Joseph Krist

Publisher

________________________________________________________________

INDIANA TOLL DEAL APPROVED

The board of the Indiana Finance Authority unanimously approved a new deal Thursday with the vendor operating the Indiana Toll Road, allowing 35% fee increases for large trucks. (The rate increase applies to vehicles with three or more axles.) The rate hike takes effect Oct. 5 and the state would receive $400 million that same day from the Indiana Toll Road Concession Co.

Indiana would receive a total of $1 billion over three years.  The risk of non-payment of the latter two installments is secured by a bank letter of credit. $600 million is projected to facilitate completion of the Interstate 69 extension in southern Indiana; $190 million for projects on U.S. Routes 20, 30 and 31; $100 million to boost rural broadband access; $90 million for improving hiking and biking trails; and $20 million to attract new direct flight routes to the state’s airports.

SUFFOLK COUNTY, NEW YORK

Quite rightly, most of the negative credit attention focused on Long Island has been directed towards Nassau County. The County still operates under the review of a state control board and the County is still coping with fallout from federal corruption trials involving recent County officials. Now it appears that Nassau’s eastern neighbor may be gaining its share of the negative credit glare.

Moody’s Investors Service has downgraded to Baa1 from A3 Suffolk County, New York’s issuer rating and general obligation limited tax (GOLT) rating. The county has $1.6 billion in GOLT debt outstanding. The county’s deteriorated financial position resulting from recurring operating deficits, deferment of pension contributions, and reliance on significant annual cash flow borrowing were cited as the basis for the downgrade.

The county’s negative available fund balance position (GAAP basis) and negative net cash position persist and grew to a negative 12% and 10.9% of revenues. The GOLT bonds are secured by the county’s general obligation pledge as limited by the Property Tax Cap Legislation (Chapter 97 (Part A) of the Laws of the State of New York, 2011). The lease appropriation bonds are secured by the county’s obligation to pay debt service subject to appropriation.

The stable outlook (revised from negative) reflects the expectation that the county will continue to make strides in reducing budget one shots and nonrecurring revenues to achieve structural balance. The outlook also reflects the county’s efforts to improve its financial position by implementing expenditure control measures and utilizing resources provided by the county’s sizeable and diverse tax base.

WASTE TO ENERGY

Investors in the high yield waste to energy space have learned the hard way over the years the importance of the financial strength of the operator can be to the credit integrity of waste to energy project financings. ratings risk comes not just from the operating performance of the project but also from the credit of the operator who often has financial obligations tied up in the operations of the facility.

A recent example is noted at the Solid Waste Authority of Palm Beach County’s (two waste to-energy plants. Earlier this month, Covanta Holding Corporation acquired the Babcock & Wilcox Enterprise, Inc. (B&W) subsidiary Palm Beach Resource Recovery Corporation (PBRRC) which operates the two plants. The change led Moody’s to note that replacing B&W with Covanta is credit positive for the authority because Covanta is a financially stronger entity and will be the guarantor for payment and performance of all of PBRRC’s covenants and obligations under the operations and maintenance agreements.

B&W announced two separate restructurings in 2016 and 2017, and the company has reported seven out of eight past consecutive quarters of net losses and three consecutive quarters of negative adjusted EBITDA through the second quarter of 2018. The company’s second-quarter 2018 GAAP net loss from continuing operations was $209.7 million, its GAAP net loss inclusive of discontinued operations was $265.8 million, and adjusted EBITDA was negative $96.2 million.

In contrast, Covanta’s ratio of cash flow from operations before any changes in working capital (CFO pre-WC) to debt, which was above 7% in each of the past three years (2015-17).

TEN YEARS AFTER (NOT THE BAND)

OK, the title dates me. Nonetheless, we are in the midst of many commemorations and retrospectives regarding the 2008 financial crisis and subsequent Great Recession. Our review takes us back to the mortgage market and the default epidemic which infected many regional real estate markets. Many have argued that the epicenter of the crisis may have been in Nevada, especially the greater Clark County (Las Vegas) market. At one point, one out of three homes was delinquent or in foreclosure. Stories abounded where lenders went to foreclose on properties only to find them vacant with the keys on the kitchen counter.

So it is with interest that at the ten year anniversary, things have changed in that market. The latest sign is the fact that S&P Global Ratings revised its outlook to positive from stable and affirmed its ‘AA’ long-term rating on Nevada’s general obligation (GO) limited-tax bonds outstanding. The basis for the move – “The positive outlook reflects our expectation that Nevada will maintain its proactive budget management as it did during the extreme economic downturn during the Great Recession along with our expectation that the state will continue to build its reserves during the economic expansion to mitigate future revenue volatility.”

With the real estate market in much better shape, S&P expects to see continued increases in the state’s reserves which improved from about 7% in fiscal 2011 to a projected, strong 14% at the end of fiscal 2018. It is noted that the economy remains subject to cyclical forces and that it still rests on the twin pillars of tourism and related gaming and entertainment revenues.

