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The crisis in affordable housing continues to reach new heights across America.
Last month, Smith's Research & Gradings reported that Seattle’s city council unanimously passed a controversial new tax on businesses to fund affordable housing and homeless initiatives in the city. The bill became known as the “Amazon tax,” because of threats by Amazon to halt new construction if the tax passed, but many other companies, too, warned that it would stifle business development in the city.
Response by Amazon and Starbucks was swift and negative. The big businesses poured hundreds of thousands of dollars into efforts to fight the tax,
Smith's Research & Gradings noted that by the time the City Council voted on it, the tax had shrunk to almost half the size of the original proposal. Still, with its passage, the city was guaranteed to net an extra $47 million a year.
Still, Amazon and Starbucks effectively lobbied to get a new ballot initiative passed (to revoke the tax). The measure would not be voted upon until November, which raised the prospect of a long fight. The tax in question is a “head tax” because it’s levied on each worker — Seattle will charge the city’s largest three percent of companies $275 per employee, per year for the next five years. Based on Amazon’s employment record, the company will pay about a third of the city-wide fund.
Last week, Mayor Jennie Durkan, along with seven out of nine Seattle city council members, issued a statement Monday night, saying the council would consider repealing the tax itself. That would eliminate the need for voters to weigh in at all. "We heard you," she wrote, referring to vocal opposition. “It is clear that the ordinance will lead to a prolonged, expensive political fight over the next five months that will do nothing to tackle our urgent housing and homelessness crisis. These challenges can only be addressed together as a city, and as importantly, as a state and a region.”
Good for business, but bad for affordable housing.
It's Still the Economy
The U.S. economy is enjoying strong growth, unemployment is hitting multi-year lows and corporate profits over the past couple of quarters were robust. Sure, the fiscal picture is getting messy, the national debt is rising and a potential trade war with most U.S. trade partners has made some people nervous, but the good times are here for the rest of 2018 and into 2019. Those dark, gloomy clouds of possible recession have been blown further back over the horizon by the Trump tax cut.
Indeed, the Trump tax cut is extending the economic recovery, nudging wages up, helping give consumers a boost, and providing a positive counterpoint to nervous-nellies twittering over geopolitical risks. And the strong performance of the U.S. economy could have political consequences in the U.S. mid-term elections, reducing the Democrats' chances to retake the either the House or Senate.
The most recent sign of an accelerating U.S. economy was the widely watched nonfarm payroll employment number for May. It exceeded our expectations (and those of many others), indicating that employment increased by 223,000 in the month and the unemployment rate declined to 3.8%, an 18-year low. The main drivers for employment generation were retail trade, healthcare, construction and manufacturing, but most sectors registered gains. The areas that showed little change were wholesale trade, information, financial activities, leisure and hospitality and government. There were also gains across all worker groups.
What to take from the employment numbers?
First and foremost, strong hiring points to strong economic growth. The U.S. economy still has room to grow. We have taken our real GDP growth forecast from 2.5% to 2.8%, but that could be a little conservative, depending on the potential for labor gains and trade policy outcomes. Q1 real GDP was 2.2%; we expect that Q2 should be around 4.0%.
Healthcare Merger Mania Drives Not-for-Profit Hospital and Health System Consolidation
While not-for-profit hospitals have a challenging operating environment, consolidations in the sector is a credit positive according to James LeBuhn, Vice President and Senior Fixed Income Analyst for McDonnell Investment Management.
In March, Cigna announced plans to acquire Express Scripts for $67 billion after its planned merger with Anthem was blocked by the US Department of Justice. CVS and Aetna have agreed to a $69 billion merger less than a year after Aetna and Humana called off their proposed merger. Meanwhile, United Health’s Optum unit has been acquiring physician practices, urgent care centers and ambulatory surgery centers in 35 key U.S. markets. In total, Optum-owned physician groups comprise about 30,000 physicians across the U.S.
Mr. LeBuhn explained the consolidation trend among health insurers, pharmacy benefit managers and retail healthcare operators is also playing out among not-for-profit (NFP) hospitals and healthcare providers. According to Kaufman Hall, there were 115 announced merger and acquisition transactions involving a not-for-profit hospital or health system in 2017, the highest number in recent history.
"Historically, mergers and acquisitions in the NFP healthcare sector were driven by financial need or distress. However, since the passage of the Affordable Care Act (ACA) in 2010, “strategic” considerations have become the key driver in the growth of provider mergers, alignments and affiliations," according to Mr. LeBuhn. He noted, among the key changes in the ACA legislation was a reduction in the rate of increase in hospital reimbursement under Medicare and a movement away from reimbursement based on volume to reimbursement based on outcomes. Thus, the legislation incentivized hospitals and health systems to operate more efficiently and provide rewards to those organizations that could reduce the overall utilization of healthcare service of a given population.
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In a 128-page proposal, Detroit Emergency Manager Kevyn Orr laid out the city's economic struggle and objectives for financial restructuring to creditors.
"Should the City of Detroit fail to make a required debt service payment for any reason, including a bankruptcy filing, National's insured bondholders are guaranteed their scheduled interest and principal payments on time and in full," said Adam Bergonzi, National's Chief Risk Officer, in a statement last March. "National will continue to monitor the situation closely in the coming months as the city and state work to resolve Detroit's fiscal crisis."
One bondholder said that since most of the bonds are insured, the industry should get behind the bond insurers. The investor noted they are counting on the bond insurers to speak on behalf of investors during negotiations with the city — the insurers have as much at stake, if not more.
