Joseph Krist

Publisher

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ISSUE OF THE WEEK

$500,000,000

Las Vegas Convention and Visitors Bureau

Convention Center Expansion Revenue Bonds

Moody’s: Aa3

These revenue bonds are all secured by the authority’s first lien pledge of net revenues from hotel room taxes collected throughout Clark County as well as revenues from its convention facilities after the payment of operating expenses. The current issuance is also secured by the Las Vegas Convention Center.

The rating was upgraded in connection with this issue. Increasing hotel room rates are generating pledged tax receipts to new all-time highs. Average daily hotel occupancy has been uncommonly strong at 89%. These factors have combined to result in maximum annual debt service coverage of 3.0 times from fiscal 2017 pledged revenues. The issue represents a significant increase in debt but the coverage levels provide sufficient cushion to absorb the new debt.

Las Vegas remains the nation’s market leader for large-scale conventions. While total visitor totals show a slight drop from their peak, the tourist market remains strong. At 42 million visitors, the market for hotel rooms remains quite strong. With the market evolving from its gambling base to a much more diverse demand base centered on entertainment and recreation, the ability to maintain revenues growth is bolstered.

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GUAM

S&P Global Ratings affirmed its ‘BB-‘ long-term rating on the Government of Guam’s (GovGuam) general obligation (GO) bonds and its ‘B+’ long-term rating on GovGuam’s certificates of participation. The credit has become the object of interest for those seeking triple exempt income not derived from Puerto Rico. At the same time, S&P Global Ratings removed the ratings from CreditWatch, where they had been placed with negative implications on March 5, 2018. The outlook is stable.

GovGuam improved its general fund cash flow and its financial results for fiscal 2018 as a result of a fiscal realignment plan. It also succeeded in balancing its fiscal 2019 budget. Guam’s credit reflects increased stability. This has occurred at a time of improving economic conditions and activity. The tourism markets are more stable (Japan is a major source of tourist demand for Guam)and the US commitment to military spending given Guam’s significant a forward role as base in the Pacific.

THE PUERTO RICO CONUNDRUM The National Federation of Municipal Analysts has filed an amicus brief in support of the major bond insurers who are suing to prevent the “clawback” of tax revenues to provide funds to help to pay the Commonwealth’s direct, tax backed debt. A district court decision in the action is under appeal by the insurers and the NFMA has chosen to support the plaintiffs argument.

The plaintiffs argue that the application of the tax revenues pledged included in the security for the bonds to another purpose is improper. We do not disagree with the notion that the statutes authorizing the bonds are clear in their intent in terms of directing those revenues towards the authority’s bonds not the Commonwealth’s general obligation bonds. The question is though: which controls the pledge? The statute or the Constitution?

A plain reading of the official statement makes the risk of “clawback” pretty clear. The fact that there is lots of statutory authority that has never been reviewed in connection with a judicial validation proceeding should be viewed through a cautious lens. Until these statutory pledges are validated, there is a risk that the pledged funds will not be available. ” Market expectations regarding the treatment of Project revenues and revenue bondholders simply do not outweigh constitutional provisions.

We heard a lot about relying on the plain language of the Constitution during the past weeks Congressional hearings regarding the confirmation of Brett Kavanaugh to a seat on the Supreme Court. So applying the plain language test would not seem to be in the favor of the Authority’s bondholders. Their cause is also hurt by the fact that, if anything, the “subsidy flow” is usually from the utility to the general fund rather than the other way around.

We have long thought that reliance upon legal provisions is important but that the most important factor to insure the timely and full payment of debt service is underlying viability of the project or enterprise. In the case of the Highway Authority’s debt, a view of the overall economic viability of the Commonwealth that allowed debt holders to rely on true operating revenues would remove the risk confronting PRHTA creditors.

MUNICIPAL OVERSIGHT IN CONNECTICUT

Since the bankruptcy of Detroit was declared after the intervention of the State of Michigan in Detroit’s financial affairs, the various state oversight programs for distressed localities have undergone a higher level of scrutiny. The latest program to take the spotlight is the Municipal Accountability Review Board , Connecticut’s local financial affairs overseer. Currently, that board is evaluating the plans of West Haven which is seeking to have a financial recovery plan approved.

