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Monday's S&P Call Notes on Puerto Rico

Posted by Jack Duval

Aug 6, 2014 2:44:00 PM

Accelerant’s coverage of the situation in Puerto Rico continues.  Accelerant Analyst Jay Dulski participated in the S&P webcast on Tuesday, August 4th. Below are his call notes.

A full replay of the call may be found on S&P’s Puerto Rico web page, and current ratings of the Puerto Rico entities may be found on the Puerto Rico Government Development Bank’s (“GDB”) website.

SP_Logo

Summary of Recent Downgrades

  • “BB” rating affirmed for General Obligations (“GOs”) with a negative outlook.
  • PREPA downgraded from “B-” to “CCC” on July 31 with a negative outlook.  Reasons included Act 71 passage and nonpayment of electric bills by government entities.

Statements: David Hitchock, Senior Director, U.S. Public Finance, S&P

  • There remain continued financing and liquidity pressures on the Commonwealth. These include budget implementation risks, as well as looming problems regarding the Puerto Rico Teachers’ Retirement System (“PRTRS”) and political and union opposition to reforms.
  • GOs downgraded on July 11 from “BB” from “BB+” due to Act 71 passage.
  • COFINAs (sales tax bonds) and Highway Authority (“PRHTA”) also downgrade on July 11.
  • On 7/31, “BB” rating affirmed for GOs following the release and review of new fiscal year budgets.
  • Costs for the Commonwealth appear to be manageable for the short run, but the negative rating reflects “no meaningful growth but stabilization of the situation."
  • S&P “does not see upside rating potential at this time.”

Statements: Judith Waite, Director, U.S. Public Finance, S&P

  • The high cost of oil has been very difficult for PREPA, as they are not yet complete in their conversion from old, inefficient oil plants to newer, more efficient natural gas plants.
  • After its own downgrade the GDB cannot provide liquidity anymore, which PREPA needs to purchase oil.
  • A $146 million credit line was issued by Citibank and a $525 million line was issued by a consortia led by Scotiabank. Negotiations are currently ongoing as PREPA is approaching an August 14, 2014 deadline. 

Statement: Horacio Aldrete-Sanchez, Managing Director and Lead Analytical Manager, U.S. Public Finance, S&P

  • Bond insurers are significantly capitalized.
  • Assured: $1.5 billion of capital above current levels.
  • Notional: $400-$500 million above requirements.

 Additional Comments and Q&A

  • PREPA has lots of costs to convert its plants to LNG and continue grid modernization. However, cost to complete the LNG conversion is less than $300 million, which is relatively small.
  • Regarding exactly how much liquidity PREPA needs, no exact number was given. They have always used bank lines (first from the GDB, and now from Citi and the Scotiabank consortia) to get their oil, and then paid down the lines as revenues come in.
  • High cost of oil and inflexibility on rates has hurt liquidity.
  • Act 71 represented a shift in attitude and was a very negative signal on the willingness of the government to pay its creditors.
  • Remember that the GO issue earlier this year is under NY law and COFINA should be a separate legal entity.
  • The question was asked how PREPA would buy fuel if they cannot secure new credit lines.  The answer was “no one knows.”  They usually buy ahead 30-45 days and have so far been successful negotiating extensions.
  • There are current proposals to amend federal bankruptcy law to include Puerto Rican municipalities to seek protection, but that would not affect the current situation.
  • There is a proposed bill which would move some of the revenues around, specifically take gas taxes away from the PRHTA and move them to other public corporations.  Act 71 allows for full restructuring of public corporation debt, which does make such actions possible.
  • There was discussion of discounts that PREPA has given other public corporations, specifically the Puerto Rico Aqueduct and Sewer Authority (“PRASA”).  The comments were that the discounts weren’t significant now, but the situation remains “delicate.”
  • PREPA’s quality of their asset pool is actually increasing as they modernize/replace their plants and continue the conversion to LNG.
  • Regarding the LNG terminal, Accelerate out of Texas is the builder, and is not PREPA funded.\
  • Remember that the GDB was downgraded to “BB-“ in July. Its largest borrower is the PRHTA, so a restructuring under Act 71 would be painful for the GDB.
  • Jay Dulski, Analyst, Accelerant: “Since municipalities are exempt under Act 71, can you comment on their health and whether the Commonwealth would seek to assist them?” The response was that the Commonwealth has “limited means” due to its financial position, and also that S&P has not examined the health of the individual Puerto Rican municipalities.
  • Acts 30 and 31 in 2013 rearranged who got the petroleum taxes, and those risks are already accounted for in the ratings.
  • Regarding the conversion of PREPA’s grid to natural gas, there have been delays.  The timeline now reads 2018/2019.
  • The GDB and the government were late on a large electric bill payment to PREPA, compounding their problems.
  • Overall government receivables are otherwise low, but the nonpayment in question was $103 million.
  • What’s PREPA’s break even electricity price? Debt service is only $0.065 of their $0.26 base residential rate.  $0.06 is their base rate for operations, which has been constant since 1989. The remaining $0.135 (and largest share) is oil cost.

