MuniLand

Detroit’s embedded time bomb

There are a lot of moving parts in the Detroit story as it goes through the largest municipal bankruptcy in U.S. history. The strangest part of the story has been the interest rate swaps that were layered onto the city’s 2005 and 2006 pension obligation bonds.

The purpose of the swaps was to lower the city’s borrowing costs by using interest-rate arbitrage. Theoretically, if financial conditions had remained “normal,” the swaps would have been beneficial for the city. Instead, Detroit’s credit rating was downgraded and the financial crisis upended the delicate conditions that underpinned the swaps.

On July 18th, when Detroit’s Emergency Manager Kevyn Orr filed for municipal bankruptcy, he also filed a proposed settlement with the swaps counterparties. Orr’s proposal would pay the counterparties – UBS and Bank of America Merrill Lynch – between 75 and 82 cents on the dollar to terminate the swaps and move them out of the picture. This action insulates UBS and Bank of America from the hatchet job that Orr plans to give to other creditors in the course of the bankruptcy process. Those unprotected creditors include bond insurer Syncora, which insured the interest-rate swaps and the underlying pension obligation bonds.

In the end it comes down to who has legal control of the city’s $15 million per month of casino tax revenues. About $4 million per month has been used since 2009 to pay UBS and Bank of America on their swaps deals. Federal bankruptcy judge Steven Rhodes ruled that the city has control of the excess $11 million. Reuters reports:

Syncora had tried to block Detroit from accessing an estimated $11 million in monthly tax revenue from the city’s three casinos, claiming it had a lien on the money, which had been used as collateral since 2009 to secure the city’s interest-rate swap agreements. Detroit’s emergency manager, Kevyn Orr, and one of his top consultants said in sworn depositions that the casino revenue is key to city’s survival.

Should China build a muni market?

Reuters reported on the possibility that China’s government will take the next step in building a municipal bond market. It seems that local governments in China have accumulated a lot of debt and it needs to moved off their books. From Reuters:

China may decide next month to expand a trial program allowing local governments to sell bonds, in response to concerns that their huge borrowings are largely hidden from view and pose a risk to the stability of the nation’s financial system.

How big is this debt?

Local government debt totals up to $4 trillion or 42 percent of gross domestic product, according to some unofficial estimates, but much of it has been raised via financing vehicles that do not disclose details on the size and health of loans.

The debate over Rhode Island’s pensions

Former SEC attorney Ted Siedle (currently formerly Putnam Investments’ compliance director), has issued a new investigative report that blasts Rhode Island Treasurer Gina Raimondo about her lack of transparency over the state’s pension investments. The report was commissioned by the Rhode Island chapter of the American Federation of State, County and Municipal Employees (AFSCME).

Raimondo says that Siedle’s allegations are entirely driven by politics, but four Rhode Island public interest groups have nevertheless encouraged the treasurer to release the pension information. From Siedle’s report (page 5):

Recently, four open-government groups – Common Cause Rhode Island, the state’s chapter of the American Civil Liberties Union, the Rhode Island Press Association and the League of Women Voters of Rhode Island released a letter to the Treasurer voicing their concerns regarding the Treasurer’s strategy of withholding hedge fund records. These groups believe that since the financial reports are paid for with public funds and detail how the state is investing the public’s money, they should be made public in their entirety; further they found ‘troubling’ the Treasurer’s decision to allow the hedge funds to decide what information to release.

Decriminalize the marijuana business

 

Slowly, the personal use of marijuana is becoming legal across America. The Council on State Governments reported:

Marijuana remains illegal under federal law, but last year, residents in both Colorado and Washington voted to make recreational use of the drug legal, essentially ignoring the 1970 law. Although these states have legalized a federally identified illegal drug, they are not the first to do so.

Starting with California in 1996, 21 states have made the use of medical marijuana for ailing patients legal. Of those 21, 16 states have decriminalized those found to be holding small amounts marijuana, six of which were added in 2013.

Detroit’s forsaken leaders

Being the emergency manager for bankrupt Detroit is no picnic. Coordinating the largest municipal bankruptcy in American history while simultaneously trying to restructure city operations, even with a posse of high-priced consultants, is a huge job. The current emergency manager, Kevyn Orr, wants to complete the bankruptcy and his term in 18 months. This is a recipe for inappropriate appointments, rich living and major mistakes.