The Municipal Accountability Review Board (MARB) was established by Section 367 of Public Act 17-2  as a State Board.  It is to be composed of 11 members appointed as follows: Secretary of OPM, or designee, Chairperson, State Treasurer, or designee, Co-chairperson, five members appointed by the Governor: a municipal finance director, a municipal bond or bankruptcy attorney; a town manager; a member having significant experience representing organized labor from a list of three recommendations by AFSCME; ? a member having significant experience as a teacher or representing a teacher’s organization selected from a list of three joint recommendations by CEA and AFT-CT.

One member appointed by the President Pro Tempore of the Senate, one member appointed by the Speaker of the House of Representatives, one member appointed by the Minority Leader of the Senate and one member appointed by the Minority Leader of the house of Representatives, each of whom shall have experience in business, finance or municipal management. The board’s powers are not unusual. It has the power to review and approve or disapprove the municipality’s annual budget, including, but not limited to, the general fund, other governmental funds, enterprise funds and internal service funds. No annual budget, annual tax levy or user fee for the municipality shall become operative until it has been approved by the board.

West Haven is a Tier III city under the oversight program. A tier III municipality has at least one bond rating from a bond rating agency that is below investment grade, or (2) the municipality has no bond rating from a bond rating agency, or, if its highest bond rating is A, Baa or BBB, provided the municipality has no 18 rating that is not investment grade, and it has either (A) a negative fund balance percentage, or (B) an equalized mill rate that is thirty or more and it receives thirty per cent or more of its current or prior fiscal year general fund budget revenues were or are in the form of municipal aid from the state. West Haven is rated Baa/BBB. have the power to pass and implement an interim budget, raise the city’s tax rate or impose mid-year spending cuts and have greater latitude to approve or disapprove new labor contracts.

The city and the board have been working over the summer to achieve agreement over a budget and the City’s five year financial plan. The city is working to avoid Tier IV status which would allow the board to have the power to pass and implement an interim budget, raise the city’s tax rate or impose mid-year spending cuts and have greater latitude to approve or disapprove new labor contracts. The board would like to see the city build into the recovery plan a timetable to restore the city’s fund balance — currently in the red — to about 5% of the city budget.  That would require a fund balance of about $8 million in the City’s $162 million budget.

The city will consider a proposed financial plan this week which it hopes it can present to the Board for approval by the end of September. Approval would allow the city to collect significantly more state aid than has been available in the absence of an approved plan.

RATING AGENCIES IN THE GLARE

The latest comments to come from the entity investigating Puerto Rico’s debt issuance and subsequent default released its comments on the role of the rating agencies. When we summarize the findings, the intent is not to bash the rating agencies. Rather it is to highlight the fact that there is virtually nothing new in this latest critique. Instead, the comments reinforce existing feelings about the rating agencies approach to distressed municipal credits.

According to the report, “In light of the evidence we reviewed, reasonable minds can differ regarding the point at which the CRAs should have stopped relying on prospective information supplied by or on behalf of the Issuers, anticipated an increased likelihood of default, or taken more aggressive actions like downgrading Puerto Rico-related bonds below investment-grade status. Indeed, our investigation uncovered evidence that the CRAs had persistent concerns with respect to certain Issuers and their issuer-supplied information prior to the 2014 downgrades.

“There is evidence that, in hindsight, there may have been a basis to take earlier or more aggressive action to change the positive ratings of certain Puerto Rico-Related Bond ratings. At least some of the CRA Analysts with whom we spoke identified longstanding concerns…. There is also evidence that certain CRA Analysts were skeptical of prospective issuer-supplied information,”

One would hope so. But the comments highlight a dilemna faced by the rating agencies when deciding that they will lower a distressed credit’s rating. The rating agencies do not want to be seen as market moving actors or even more especially a hindrance to issuer access to capital. This alone explains the belief of many who manage and or actively trade bonds that bond ratings are lagging rather than leading indicators.

Bottom line: you have to do your own homework. This is already the case for institutions and hopefully will become more of a practice among individuals. Ask questions, look at rating reports, but don’t use these as a substitute for common  sense and a healthy skepticism regarding the ultimate sources of information. Keep up with the news and if something looks wrong, it probably is.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.