Get Updates on the Puerto Rico Municipal Bond Crisis

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Topics: Puerto Rico Municipal Bond Crisis, municipal bond expert, UBS closed-end funds

Puerto Rico Municipal Bond Crisis Wiki Launched

Posted by Jack Duval

Jul 31, 2014 6:32:00 PM

Accelerant is pleased to annouce the launch of our new Puerto Rico Municipal Bond Crisis Wiki, which can be found here.

Puerto-Rico-Flag

 


For more detailed information about the Puerto Rico municipal bond crisis, please see our white paper, The Puerto Rico Municipal Bond Crisis:  What Took You So Long?

For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

Get Updates on the Puerto Rico Municipal Bond Crisis

 

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Municipal Bond Crisis: Downgrades, Padilla Ready to Sue

Posted by Jack Duval

Jul 15, 2014 10:43:00 AM

This post continues our coverage of the Puerto Rico municipal bond crisis.

Governor_Padilla

 

S&P Downgrades

Standard & Poor's cut Puerto Rico's general obligation rating to "BB" from "BB+" on Friday. In their announcement, Standard & Poor's cited many of the issues we've been writing about, including the passage of a new law allowing certain corporations to restructure their debt (see our Act 71 coverage).  

Two other Puerto Rico bonds were also notched lower by the rating agency, including the Puerto Rico Sales Tax Financing Corporporation (COFINA) first lien sales tax bonds from "AA-" to "BBB," and the second lien COFINA sales tax rating from "A+" to "BBB-."[i] 

Governor Padilla Readies Lawsuits against Ratings Agencies

Carribean Business just reported that Puerto Rico Governor Padilla is preparing lawsuits against all the major ratings agencies.

“They put me in a position to choose between them and the people,” García Padilla said. “Well, this is a government of the people and I am going to defend Puerto Ricans against Moody’s, S&P and Fitch.”

As we have reported here, Puerto Rico municipal bond investors should be prepared for extreme haircuts in the coming restructuring.


For more detailed information about the Puerto Rico municipal bond crisis, please see our white paper, The Puerto Rico Municipal Bond Crisis:  What Took You So Long?

For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

Get Updates on the Puerto Rico Municipal Bond Crisis

 

Notes:

[i] "S&P downgrades Puerto Rico GO rating to "BB' from 'BB+'." Reuters. http://www.reuters.com/article/2014/07/11/usapuertorico-ratings-idUSL4N0PM4ES20140711

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Municipal Bond Crisis, Next Up: Muni Funds and Monolines

Posted by Jack Duval

Jul 9, 2014 8:52:00 PM

This post continues our coverage of the Puerto Rico municipal bond crisis.

As discussed here, things are starting to move quickly in Puerto Rico, however, now the ripple effect is beginning to be felt.  In particular, municipal bond funds and monoline insurers have been particularly hard hit by the recent news coming out of Puerto Rico.

Franklin Funds

Municipal bond funds with oversized allocations to Puerto Rico have been particularly hard hit. On Tuesday, the $330.4 million Franklin Double Tax-Free Income Fund (FPRTX) fell to its lowest level since its inception in 1985. The fund has about 69 percent of its assets in Puerto Rico debt, so no real surprise there. Franklin Funds, along with Oppenheimer Rochester Funds, is gearing up for a legal challenge directed at new government legislation we reported on last week that paves the way for Puerto Rico to restructure some of its troubled debt[i].

