A Treasury market rally, low supply and strong demand for high-yielding securities greeted Detroit when it sold $135 million of debt yesterday, the first sale of bonds backed only by the city’s promise to repay since it filed a record-setting bankruptcy five years ago, Bloomberg reported. The conditions allowed Detroit to secure lower interest rates than initially expected, leaving it paying even less than some borrowers that haven’t reneged on their debts. Bonds were priced with yields ranging from 3.36 percent on a 2020 maturity to 4.95 on those due in 2038 - tighter than what was first offered. The city also was able to increase the size of the deal from $111 million to $135 million, an indication of strong demand.
To find the distress in the municipal-bond market, look to the Southeast and Midwest. That’s the conclusion from Municipal Market Analytics, a research firm that examined state and local government bond defaults by using Bloomberg data and disclosure filings from issuers. Such lapses are extremely rare, accounting for a minuscule share of the nearly $4 trillion market. But counties in the Midwest and Southeast are home to about 37 percent and 22 percent, respectively, of outstanding bonds that are in default for failing to make adequate payments or for violating elements of the debt contracts. Excluding bankrupt Puerto Rico, about $19 billion of the $31.8 billion in defaulted and impaired bonds are in those two regions. That share is notable considering the areas together have issued only about one-third of all outstanding bonds.
According to a new study commissioned by the Youth Development Institute of Puerto Rico and presented in Congress last week, 30 percent of Puerto Rican families with children lost their jobs or had their work hours reduced after the hurricane, according to an opinion piece published by The Hill. The poorest families took the hardest hit, and they are still having trouble meeting their most basic needs. Economic precarity will also hinder the Island’s ability to recover and impede long-term economic development. Prior to Maria, economic insecurity among families with children and youth had fueled the migration of hundreds of thousands of Puerto Ricans to the continental U.S. Puerto Rico’s Department of Education estimated a 30,000-person drop in school enrollment in 2018-19, on top of the 20 percent annual decrease it has been experiencing in recent years. After Maria, it is more urgent than ever that the children left on the Island be given the opportunity to develop to their full potential. Congress can take a step in the right direction by extending the Child Tax Credit to families of one and two children in Puerto Rico, according to the op-ed. Although most Puerto Rican families do not pay federal income taxes, they pay federal payroll taxes, which is why families of three or more children can claim the credit on the island. However, most Puerto Rican families do not qualify for the tax credit because they have less than two children. This extension would mitigate the economic losses after Hurricane Maria, reward hard work, reduce child poverty and incentivize families with children to stay on the island.
Puerto Rico Governor Ricardo Rossello flew to New York this week on a mission: persuade potential tourists that the hurricane-ravaged island was ready for their return, the New York Times reported. But Puerto Rico's recovery from last year’s Hurricane Maria has been a “mixed bag,” Rossello told Reuters yesterday, acknowledging that the bankrupt U.S. territory, while improving, is far from out of the woods. Puerto Rico has received only a small fraction of the federal funding it needs to get back on its feet, Rossello said, and getting access to the rest could take more than a decade. His administration estimates that fixing Puerto Rico fully will require $139 billion, but the federal government has earmarked only about $60 billion to $65 billion for the recovery, he said. Of that, only about $3 billion to $4 billion has actually flowed into the island’s coffers. Obtaining the remainder could take 10 to 11 years, he said, adding that his team is lobbying the U.S. Congress for more money. Compounding the problem is Puerto Rico's bankruptcy in U.S. federal court, where it is trying to restructure $120 billion of debt and pension obligations. There are also ongoing spending disputes between the government and a federally appointed fiscal oversight board.
The end of the London interbank offered rate after 2021 could have costly consequences for states and cities, and managers need to start preparing, the Government Finance Officers Association said yesterday, Bloomberg News reported. About $44 billion of floating-rate municipal bonds and an unknown amount of loans and interest-rate swaps entered into by states and cities are tied to the U.S. dollar Libor. Many of these securities and contracts will continue long after 2021, when Libor is phased out. Municipalities will need to take inventory of debt and investments tied to Libor, and hire lawyers and advisers to review contracts and renegotiate them before 2022, according to the GFOA. States and cities should also develop mechanisms to transfer Libor-based products to the Secured Overnight Financing Rate, Libor’s replacement.
Puerto Rico’s federal overseers are poised to raise their forecast for the island’s budget surplus over the next four decades after an influx of aid and rebuilding from last year’s storm is expected to give a jolt to the economy, Bloomberg reported. The change will increase Puerto Rico’s cumulative surplus — before any debt payments are made — to more than $20 billion through 2058. The jump is likely to please the island’s creditors, who are fighting for a piece of Puerto Rico’s revenues as it makes its way through bankruptcy. Yet such long-term fiscal projections have proven to be especially volatile, and the new estimates will follow an admission that the board made a $4 billion error the last time it certified a fiscal plan. The estimates will provide the latest signal that the island is recovering better than analysts initially expected from the blows of Hurricane Maria in 2017. Since the storm, Puerto Rico and its federal overseers have redrawn the government’s fiscal plan and the projections several times to account for the influx of federal aid that’s expected to temporarily buoy the economy. The more sanguine outlook, and the government’s progress toward cutting deals with some major creditors, has triggered a rebound in the price of its debt, with its most frequently traded general-obligation bonds more than doubling this year. The last fiscal plan estimated that Puerto Rico would have a cumulative surplus of about $4 billion over the next 40 years, assuming that the government implemented budget cuts, among other moves. The new projection, incorporating higher-than-expected disaster aid and tax receipts, raises that figure to more than $20 billion.
Illinois is poised to reap lower borrowing costs as it returns to the municipal-bond market for the first time since pulling back from the brink of becoming the first junk-rated U.S. state, Bloomberg News reported. Illinois is offering $920 million of general-obligation refunding bonds for yields ranging from 3.05 percent to 4.41 percent, according to three people familiar with the terms who declined to be named as the pricing isn’t final. The preliminary yields are about 30 basis points lower than the state’s deal in April, according to data compiled by Bloomberg. Proceeds from the negotiated offering will also pay termination payments to banks to cancel interest-rate swap agreements and eliminate Illinois’s derivative exposure, bond documents show. Bondholders and rating companies have praised Illinois’s progress. Spreads on the worst-rated state’s 30-year bonds over benchmark debt tightened to the lowest since March 2015 after Moody’s Investors Service lifted its outlook to stable from negative last month. It’s the first time Illinois has been at that level since December 2012, according to Moody’s.
