Surge in Oregon schools' deferred interest bonds sets off alarms

A spike in Oregon school districts’ reliance on capital appreciation bonds to fund expansion is stirring a debate among debt analysts.

Since early 2017, Oregon school districts have floated the greatest par value of tax-exempt CABs at almost 50% of the $1.1 billion total in primary market issuance for schools, according to an April 2 report from Municipal Market Analytics.

Speculative borrowing structures such as CABs can strain credit quality if property value growth assumptions do not materialize, wrote Lisa Washburn, an MMA managing director and the report’s author. 

https://www.bondbuyer.com/news/oregon-schools-cab-surge-sets-off-alarms

New Jersey bill seeks P3 expansion

Municipal Market Analytics analyst Lisa Washburn said that availability payments don’t help with funding challenges for infrastructure projects, because governmental entities still have to make the payments just as they would with debt service. While expanding P3s would have some benefit to New Jersey, she said, they probably wouldn't make a major dent in the state’s fiscal challenges.

“If you look across the country there hasn’t been a large number of P3s relative to traditional municipal financing,” said Washburn. “If they were so much more effective, you would see them used a lot more.”

Oroho and Sweeney's plan to spearhead the P3 bill comes with New Jersey still hamstrung by revenue shortfalls. The proposal also arrives in the midst of President Trump's push to place more funding responsibilities for infrastructure projects on the private sector and with state and local governments.

https://eresearch.fidelity.com/eresearch/markets_sectors/news/story.jhtml?storyid=201804131904SM______BNDBUYER_00000162-bb5d-dc54-a76f-bbfdc981_110.1

Puerto Rico GO bond hits five-month high

Maria was cataclysmic for Puerto Rico, cutting electricity to all 3.4 million residents. On the six-month anniversary, tens of thousands remained without power, thousands of homes remained in disrepair, and many businesses remain closed, even as debt prices began to recover.

Other analysts put little stock in the rise in the bond price. "Puerto Rico bonds are almost strictly held by optimists," said Matt Fabian, of Municipal Market Analytics, adding that the Puerto Rico bond market is "illiquid and strange" and that investor recovery prospects "are still grim."

To be sure, hurricane recovery is far from the only driver of creditor repayments. Litigation is a factor as well, particularly a fight between the Puerto Rican central government and its sales tax authority, COFINA, which itself owes $18 billion of debt.

http://www.financetime.org/puerto-rico-go-bond-hits-five-month-high

State's Largest Pension Funds Returns In Excess Of 16% In 2017 - Pension Assets Grow By $4.2 Billion, Post Highest Calendar Year-End Value

Earlier this year, Governor Malloy suggested a

restructuring of payments into the TRF. Treasurer Nappier challenged that plan because it would constitute a technical default under a bond covenant -something that the State has never before done. She said, "Once that line is crossed, the rating agencies may take a dim view of our promises, the consequences of which we will face for a generation. In fact, a recent report from Municipal Market Analytics confirms that any violation would be a 'clear credit negative'."

http://www.publicnow.com/view/941113FA19FF87A8ADC0E4D8BF3811260215F8F5

Tax Law Complicates ‘Smart City’ Financing Plans

The tax law “raises borrowing costs for state and local governments in a couple ways,” Fabian said. For one, the overhaul “undermines the demand from corporations” for tax-exempt income. “By capping the deduction for state and local taxes, it makes it more difficult for state and local governments to raise taxes to pay for infrastructure.”

https://www.bna.com/tax-law-complicates-n57982090054/

New Jersey budget proposal seeks taxes to boost programs, lift budget

Municipal Market Analytics analyst Lisa Washburn said Murphy is facing political resistance to the millionaire’s tax. Senate President Steve Sweeney, D-Gloucester, proposed an alternative to Murphy’s plan last week that would impose a 3% surcharge on corporations earning more than $1 million in net income to help increase school funding through $657 million of new revenue.