Monoline Insurers

MBIA has also been hard hit from its Puerto Rico exposure. The bond insurer, which came out the other side of the financial crisis in 2008, saw its stock trade lower for the 13th consecutive day on Tuesday (the longest streak of declines since going public in 1987). Bloomberg reports that the insurer has $4.8 billion of net exposure to Puerto Rico guarantees, and its competitor Assured, with $5.3 billion of exposure, also finds itself in troubled waters.[ii] 

Amid these ripple effects in private industry from the Puerto Rico situation, U.S. lawmakers hinted on Tuesday they would be wiiling to provide "technical assistance" to Puerto Rico just as it would "any state or territory of the United States." As soon as next week, the U.S. House should vote on a spending bill that would begin to encourage the Treasury Department to look into the Puerto Rico matter more closely [iii].  

Chart 1: 5-Year Chart of Franklin Double Tax-Free Income Fund (FPRTX)

Franklin_Double_Tax-Free_Income_A_-_FPRTX

 (Yahoo! Finance)

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For more detailed information about the Puerto Rico municipal bond crisis, please see our white paper, The Puerto Rico Municipal Bond Crisis:  What Took You So Long?

For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

Get Updates on the Puerto Rico Municipal Bond Crisis

 

Notes:

[i] "Franklin Muni Fund Declines to Record Low on Puerto Rico Losses." Bloomberg. http://www.bloomberg.com/news/2014-07-08/franklin-muni-fund-declines-to-record-low-on-puerto-rico-losses.html

[ii] "MBIA in Longest Slump Ever on Puerto Rico Default Concern." Bloomberg. http://www.bloomberg.com/news/2014-07-08/mbia-in-longest-slump-ever-on-puerto-rico-default-concern.html

[iii] "Congress Open to Puerto Rico Techno Aid, Hoyer Says." Bloomberg. http://www.bloomberg.com/news/2014-07-08/congress-open-to-puerto-rico-technical-aid-hoyer-says.html

 

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Municipal Bond Crisis: On the Precipice

Posted by Jack Duval

Jul 2, 2014 4:44:00 PM

 

Legislation we reported on last week (since named the Recovery Act) was signed into law over the weekend by Puerto Rico’s Governor Alejandro Garcia Padilla. The legislation would allow public corporations like the troubled Puerto Rico Electric Power Authority (known as Prepa) to restructure debt and renegotiate labor contracts outside of bankruptcy.[i]

The Prepa debt restructuring would be the largest municipal restructuring ever in the $3.7 trillion state and local market. Prepa’s $8.6 billion in debt exceeds Detroit’s $8 billion of GO and water-and-sewer debt and Jefferson County, Alabama’s $4.2 billion debt failure, both recent high profile debt restructurings in the United States.[ii] Importantly, 70% (or $5.8 billion) of Prepa’s $8.6 billion debt outstanding doesn’t have any bond insurance protecting investors.

On Tuesday, Moody’s downgraded altogether over $61 billion in total of Puerto Rico debt, including the Prepa bonds above, which were downgraded five notches to Caa2 from Ba3.[iii] Investors have responded accordingly, as uninsured Prepa bonds maturing July 2040 traded at 44.1 cents on the dollar as of midday Tuesday.

As can be seen in the chart below, the selling has extended beyond the Prepa bonds and has affected the broad-based S&P Puerto Rico Municipal Bond Index (which contains primarily GO bonds).

Chart 1. S&P US and Puerto Rico Municipal Bond Indices

7.2.14_SP_Puerto_Rico_Municipal_Bond_Indicies

For a higher resolution version of this chart, click here.  

Institutional investors were also gearing up for a legal challenge to counter Puerto Rico’s recent actions. Both Franklin Funds and Oppenheimer Rochester Funds filed suit after the governor signed the Recovery Act bill.[i]

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For more detailed information about the Puerto Rico municipal bond crisis, please see our white paper, The Puerto Rico Municipal Bond Crisis:  What Took You So Long?