On June 4, 2008, Moody's Investors Service placed the Aaa insurance financial strength ratings of MBIA Insurance Corporation and its affiliated insurance operating companies on review for possible downgrade. In the same rating action, Moody's also placed the surplus note rating of MBIA Insurance Corporation (Aa2-rated) and the ratings of the holding company, MBIA, Inc. (senior debt at Aa3), on review for possible downgrade. The rating action reflects Moody's growing concern that MBIA's credit profile may no longer be consistent with current ratings given the company's diminished new business prospects and financial flexibility, coupled with the potential for higher expected and stress losses within the insurance portfolio. Moody's noted that the most likely outcome of the ratings review would be a downgrade, with MBIA's insurance financial strength rating likely to fall within the Aa range, although a downgrade to the single-A rating category is also possible.
Art Schloss on hotel financing: The tax code permits tax exempt financing for two distinct classes of hotels — convention center hotels and hotels on airport property. With the events of 9/11, it has become virtually impossible to finance airport hotels, however, a reasonable number of convention center hotel financings are expected in 2003 and they tend to be quite large.
Even before 9/11, the convention and meeting business was not exactly buoyant. The total number of meetings in 1999 — corporate, association, and convention — was 1,012,500, an increase of only 4% over 1998. Meeting industry expenditures totaled $40.2 billion, a 4% decline from 1998. The total number of meeting attendees in 1999 was 78.9 million, down one percent from 1998.
To meet a "perceived" demand for meetings and conventions, more perception than reality, cities embarked on a convention center and convention center hotel edifice complex in recent years. What is interesting in the list of convention center hotel financings is that none of these cities is what one would think of as a first class convention destination. How many world class conventions are likely to be attracted to venues that have recently issued debt?
Fitch IBCA downgraded to "CCC" from "BBB-" the $85 million of solid waste revenue bonds for the Mobile Energy Services Company LLC project. S&P had put the bonds on CreditWatch and subsequently downgraded the bonds to "CCC" from "BBB-".
Moody's Investors Service threatened to provide an unsolicited rating on the deal on a new issue basis. They gave the bonds a "Baa" rating. Smith's suspects someone at Moody's is in the dog house for being an eager beaver. At present, Moody's has the rating under review.
The facility is one of the largest pulp, paper and tissue production complexes in North America. The downgrades immediately followed the announcement that users of the facility were going to effectively abandon its operation. Goldman Sachs was the lead manager on the deal. Bonds were issued in 1995 as a conduit IDB financing through the Industrial Development Board of the City of Mobile, Alabama. The deal was structured as $85 million of term bonds, due January 1, 2020, and priced at par on the sale date of August 17, 1995 and $220 million of parity corporate debt.
June 11, 2018, Vol. XXVI, Issue 10 Municipal Edition
The Global Economic Doctor
May 15, 2018, Vol. 3, Issue 9
Just the Facts...
Since the masses are always eager to believe something, for their benefit nothing is so easy to arrange as facts.
— Charles Maurice de Talleyrand
Summary: To put it mildly we live in fast-paced times. The news brings us Russian probes, indiscretions of political leaders and up-close shootings. And that is only in the daily U.S. news cycle. The Middle East remains a bubbling geopolitical cauldron, pushed along by clashing political agendas coming out of the corridors of power in the United States, Iran, Israel, Saudi Arabia and Russia. A number of Emerging Markets economies have become flashing red lights on financial market radar screens. Argentina has already turned to the International Monetary Fund for help, and we believe Turkey could follow it in the months ahead. Malaysia just witnessed a political upset, with its first change of government since independence in 1963. Italy, Europe's largest debtor and home to a still-challenged banking system, sits on the edge of having a Eurosceptic, populist government, which could be disruptive of the European economy. There are looming elections in Brazil, Colombia, Mexico and the United States, none of which seem to have any clear-cut outcomes (at this juncture).
And then there is a swirl of policy action around the Trump administration – a summit between the U.S. President and North Korea's leader is set for June 12; the push to renegotiate NAFTA; trade talks with China (with huge potential consequences for the global economy); a reconsideration of the U.S. pull-out from the Trans-Pacific Partnership (TPP); the decision by Washington to pull out of the Iran nuclear deal; the possibility of a tougher policy line on Cuba; and a new program by the U.S. to take aim at "freeloading" foreign countries that benefit from U.S.-funded pharmaceutical research as part of a broader effort to lower drug costs.
Although global economic growth remains relatively strong and forecasts for 2019 still point in that direction (the IMF is looking at 3.9%), the world is becoming more unsettled. There is a substantial undercurrent of potentially disruptive factors which are mirrored on the economic side in the following questions: How quickly do interest rates rise?; Does the ongoing push toward protectionism result in meaningful speedbumps in economic activity?; and What is the impact of the ocean of government and corporate debt accumulated since 2008 with an eye to rising rates? We are reaching a new tipping point, driven along by heavy debt loads, an unwillingness to address major problems (debt and big fiscal deficits), and economic policies that will undercut growth (protectionism). The situation is not made any better by the breakdown in civil dialogue.
Somewhere out there is the next financial crisis. The ground is already shifting in that direction. Although the crisis is not imminent and markets still have room to run in 2018, policymakers need to wake up.
Smith's Research & Gradings, has become a bellwether research company, often predicting significant trends and spotlighting controversial subjects sometimes months before they come to light elsewhere. Smith’s provides independent research and third-party analysis for institutional investors. Smith's analysis is an indispensable part of Wall Street and the world's capital markets.
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