“Governor Murphy faces several obstacles in raising incremental and new revenues to fund rising legacy costs and his priorities that include increased education and infrastructure spending,” said Washburn. “His desired millionaire’s tax lacks full support…in large part because of the negative impact of tax reform on the SALT deduction.”

https://eresearch.fidelity.com/eresearch/markets_sectors/news/story.jhtml?storyid=201803131901SM______BNDBUYER_00000162-20eb-d4ab-aff7-38efe477_110.1

Connecticut Won't Default on Pension Bonds, Budget Director Says

Connecticut Treasurer Denise Nappier warned that Malloy’s proposal to stretch out payments on the teachers’ pension’s unfunded liability beyond 2032 to sidestep a potential $5 billion payment increase would trigger a technical default. Municipal Market Analytics, an independent research firm, said last week that such a breach would be a “clear credit negative" and investors should demand higher yields on Connecticut bonds to compensate for the risk.

https://www.bloomberg.com/news/articles/2018-03-13/connecticut-won-t-default-on-pension-bonds-budget-director-says

San Francisco earns its first triple-A credit rating in about 40 years

n theory, a higher credit rating lowers the interest rate a city must pay on its debt, the same way a higher FICO score will usually get you a cheaper mortgage.

However, with interest rates so low, the difference between being rated Aa1 and Aaa is very small, said bond analyst Matt Fabian, a partner with Municipal Market Analytics.

“San Francisco’s bonds are already received as if they’re AAA or almost AAA, so the actual upgrade, in dollar terms, won’t have a material impact on borrowing costs,” Fabian said in an email. “This is better seen as a political shot in the arm for the mayor.”

https://www.sfchronicle.com/business/networth/article/San-Francisco-earns-its-first-triple-A-credit-12736403.php

New Jersey bill would spur municipal bonds for commercial real estate development

Municipal Market Analytics analyst Lisa Washburn said the bill enables local governments with another mechanism to encourage economic development by facilitating developers with access to the tax-exempt market through ERG grants or securing bonds with PILOT payments. She noted that a positive of the legislation for bondholders is provisions assuring that the pledge of PILOTs are subject to a statutory lien.

“The presence of a statutory lien gives investors some comfort that their claim to the PILOT payments should survive a hypothetical chapter nine,” said Washburn. “They will be a secured versus an unsecured creditor thus improving recovery prospects.”

Washburn said there are risks associated with the proposal since bonds are non-recourse unless specifically guaranteed by the municipality. While local governments can be immune from the bonds, Washburn noted that some localities may feel pressure to eventually step in and specifically guarantee the debt to assure completion.

“Financings for some projects may be speculative and that may result in trying to get the municipality to guarantee the debt to allow it to secure better rates, which would be a risk factor to the municipality should the project sour,” said Washburn. “These would likely increase the amount of riskier debt issued in the state.”

https://eresearch.fidelity.com/eresearch/markets_sectors/news/story.jhtml?storyid=201803091857SM______BNDBUYER_00000162-0b3a-d525-a77e-ef7f8dbe_110.1

American's protest more speed bump than roadblock for Chicago's big O'Hare plans

“Modern American airports are essentially public-private partnerships and airport authorities typically move in concert with their airline, so to roll out a sweeping new plan without buy-in from a major airline is unique but it doesn’t mean it’s not possible” to proceed, said Matt Fabian, partner at Municipal Market Analytics.

“In general, Chicago’s economy is growing and it would make sense for them to make a big investment in the terminals,” but American’s opposition “complicates the situation and it could raise the price” of borrowing whether the airport takes a rating hit or not, Fabian added.

https://www.bondbuyer.com/news/muni-market-ponders-chicagos-big-borrowing-plans-for-ohare?feed=0000015a-fd09-d93b-abda-fddf17b30000

Center for Investigative Journalism: The Fantasy of the Fiscal Plan for Puerto Rico

Matt Fabian, financial analyst and partner at Municipal Market Analytics, believes Puerto Rico needs to be more self-sustainable and not bet it will receive more funds from Uncle Sam in the future. “There’s a line in the fiscal plan that talks about using the federal government as a partner or relying on them, and that’s madness. It’s madness to rely on the federal government and on ‘this’ federal government for incremental aid over the next five, ten years. They need to think sustainably about what they can do on their own,” Fabian commented.

http://caribbeanbusiness.com/the-fantasy-of-the-fiscal-plan-for-puerto-rico/

Chasing Yields, Muni Buyers Sign Away Safeguards Against Default

When Mount St. Mary’s University, a small Catholic college, borrowed money a decade ago to build and renovate dorms at its rural Maryland campus, it pledged a 179-bed residence hall as collateral, leaving investors with an asset they could seize if it defaulted.

