virtually all interest rate swap contracts at the GDB. They outlined new revenue sources and detailed expense reductions for general government operations.

The government reiterated that it intends to “ring fence” the debts of several public corporations while protecting their constitutionally-guaranteed general obligation debt and sales tax-backed Cofina bonds. An investor group that owns about $3 billion in Puerto Rico general obligation and Cofina debt announced that it supports the government and stands ready to assist Puerto Rico with financing.

Best of muniland on Twitter

Here are the best tweets with the #muniland hashtag for July 18, 2014:

Less and less state and local money for infrastructure:

State support for bankrupt cities:


Puerto Rico:

Estimating muniland bond recoveries

A lot of people in muniland have asked me how much the bonds of Puerto Rico’s electric monopoly Prepa will recover if they are restructured. I’ve thrown out a few numbers, but I don’t have an analytical tool to do a proper cash flow analysis. Chris Foster, managing director of New Oak, has published an open source model (download middle right of page – XLSM file) that allows one to adjust various inputs like fuel prices and electric rates to estimate the level of debt service that Prepa can support.

Puerto Rico

New Oak put most of Prepa’s historical financial data into the spreadsheet and creates scenarios that can be adjusted to estimate how much bondholders will have to be cut.

Foster explained that his firm, a subadvisor to funds and financial institutions, was hearing a lot of uninformed theories about Prepa. He thought modeling the potential outcomes would be helpful. His firm and their clients do not own Prepa bonds. Foster said that it was time for everyone involved “to look at the math.”

Best of muniland on Twitter

Here are the best tweets with the #muniland hashtag for July 17, 2014:

Uneven job growth across the country:

The funding that states receive from the federal government:


ETFs: the new future for muniland trading?

Why it is so expensive to trade muni bonds?

Why is it so expensive to trade municipal bonds? We finally have some answers from a long awaited MSRB report on trading in the opaque muni bond market. The study was conducted by former SEC Director of Enforcement Erik Sirri. It maps where bonds go before they settle into retail customer accounts. Every time the bonds change hands, the price is marked higher. In the dark muni market, nobody sees this happening.

Sirri’s study analyzed 43 million trades between 2003 and 2010. Over 73 percent of the muni trades were for less than $50,000.

muni trades

A trade begins when a dealer buys bonds from a retail customer, and then either sells those to another retail customer or trades them to a dealer (who then sells them to a customer). This “inter-dealer” trading can happen 2-10 times before a bond lands in a customer account. The report refers to these as “chains” of trades. You can see how the bonds are marked up between the chains here:

Best of muniland on Twitter

Here are the best tweets with the #muniland hashtag for July 16, 2014:

Electricity — the nation’s most vital infrastructure:

It’s all about the cash flow:


Best of muniland on Twitter

Here are the best tweets with the #muniland hashtag for July 15, 2014:

Moody’s remains negative on higher education: 


Contrasting CalPERS news:

The false equivalence of credit ratings

In a new report, Janney Capital Markets analyst Tom Kozlik calls out Standard & Poor’s for credit ratings on local governments that he says are too liberal. Kozlik claims that S&P is inflating ratings. I think his analysis is solid, but inconclusive given the size of his claim. Kozlik opens the door to more critical analysis of the comparability of ratings.

The Bond Buyer wrote:

Since S&P updated its criteria, it is more common for issuers to have ratings from S&P that are multiple notches higher than their ratings from Moody’s. ‘This leads us to believe that ratings shopping will continue, perhaps at an even faster pace than before,’ Kozlik wrote.

Ratings are opinions. There is nothing in federal law or the SEC rules that says one rater must be as conservative as another. Credit rating firms are free to analyze bond issuers however they want, as long as they disclose the methodology. Kozlik seems to believe, like most of the market, that raters should assign alphanumeric ratings in a standardized way to signal risk on an equal scale.

  • # Editors & Key Contributors