For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

Get Updates on the Puerto Rico Municipal Bond Crisis

 

Notes:

[i] “Puerto Rico Swap Cost at Record High Before Bond Payments.”  Bloomberg. http://www.bloomberg.com/news/2014-07-01/puerto-rico-swap-cost-at-record-high-before-bond-payments.html

[i]Puerto Rico’s Indebted Power Utility Adds to Island’s Problems.” New York Times, Dealbook. http://dealbook.nytimes.com/2014/07/01/puerto-ricos-indebted-power-utility-adds-to-islands-problems/?_php=true&_type=blogs&partner=rss&emc=rss&_r=0

[ii]Most Puerto Rico Electric Debt Lacks Lifeline for Investors.” Bloomberg. http://www.bloomberg.com/news/2014-06-27/bulk-of-puerto-rico-electric-debt-without-lifeline-for-investors.html

[iii]Moody’s downgrades Puerto Rico GOs to B2 from Ba2; outlook negative.” Moody’s. https://www.moodys.com/research/Moodys-downgrades-Puerto-Rico-GOs-to-B2-from-Ba2-COFINA--PR_303126

 


 

 

 

 

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Municipal Bond Crisis Update: A 1-2 Combo Last Week

Posted by Jack Duval

Jun 16, 2014 1:08:41 PM

This post continues our expert coverage of the Puerto Rico municipal bond crisis and UBS closed-end funds.

Things are starting to happen again in Puerto Rico.  In particular, Fitch downgraded its rating on $8.7B of Puerto Rico Electric Power Authority bonds, and Puerto Rico Municipal CDS spreads spiked over 300 basis points (or about 64 percent) in one day last week.

Fitch Downgrade

On June 11th, Fitch downgraded it’s rating on Puerto Rico Electric Power Authority bonds.  Here’s a summary:

  • The $8.7B of PREPA bonds were downgraded to BB  from BB+ and put on Rating Watch     Negative;[1]
  • The primary reason is “heightened concerns about PREPA’s ability to manage near-term liquidity demands brought on by maturing bank lines of credit and the required repayment of outstanding loans due in July and August”;[2]
    •  $671M of outstanding loans are due in July and August based on two lines of credit of $250M and $550M;[3]
  •  The structural issues of population and economic decline have led to energy sales falling    by 3.7 percent during the first 10 months of the fiscal year;[4]
  • In the first 10 months of the fiscal year PREPA had a net loss of $204M;[5]
  • PREPA’s receivables remain high at $1.5B, or 33 percent of annualized fiscal 2014 revenues.  This is caused by customer’s late payments;[6]
Credit Default Swap Spike

The chart below is presented without commentary except to note that the decline in CDS following the record junk bond issuance in March is unlikely to be repeated.[7]

Chart 1:  Puerto Rico Municipal Bond CDS

puerto_rico_CDS

Our white paper, The Puerto Rico Municipal Bond Crisis:  What Took You So Long?, can be accessed here.

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For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

Notes

[1]     The Bond Buyer, Robert Slavin, “Fitch Downgrades PREPA to BB”; June 11, 2014.  Available at http://www.bondbuyer.com/news/regionalnews/fitch-downgrades-prepa-to-bb-1063430-1.html?zkPrintable=true;  Accessed June 16, 2014.

[2]      Reuters, “Fitch cuts Puerto Rico electricity authority’s rating again”; June 11, 2014.  Available at http://uk.reuters.com/article/2014/06/11/usa-puertorico-electricity-idUKL2N0OS1PS20140611; Accessed June 16, 2014.

[3]       See Supra note 1.

[4]       See Supra note 2.

[5]       See Supra note 1.

[6]       See Supra note 1.

[7]       Chart obtained from Bloomberg.  The gold line is the five-year CDS price and the blue line is the 10-year CDS.

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Debt Rally Continues

Posted by Jack Duval

Mar 11, 2014 9:02:45 AM

This post continues our expert coverage of the Puerto Rico municipal bond crisis.

As can be seen in the chart below, the post-downgrade rally in Puerto Rico debt continues.  The New York Times is reporting that yield talk on the planning $3B issuance is in the eight-handle range.  Significantly below the 10-plus percent yields contemplated just a few weeks ago.  However, there is a fly in the ointment.  As the times reports:

... the commonwealth’s fiscal agent, the Government Development Bank, also has hired an affiliate of a well-known restructuring firm, raising concerns among some investors that Puerto Rico is weighing a revamping of its existing debt load, even as it prepares to raise fresh funds.

We have covered the dire state of Puerto Rico finances extensively, here, here, and here.  (You can search our blog by keyword to get all our coverage.)  Also, Accelerant recently published a white paper on the Puerto Rico municipal bond crisis, which can be accessed here.

 For a higher resolution image of the chart below, click here.