In December, it refinanced the debt without extending bondholders that security. Lenders didn’t mind, placing nine to 12 times as many orders for $56.6 million of junk-rated bonds than were available, according to William Davies, the university’s chief financial officer.

The demand for higher-yielding debt during the decade-long era of low interest rates has allowed hospitals, schools and other borrowers in the $3.8 trillion municipal-bond market to jettison some of the protections they previously provided to investors. Even now, amid growing speculation about rising interest rates, a steady flood of cash has pushed risk premiums to their lowest level since the financial crisis.

High-yield municipal-bond funds have drawn in $23 billion in the last four years, about a quarter of inflows into state and local bond funds over that time, according to Lipper U.S. Fund Flows data. That has helped drive spreads over top-rated bonds to 2.92 percentage points by Feb. 12, down by about two-percentage points from two years ago.

“Borrowers have had very strong leverage over lenders for three years," said Jim Murphy, who oversees T. Rowe Price Group Inc.’s $5.5 billion Tax-Free High Yield Fund.

In addition to forgoing mortgage pledges, borrowers are selling bonds without reserve funds they can tap if they don’t have enough cash to service debt. Early warning mechanisms, such as rate covenants, which require borrowers to charge enough fees to pay debt service, are often weaker and remedies can be more limited than they had been, according to Municipal Market Analytics.

That will likely cause an increase in defaults -- which are extremely rare -- if the economy weakens, said Matt Fabian, a partner at MMA. 

“The more bonds done without a reserve fund or without a mortgage or with minimal coverage, the more likely they are to transition directly to default from under stress," he said.

Sales by the riskiest segments of the municipal market, which includes hospitals, charter schools and retirement facilities, has risen to 16 percent of issuance from 11 percent in 2014, according to the firm. Before the financial crisis, in 2007, such sectors made up about a quarter of municipal bond sales, according to MMA.

https://www.bloomberg.com/news/articles/2018-02-20/chasing-yields-muni-buyers-sign-away-safeguards-against-default

After Muni-Bond Boom, Analysts Expect Distress to Be on the Rise

Bankers say bad loans are made in good times, and the $3.8 trillion municipal-bond market may be no exception.

High demand from investors, a dwindling supply of new deals, and historically low yield penalties on the riskiest bonds has created an borrower’s market, Municipal Market Analytics analysts Matt Fabian and Lisa Washburn wrote in a note to clients Monday. This atmosphere has produced a rise in issuance in sectors most "prone to impairment," they said. "Over recent years the mix of defaults has become more diversified than it was previously," Washburn wrote.

https://www.bloomberg.com/news/articles/2018-02-14/after-muni-bond-boom-analysts-expect-distress-to-be-on-the-rise

Muni money funds show signs of life

If 2017 was the year the municipal money market funds stopped bleeding assets, 2018 is the year they've started growing again.

Tax-exempt money market fund assets have increased by almost $7 billion since the beginning of the year, seven times as much as all last year, according to Investment Company Institute data.

"With rates rising there's just been a better bid for floating-rate products," said Matt Fabian, a partner at Municipal Market Analytics. "It's a reasonable place for investors to park cash."

http://www.investmentnews.com/article/20180212/FREE/180219985/muni-money-funds-show-signs-of-life

Multiple factors drive upswing of bankruptcies, closures among rural hospitals

LOS ANGELES — The number of Chapter 9 bankruptcies by rural hospitals has climbed over the past five years as populations shrink and federal reimbursements decline.