Now the mayor of Detroit, Dave Bing, has weighed in with scathing comments about Orr’s performance. From The Detroit News:

Mayor Dave Bing reiterated Wednesday his growing frustration with how consultants and Emergency Manager Kevyn Orr have taken over City Hall and sidelined his team.

Puerto Rico unveils a plan

 

Puerto Rico’s top public officials held a two-hour conference call on Tuesday that was open to all investors. That may have been a first for the Commonwealth. Previous calls and conferences had been relatively restrictive in who was admitted. The yields on Puerto Rico’s debt have skyrocketed and the Commonwealth’s access into the public debt markets has been basically shut down. The open conference call was a good change of approach.

Bond investors want to hear the facts about Puerto Rico’s fiscal condition and how they will be repaid on their investments. The call made some progress toward that goal.

The economic and fiscal situation in Puerto Rico is still extremely dire. The economy is mired in a six-year malaise that would be worse if the Puerto Rico government had not issued debt to cover government deficits. As the island has moved away from issuing debt to plug holes in the budget, it has simultaneously reduced the amount of fiscal stimulus that has been injected into the economy. The economy shrank 5.4 percent year over year in August. It will likely shrink more as the Commonwealth reduces its deficit financing.

Financing more solar energy

Most discussion of solar energy in the U.S. is focused on the large, centralized photovoltaic installations that are going up in the sunny parts of the country. But there is another rapidly growing area in site-based residential or commercial solar installations. Traditionally these small installations have been hard to finance, but there are some powerful new mechanisms that may accelerate growth.

One new approach follows the mortgage origination process where bundles of small financings are gathered and then pooled into securitizations. Standard & Poor’s Director of Utilities, Trevor D’Olier-Lees, projects that the cost of residential installations on a million homes would be about $16 billion. 45 million suitable homes could use $750 billion to equip them with solar power. D’Olier-Lees says that banks are not the best providers of these long-term financing assets, but the loans would make ideal securitization vehicles. Some companies are starting to work on these structures. From Green Tech Media:

No rooftop solar-asset backed securities have yet been issued. But ‘multiple residential and commercial solar developers such as Sunrun, SunPower and SolarCity are likely working on issuing asset-backed securities over the next three to nine months,’ Credit Suisse reported in its February 25 Solar Snippet. Other third-party leasing companies like Clean Power Finance and Vivint, the report added, are also showing strong enough growth to participate.

The cost-benefit of college sports

A Moody’s report published on Thursday looks at the risk that expensive athletics programs pose to American universities. The majority of these programs lose money, but it has been arguable that athletic success typically enhances a university’s image. It’s a spending gamble, then, for schools to employ to attract students. Moody’s writes:

Universities pursue high-profile sports programs for the opportunity to increase brand recognition, student demand, and donor support. However, that upside comes with financial and reputational risks that require careful oversight. As the commercial success of big-time college sports has grown, so too have the potential benefits and risks to universities.

Here are the risks:

» Budgetary Strain: 90 percent of athletic programs are not self-sustaining, requiring growing subsidies, which divert funding away from other university operations.

The SEC’s role in building better markets

The SEC has just launched a new part of its website dedicated to analyzing the structure of equity markets. Here is how the SEC describes it:

The Securities and Exchange Commission created this website to promote better understanding of our equity markets and equity market structure through the use of data and analytics.

Review current staff market structure research, use interactive data visualization tools to explore a variety of advanced market metrics produced from the Commission’s Market Information Data and Analytics System (MIDAS), download dozens of data sets to perform your own analyses, and further the dialogue through public feedback.

Dodd-Frank appears in muniland

Already the long reach of Dodd-Frank into muniland is having an effect. Al.com tells the story (emphasis mine):

The Wall Street investment bank leading Jefferson County’s pitch to exit Chapter 9 municipal bankruptcy could be violating securities law if it serves as an underwriter in the deal, a lawsuit brought by Jefferson County sewer ratepayers says.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment bank may not act as both a financial advisor to a municipal issuer and as an underwriter when that debt goes to market. Serving in both roles could create a conflict of interest for the bank, and the practice was outlawed in 2011.

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