SP_PR_and_US_Indicies

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For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Debt Crisis Approaching a Minsky Moment

Posted by Jack Duval

Feb 19, 2014 8:27:35 AM

This post continues our expert coverage of the Puerto Rico municipal bond crisis.

It appears that Puerto Rico has entered the Ponzi finance phase of its debt crisis.  The New York Times reported yesterday that the commonwealth is looking to issue $3B in new debt.

Financial Fragility

For those of you unfamiliar with Hyman Minsky, he was an economist who studied financial crises, and identified three phases of financial fragility:

  1. Hedge Finance:  when borrowers pay back principal and interest out of their cash flows.  Sub-prime debt crisis analogue:  amortizing mortgage loans.
  2. Speculative Finance:  when borrows can pay back interest out of their cash flows but have to keep rolling over their debt.  Sub-prime debt crisis analogue:  interest-only mortgage loans;
  3. Ponzi Finance:  when borrowers cannot pay back back principal or interest from cash flows and must continue to borrow just to make interest payments.  (The belief at this phase is that capital appreciation will allow the asset to be sold and the principal and interest to be repaid and result in a profit to the borrower.)  Sub-prime debt crisis analogue:  negative-amortization mortgage loans.

Puerto Rico has likely been in the Ponzi finance phase for a while.  The commonwealth has had to keep increasing their debt load to make principal and interest payments.  This is the economic equivalent to a negative-amortization loan.  Not only does the debt not get paid down, the principal balance grows.

Debt Deflation

The denouement for a borrower caught in a Ponzi finance is debt deflation.  This occures when lenders finally refuse to finance any further debt expansion and the borrower defaults on its obligations.  The creditors seize the assets and sell them, causing prices to fall - deflation.  This depresses the economy, causing more defaults, more asset sales, and further deflation.

Eventually, those that speculated are bankrupted, as are many of their financiers, and the assets end up in strong hands as the leveraged players are squeezed out.  The stage is then set for cycle to start again.  Having been burned by easy lending, creditors will only lend to strong players who can repay all their principal and interest from their cash flows - hedge finance.

After the economy strengthens, lending standards are loosened and loans are made to those strong enough to pay back interest through cash flows, but debts can be rolled over - speculative finance.  Finally, asset price appreciation allows lenders to justify Ponzi finance and the table is set for another crisis.

Covenant Heavy

The hedge funds and other speculators who are willing to finance Puerto Rico are aware of the risks and are demanding extreme loan covenants to continue the Ponzi finance - fully anticipating a default.  Some of those include:

  • The new debt would be a general obligation of Puerto Rico and created under an independent authority, Cofim, and would be senior to all other obligations of the commonwealth;
  • Acceleration provisions, which would speed up the debt repayments if certain events were to occur (such as a debt restructuring);
  • Agreement to resolve any legal disputes about the debt in U.S. District Court - Southern District of New York - a more creditor friendly venue than Puerto Rico;
  • "Double-Barreled" structure where the bonds would be backed by the general obligation of Puerto Rico and specific public assets.

These covenants are critical for Puerto Rico debt because, as a commonwealth, it cannot declare bankruptcy, and thus any debt restructuring will be governed by the bond convenants.

Accelerant recently published a white paper on the Puerto Rico municipal bond crisis, which can be accessed here.

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For information about Accelerant municipal bond and closed-end fund experts Gerry Guild, Steve Pomerantz, and John Duval, Sr., click here.

 Get Updates on the Puerto Rico Municipal Bond Crisis

 

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Topics: municipal bond crisis, Puerto Rico, UBS closed-end funds

Puerto Rico Municipal Bond Crisis - Unfunded Pension Fund Data

Posted by Jack Duval

Nov 16, 2013 3:17:01 PM

As part of our continuing analysis of the Puerto Rico municipal bond crisis, we have compiled data on the three pension plans funded by the Commonwealth of Puerto Rico.  The trend is clear at a glance - these pension funds have been chronically underfunded since at least 2000 and are headed for insolvency in the next year or two.

For our previous discussion of the Puerto Rico pension system, see this.

For a higher resolution version of this chart:  Puerto Rico Municipal Bond Crisis - Unfunded Pensions.

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Topics: Puerto Rico Municipal Bond Crisis, unfunded pension, litigation, investments, fixed income, municipal bond expert, UBS closed-end funds

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