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Puerto Rico in Crisis

Governor Ricardo Rosselló, the disgraced outgoing governor of Puerto Rico, announced he was nominating Pedro Pierluisi Urrutia as the next secretary of state in the latest round of political hijinx. Under the line of succession, Mr. Pierluisi will become the next governor of the US territory after Gov. Rosselló resigns.

"After much analysis and taking the best interests of our people into account, I have selected Pedro Pierluisi Urrutia for the position of Secretary of State. To tend to this matter, I will call for a special session tomorrow," he said on Twitter in Spanish.

The nomination must be approved by the Senate and the House of Representatives. If he is approved, Mr. Pierluisi would become governor Friday afternoon after Gov. Rosselló resigns from office.

Mr. Pierluisi, 60, served as Puerto Rico's Resident Commissioner, the island's sole representative in Congress, from 2009-2017. He also previously served as Puerto Rico's Secretary of Justice under former Gov. Pedro Rosselló, the current governor's father.

Wanda Vázquez Garced, Puerto Rico's secretary of justice, would have been the next in line, but she said on Monday that she does not want to be governor.

At Presstime: Sources indicate Mr. Pierluisi may not be approved.



Smith's Cyber Gradings: Louisiana Declares State of Emergency

A Smith's Cyber Gradings Alert was issued for Louisiana Schools on July 23rd for schools in Parishes of Oachita, Morehouse, and Sabine.  On July 24th, Tangipahoa Parish shutdown its computer and phone systems because it had detected a ransomware attack.

Louisiana took the rare step of declaring a state of emergency following multiple ransomware attacks on schools in the northern parishes. With the declaration of an emergency, state resources have been made available including support from the Louisiana National Guard, Louisiana State Police, the Office of Technology Services and others. The U.S. Federal Bureau of Investigation is also said to be investigating the ransomware attacks.

Governor John Bel Edwards' emergency declaration marks the first activation of Louisiana's cybersecurity-specific emergency support function, which was introduced in 2017. Gov. Edwards established the Louisiana Cybersecurity Commission as a statewide partnership of public, private, academic and law enforcement stakeholders who could specifically examine cybersecurity threats as needed.

The ransomware attacks encrypted data on school computer systems in the Parishes of Oachita, Morehouse and Sabine which made phones, files and computer equipment inaccessible.



Q2 Ratings Upgrades and Downgrades

Smith's tracked 412 ratings upgrades and adjustments for the first six months of 2019 affecting $107.5 billion in outstanding long-term municipal debt.  The tallies for the same period during 2018 were 437 ratings changes affecting $124.3 billion in outstanding debt. The majority of issues upgraded during the first six months occurred in the G.O. category with 183 upgrades, affecting $61.8 billion in outstanding debt. The Healthcare sector saw 42 upgrades, affecting $14.5 billion.

Smith's tracked a total of 203 downgrades and ratings adjustments in the first six months of 2019, affecting $57.6billion in outstanding long-term municipal debt. The totals for the same period in 2018 were 280 ratings changes and $66.9 billion. The majority of the issues downgraded were in the G.O. sector with 79 issues, totaling $26.8 billion. Smith's tracked 33 downgrades in the Education Sector, with $3.3 billion outstanding, and 32 downgrades in the Healthcare category with $7.1 billion outstanding.



Municipal Bond Analyst Survey, 2019  (click link for full survey)

  — by Tom Kozlik








5 Years  Ago

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15 Years Ago

20 Years Ago

Smith's Research & Gradings has raised the probability of default and lowered its recovery gradings for Puerto Rico Enterprise Bonds in the wake of the enactment of the "Recovery Act" which is an attempt at enacting a local Restructuring Law.

The probability of default was increased due to the change of law, which is part of Smith’s Political Event Risk Gradings. SRG provides Smith’s Political Event Risk gradings because it is one of the major reasons for municipal bond defaults.

Currently, Puerto Rico’s G.O. and Sales Tax Revenue Bonds (COFINA) are protected under the Commonwealth of Puerto Rico’s Constitution.  However, the willingness and ability of the local politicians to repudiate contracts by changing local laws undermines the rule of law. In its simplest terms, Puerto Rico’s heightened Political Risk is due to change of law.



It was announced that HUD is approving plans submitted by state housing finance agencies for $1,035,322,485 to jump start affordable housing programs in states throughout the country that are currently stalled due to the economic recession. Funded through American Recovery and Reinvestment Act of 2009 (Recovery Act), HUD's new Tax Credit Assistance Program will allow 26 state housing finance agencies to resume funding of affordable rental housing projects across the nation while stimulating employment in the hard-hit construction trades.

Earlier this year, Barbara Thompson, Executive Director of the National Council of State Housing Finance Agencies sent a letter to HUD outlining elements needed for a successful federal intervention program to support State HFA affordable lending programs. Tops on the list was the creation of a market for state HFA tax-exempt Housing Bonds by purchasing them directly or through the housing GSEs, Fannie Mae and Freddie Mac.







Merrill Lynch's report on Overland Park, Kansas, Hotel Bonds provides investors with a "virtual site visit" experience.  These bonds financed a 412-room City-owned Sheraton hotel that opened in December 2002.

Performance was impacted by 9/11, overbuilding among limited service hotels, pressure from negotiated customers, optimistic projections, and poor convention center performance. Occupancy of 66% and Average Daily Rates of $135 were projected for 2003, the first year of operations. Actual numbers were 62% and $104.

These hotel revenue bonds are distinguished by an additional pledge of citywide hotel taxes. This was one of the first High Yield hotel bonds to contain such a back-up feature. Tax receipts will be necessary to pay at least a third of debt service in 2004.  It has made a critical difference, as the Sheraton has under-performed original projections.












The Foothill/Eastern Transportation Corridor Agency bought more time by restructuring $1.6 billion in debt. The refunding revenue bond offering was necessary to gain cashflow relief.  Smith's contacted Adam Whiteman, senior tollroad analyst at Moody's.

The Foothill/Eastern Transportation Corridor is a 24-mile long tollroad located outside of Los Angeles in Orange County, California. Ultimately Foothill/Eastern will become part of a vast concrete triangle. To accomplish this higher level of debt service coverage structurally, principal is being pushed back to the latter years beginning 2017. During the early years, the debt service has been reduced between $21-30 million except for a spike of $47 million in 2002. In addition the debt is being pushed out an additional five years to 2040.





August 1, 2019, Vol. XXVII, Issue 13  Municipal Edition


The Global Economic Doctor


August 1, 2019

Scott B. MacDonald, Ph.D.


The Fed in an Era of Competitive Central Banking

Summary: On July 31st the Federal Reserve met and decided to cut interest rates by 25 bps, to a 2.0%-2.25% range. So far, so good. That was generally expected. What was not expected was the language and tone that followed during Chairman Jerome Powell’s news conference. In particular, the Fed head sought to reassure his audience that the U.S. central bank had not ruled out further cuts if “uncertainties” about the economic outlook remain, but he then cautioned that the cut was only a “mid-term policy adjustment.” To put it mildly, Powell left a major question mark as to whether the central bank will follow up with an aggressive rate-reducing regime. In an era of competitive global central banking (which resembles a race to the bottom by central banks lowering their rates) Fed efforts to be prudent (i.e. moving in a slow and deliberate way), leaves the U.S. at a disadvantage of being too slow in cutting rates, making the dollar less competitive in what is becoming a more sharper-elbowed global trade system, and generates uncertainty over the future of economic expansion.

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