In the last five years, not including this year’s first filing, 13 hospitals have filed for Chapter 9, said Matt Fabian, a principal with Municipal Market Analytics.

With the distress in the sector trending up, Fabian said, it was no surprise that the first Chapter 9 bankruptcy filing of the year is a rural healthcare district.

https://www.bondbuyer.com/news/bankruptcies-and-closures-on-the-upswing-for-rural-hospitals

Survey splits on infrastructure prospects

A survey of municipal bond market participants found a split on whether an adopted infrastructure plan will make a difference in kick-starting projects.

Attendees at The Bond Buyer's National Outlook Conference had the opportunity to vote in a live market survey, which was sponsored by Fitch Ratings.

“It has been a dynamic past few months for the U.S. public finance market, with the rush to issuance in late ’17 and then tax reform,” said Dan Champeau, head of global public and infrastructure finance at Fitch, who moderated the survey panel. 

https://www.bondbuyer.com/news/live-market-survey-answers-split-on-infrastructure-prospects?feed=0000015b-11b9-dcff-abff-f9fd85f60000

New Tax Law Colors Marketing and Demand for Chicago Sales Tax Securitization

Byline: Yvette Shields

Chicago's top-rated sales tax securitization bonds required more leg work and styling to cater to post tax-reform market appetites, market participants said.

On its second outing with the Sales Tax Securitization Corp. credit, the city faced a market environment with higher yields and weaker demand compared to its inaugural sale in December, and its tax-exempt spreads widened as a result, but a one-week delay in the pricing that saw the transaction downsized and the addition of a taxable piece improved its prospects.

"The fact it got pushed meant it wasn't a slam dunk," said Matt Fabian, partner at Municipal Market Analytics. "The underwriting seemed to face some hurdles that the first underwriting didn't."

The city had planned a nearly $900 million tax-exempt issue last week -- a follow-up to the $744 million debut last December -- but held the deal citing a tougher "market tone" and investor input that prompted a look at an index-eligible taxable bond.

The city returned with $376 million of tax-exempts that priced Tuesday and $304 million of taxables that priced Wednesday.

https://www.highbeam.com/doc/1G1-524880963.html

Puerto Rico Bondholders, Undeterred by Plan, Await Day in Court

General obligations with an 8 percent coupon and maturing in 2035 traded Thursday at an average price of 26.8 cents on the dollar, up from 26 cents Wednesday, according to data compiled by Bloomberg. Those securities, the island’s most actively traded, were first issued for 93 cents four years ago.

“It’s hard to picture investors who are still holding these bonds selling based on this news because this is what they expected to happen,” said Matt Fabian, a partner at Municipal Market Analytics.

https://www.bloomberg.com/news/articles/2018-01-25/puerto-rico-bondholders-undeterred-by-plan-await-day-in-court

Funding gap spurs unlikely proposal for $100 billion of new Illinois pension bonds

CHICAGO – Municipal market participants threw cold water on a proposal pitched by an Illinois pension advocacy group to borrow more than $100 billion to pay down the state’s massive unfunded pension tab.

The proposal pitched by the State Universities Annuitants Association calls for Illinois to issue $107 billion of 27-year fixed-rate bonds this year to bring the five-fund state system up to a 90% funded ratio.

The state has $128.9 billion of unfunded liabilities and the retirement system is just 39.9% funded based on fiscal 2017 actuarial data. Based on the market value, the t

https://www.bondbuyer.com/news/funding-gap-spurs-unlikely-proposal-for-100-billion-of-new-illinois-pension-bonds?feed=0000015b-11b9-dcff-abff-f9fd85f60000

Muni market participants applaud PABs in purported infrastructure plan

Muni market participants are pleased that the latest purported version of the Trump administration’s infrastructure plan would expand and ease restrictions on private activity bonds so that they could play a major role in helping to finance infrastructure projects.

The six-page plan was circulated on Monday by lobbyists and publications such as Axios. It makes no mention of the Trump administration and is not dated.

https://www.bondbuyer.com/news/muni-market-participants-applaud-pabs-in-purported-infrastructure-plan