MuniLand

Don’t let Chicago’s crisis go to waste

Moody’s cracked the whip and downgraded the rating of Chicago’s general obligation bonds to Baa1 from A3 this week. It’s only a one-notch downgrade, but no American city should wear the scarlet letter of BBB. Chicago’s Mayor Rahm Emanuel is seemingly frozen in place and having a tough time addressing the city’s fiscal problems. His behavior belies his famous 2009 quip to never let a serious crisis go to waste.

Moody’s in its rating comment about the city’s $8.3 billion general obligation and sales tax debt seems to think Chicago is in pretty rough shape:

The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city’s credit quality will likely weaken. The formidable legal and political barriers to these actions are incorporated in the outlook.

The State of Illinois’s constitutional protection of pension benefits raises the possibility that any attempt to reduce accrued benefits will be litigated by plan members. Ongoing unwillingness to sufficiently increase revenue ensures that annual pension payments will remain a considerable operating stress while continuing to fall well below actuarially sound contributions.

As such, the city’s financial operations will remain structurally imbalanced and the long-term solvency of the city’s pension funds will be exposed to a significant degree of asset return risk.

Puerto Rico’s perfect storm

 

Two critical documents related to Puerto Rico’s upcoming $3.5 billion general obligation bond offering have been released: A draft of the preliminary official statement (POS) for the general obligation bond underwriting and a special liquidity update from the Government Development Bank (GDB).

Both documents contain new financial information and a laundry list of risks for potential bondholders. Citi has published a special focus report on the upcoming GO bond offering. Raise the starting gun; the race will begin soon.

Where did all the bonds go?

Long-term municipal bond issuance is shrinking. I don’t need to recite the numbers, just look at the chart above (from Sifma with data from Thomson Reuters).

Municipal tax-exempt bond issuance has been lower than 2008-levels for five years. I wrote last August:

There are many factors that are weighing on issuance, but the primary one is likely to be the higher rate environment. There are other factors like shrinking federal revenues due to sequestration and rising pension and healthcare costs for state and local governments. There has been more active pressure from rating agencies about future liabilities like pensions and a lot of uncertainty about the direction that Congress will take regarding capping the muni bond tax exemption.

Chris Christie’s pension reform: round two

I have a lot of experience talking to Congressional staffers, regulators, rating agency analysts, municipal bond traders and portfolio managers. When you pump these parties for information there is always a clear line about the type and amount of information they will share.

But I had a bad encounter with the press spokesperson for New Jersey Governor Chris Christie’s treasury department. When I questioned the department’s methodology for their claim that reform in 2011 had reduced over $100 billion in future state pension liabilities, the treasury spokesman told me I need to go to college to understand pension fund projections. I wrote in 2011:

The accomplishment that seemed to be propel Christie to national prominence was his pension reform efforts. He has over-inflated his accomplishments on the issue. For example, he claims he made only one of three payments in seventeen years into the state’s public pension funds. If this were true the funds would have collapsed.

Tax reform is back in muniland

Tax reform is back in muniland headlines. Naomi Jagoda of the Bond Buyer has the details:

House Ways and Means Committee chairman Dave Camp’s draft tax reform plan, released Wednesday, would terminate the tax exemption for private-activity bonds and advanced refunding bonds issued after 2014.

As expected, the plan would create three individual income brackets — 10 percent, 25 percent and 35 percent — and would tax a portion of muni bond interest, which is currently tax-exempt, for those in the highest bracket. The surtax would apply to individuals with incomes of $400,000 or more and couples with $450,000 or more of income as well as all munis they hold, whether new or outstanding.

Puerto Rico Senate approves $3.5 billion general obligation issuance

The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:

1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,

2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,

The SEC’s new municipal adviser rule is not confusing

Governing.com ran a story titled “Why’s the SEC’s New Municipal Advisor Rule So Confusing?” Actually the new rule, although not yet finalized, is not confusing. There are resources for muniland participants to understand how it will be implemented and what responsibilities muni advisors have towards their clients. In fact, I have never seen a better rollout for a new regulatory effort.

Here is a roadmap:

As directed by Congress in the 2010 Dodd Frank legislation, the SEC published the definition of a municipal adviser last September. Over 1,100 municipal advisers have registered with the SEC and MSRB (registrations here including a downloadable list). Reuters detailed what happened last January:

After it was signed in 2010, the Dodd-Frank law ignited a fight over exactly who counts as a municipal adviser. The dispute lasted until the SEC approved a final definition in September, which allowed the MSRB to begin drafting regulations.

Puerto Rico’s bond rally and economic contraction

Reuters and others have reported on the recent rally in Puerto Rico bonds.

The S&P Municipal Bond Puerto Rico Index is up 4.94 percent so far this year, with most of that increase happening in February. That same index fell more than 20 percent in 2013, when net outflows in Puerto Rico-oriented funds totaled $20.2 billion, or 28 percent of $83.4 billion in assets under management, according to Lipper data.

The primary spur for the February rally in Puerto Rico bonds was the investor call held by the Government Development Bank on February 18. The GDB had held its previous investor call on October 15, 2013 and it hadn’t issued any financial information in the  four months between calls. Investors were starved for information aside from the monthly Economic Activity Index data issued by the GDB.

Looking back over my previous writing, another big movement in Puerto Rico bond prices caught my attention. This was the violent 40 percent spread widening of Puerto Rico general obligation bonds that happened between August 28 and September 3 last year:

How much will Detroit bondholders suffer?

 

Detroit’s proposed treatment of general obligation bondholders has turned muniland upside down. Here is what Fitch Ratings says:

Fitch Ratings believes the recent Detroit plan of adjustment filed with the Bankruptcy Court on Friday, Feb. 21, 2013, if confirmed, would set a troubling precedent in the municipal market. The plan not only classifies unlimited tax general obligation (ULTGO) bonds as ‘unsecured,’ but further degrades ULTGO value by giving other similarly classed ‘unsecured’ creditors preferential treatment, including unfunded pension and retiree health care liabilities.

Reactions to Detroit’s plan of adjustment

Detroit’s plan of adjustment was filed on Friday by Emergency Manager Kevyn Orr (Plan of Adjustment Disclosure Statement):

Losers:

Retirees
Unsecured bondholders
Swaps counterparties
Bond insurers

Winners:

Detroit Institute of Art (DIA)
Various foundations contributing to save the DIA
Secured bondholders
Residents of Detroit
The state of Michigan

Here is a 140-character summary:

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