PENSION IMPACT ON LOCAL ILLINOIS RATING

The potential for rising pension costs to wreak havoc with the ratings of individual municipalities in Illinois becomes more apparent over time. The latest victim is Alton, Il. S&P announced last week that lowered its long-term rating to ‘A’ from ‘A+’ on Alton, IL’s existing general obligation (GO) debt. The outlook is negative.

The reasoning behind the move is clear. “The downgrade and negative outlook reflect a view of Alton’s significant pension liabilities stemming from its policemen’s and firefighters’ pension plans and the pressure the liabilities are exerting on the budget. City officials are justifiably concerned about the low funding levels, the affordability of the required contributions, and the city budget’s ability to absorb the costs.

The action comes in spite of the pending sale by the City of its wastewater treatment plant and sewer system to Illinois American Water. From S&P’s standpoint, the sale and the proceeds it will produce while directed towards funding its pension costs will not be enough on its own. Said S&P: “While we recognize the sale presents a measure of budget predictability in the near term, the city will still have a significantly high pension liability and exposure to escalating pension contributions, and we believe it will need to devise a long-term plan to stabilize its policemen’s and firefighters’ pension funds.”

MASS TRANSIT LOW INCOME DISCOUNTS COME TO THE MILE HIGH CITY

The Denver Regional Transit District’s low-income fare program was approved.  It will take effect in early 2019 and provide a 40 % fare discount to households at or below 185 % of the federal poverty level. Denver now joins cities including Seattle and New York in operating similar programs. A deeper-than-existing 70 percent fare discount for riders between the ages of six and 19 was also approved. The low income discounts are added to the existing array of discounts available to Denver residents including discounts which serve seniors ages 65 and up, individuals with disabilities, Medicare recipients, and elementary, middle and high school students ages six to 19. Children five and younger already ride free with a fare-paying adult. Base fares on buses and on the region’s rail transit line to Denver International Airport will rise from $2.60 to $3, and regional bus fares from $4.50 to $5.25. Fares will go up along the region’s A-Line train, driving the cost of a one-way trip between Denver and the airport from $9 to $10.50.

THE MARKET CLAIMS ANOTHER COAL PLANT…

The Navajo Generating Station (NGS) on the Arizona-Utah border will cease operations in a year’s time. A planned sale to two investors was called off. They could not come to terms after failing to find clients who would be interested in buying electricity from the coal fired power.

The announcement comes despite significant efforts by Interior Secretary Zinke to find ways to keep the plant open. Navajo was for many years considered a major source of regional air pollution being blamed for among other things smog in and around the Grand Canyon. Nevertheless, the Interior Secretary strongly supports keeping the plant open. This flies in the face of the market’s clear message regarding the long term relative uneconomic viability of coal generation in the power supply marketplace.

…WHILE NATURE PRESSURES ANOTHER

The water itself might have been enough, if it wasn’t then the hog waste in the water may have been enough. Now another aspect of coal fired generation having deleterious environmental effects is rearing its head in North Carolina. The earthen dam separating Sutton Lake from the Cape Fear River breached near Wilmington, N.C.  Now coal waste threatens to drain into the Cape Fear River.

The breach follows reached the news that water had the dam that separates the lake from the coal ash ponds for the L.V. Sutton Power Station (operated by Duke Energy). Floodwaters had displaced about 180 truckloads of coal ash from a nearby pond.  Coal ash contains heavy metals like arsenic and cadmium, and its disposal is federally regulated.

A prior coal ash spill at a Duke facility in 2014 saw Duke admitting fault and paying more than $100 million in fines and restitution for that incident.

NEGATIVE SENIOR LIVING TRENDS

This year we have seen two studies of overall national occupancy rates at senior living facilities. The National Investment Center for Seniors Housing & Care reports that skilled-nursing facilities had fewer patients in the second quarter than ever before. Occupancy reached a record low of 81.7% in the second quarter of 2018, down from 83.1% in the second quarter of last year.

The Affordable Care Act drives demand downward as it  rewards new care models that facilitate primary and home healthcare. Additionally, the Centers for Medicare and Medicaid (CMS) recently finalized a new payment rule for SNFs that ties payments to the complexity of patients’ clinical needs rather than volume of services provided.

Earlier in the year, a similar survey of assisted living data for the first quarter of 2018 showed a similar experience. Assisted living occupancy reached a record low in the first quarter of 2018, according to data released by the National Investment Center for Seniors Housing & Care.

Occupancy in assisted living hit 85.7% during the quarter, down 0.7 percentage points from the fourth quarter and down 1.3 percentage points from year-earlier levels. Overall, average seniors living occupancy fell to a six-year low of 88.3% in the first quarter, down 0.5 percentage points from the previous quarter and down 0.9 percentage points from year-earlier levels. This rate put senior living occupancy 1.4 percentage points above its cyclical low of 86.9% reached during the first quarter of 2010 and 1.9 percentage points below its most recent high of 90.2% in the fourth quarter of 2014.

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.