Smith's Research & Gradings
Eversheds Shutherland On Water-Energy-Infrastructure: Creating Value For Investors
When Mr. Georgino speaks about water and energy, Smith's Research & Gradings listens. He recently provided an update on the sector during an Infrastructure Conference at The Eagle's Nest in the Adirondack Mountains.
"By 2025, 1.8 billion people will experience absolute water scarcity, and 2/3 of the world will be living under water-stressed-conditions," Mr. Georgino said. He explained that absolute water scarcity means you are dying of thirst.
"The UN projects that by 2030 the global demand for water will exceed supply by 40%. And, by 2050, the UN estimates that urban populations could increase by 2.5 billion," Mr. Georgino said. "By 2050, the World Bank estimates that demand for water in cities could increase by 50%-70%."
Those are some very scary numbers and those events are just over the time horizon. He could sense how uneasy those factoids made the audience. So, he quickly added, "Mark Twain is quoted as saying that Whisky is for drinking and water is for fighting. "
Accelerating the Texas Economy at High Speed
More than 16-million trips are being made every year between the economic powerhouses of Dallas and Houston. There are 50,000 super commuters between Houston and North Texas already. And, they all drive in trucks, planes and cars.
The Texas Bullet Train changes all of that. This train technology is the safest, most reliable form of travel anywhere in the world, according to Robert Eckels, president of Texas Central High Speed Railway.
The Texas Central High Speed Railway could have high marks from Smith's Reliability Gradings, which might benefit both North Texas and Houston.
"IT'S SAFE." Mr. Eckel's says with a Texas drawl. "52-years of operations in Japan, zero accidents and zero fatalities from operations.
"IT'S FAST. It travels at nearly 200-miles per hour." he added, " Houston to North Texas in 90-minutes."
He jumped the tracks a bit to explain that a third station in the Brazos Valley will be built. The Brazos Valley station will attract thousands of college students from universities like Texas A&M and Sam Houston State University.
Mr. Eckels noted comprehensive studies indicate 90% of people with live within an hour of the North Texas or Houston stations will save time when making this trip on the Texas Bullet Train compared to driving or flying.
"IT'S RELIABLE. No other travel option in Texas is this reliable," Mr. Eckels said "with less than a one-minute delay annually."
Moody's Krummenacker On Project Finance Methodologies
Kurt Krummenacker, Senior Vice President, Project Finance at Moody's Investors Service, recently gave an overview of the rating agency's Project Finance Methodologies.
Project finance is defined as single assets with high essentiality, a strong fundamental asset profile and a long asset life. These can be organized into a hierarchy of projects starting with the least complicated and lowest essentiality:
- Parking garages and meters
- Airport fuel facilities, baggage handling systems, and hangar facilities
- Stadiums and arenas
- Hotels and convention centers
- Shopping malls
- Oil and gas production and rolling stock projects
- Unregulated pipeline and transmission lines
- Water and wastewater treatment, desalination and other industrial processing plants
- Chemical storage facilities, trigeneration and liquefied natural gas (LNG) facilities.
What Are P3?
No standard definition of what constitutes a Public Private Partnership exists globally, Mr. Krummenacker said.
In general, he looks for a long-term contract between a governmental entity and a private partner to deliver assets/services in exchange for right to future payments. He added, "We do not consider privatizations or sale of public assets a PPP."
A private partnership provides a combination of design, build, finance and maintenance of the project. The P3 will have life cycle and asset management, with the asset usually reverting back to public sector at end of the contract in pre-defined condition.
Housing: Oregon Governor's Plan
Smith's Research & Gradings has documented the ongoing and persistent threat to affordable housing in America.
Thousands of Oregon's students — an estimated 23,000 — are homeless or on the verge of living without shelter.
There's a dearth of affordable housing in the state.
And a record number of people are spending so much of their income covering rent and utilities they are struggling to pay for other basic needs.
For years, it was local cities and counties that tackled housing issues. But now, the situation is so severe that for the first time in recent memory, one of the central debates in the gubernatorial race is how to fix the growing housing and homelessness emergency.
Governor Kate Brown said her priority is to end child homelessness. Brown has called for spending $20 million from the state's general fund to quickly provide housing and connect children to additional services through the state's human services agency.
In addition, she wants to borrow money to build and preserve around 4,000 units of affordable housing. Much of the new housing the governor is calling for would be paired with additional supportive services, such as connecting tenants to health care providers.
By 2023, Brown said her administration would have 25,000 new affordable homes under development. There are currently 7,800 homes in the pipeline, according to her plan.
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Wall Street greeted the news the U.S. Federal Government "shutdown" last week due to a budgetary impasse with disbelief. An All-Star Analyst said, "If the newspapers and television were not reporting on the story, there is nothing happening in my life that indicates the Federal Government is shutdown."
In Washington, D.C., the rally in the financial markets following news of the shutdown was greeted with dismay. The U.S. faces enormous political challenges, both in the near term and longer term. On the immediate horizon, the political parties need to do something to be taken seriously. Shutting down the U.S. government is a political prank. It's a cry for help.
However, President Obama needs to respond in a serious manner. The Executive Branch does not have the power of the purse under the U.S. Constitution. Ideally, President Obama makes some concessions and the U.S. Congress can declare a victory.
Ying-Chen Li, JPMorgan Tax Exempt Strategy writes: With adversity comes opportunity; after one of the most tumultuous days in financial markets in recent history, long-term Municipal bond yields pushed appreciably higher than Treasury yields, which provides opportunities for both traditional and cross-over investors.
Lehman Brother's bankruptcy, Bank of America's (BAC) purchase of Merrill Lynch, and AIG's precarious circumstance, sent shockwaves throughout world financial markets on Monday. As investors fled risky assets, two-year Treasury yields declined an astonishing 44bp, and the 30-year Treasury yield fell below 4% for the first time in history. Systematic risk aversion coupled with the prospect that Lehman and Merrill will unload their Municipal bond holdings left the Muni market stunned, and brought trading activity to a snails pace.
Investors in U.S. airport bonds face an increasingly uncertain future in the wake of airline bankruptcies.
What is important for the municipal bond market to consider are the nature of the risks. Recent filings under the bankruptcy code have heightened concerns about adverse litigation. Smith's ratings system covers the legal risks as part of our "event risk rating" and our recovery ratings.
In the airport sector, Smith's reviews of the Charlotte/Douglass airport in North Carolina over the past five years found a reliance on a single carrier: US Airways. The concentration of flights on a single carrier, as in the case of Charlotte/Douglass, can shift the analysis to the corporate revenues.
Smith's has dropped its event risk rating for the entire airport revenue sector to "-1" from "0".
The rating action was prompted by the aforementioned question about the future of air transportation, in general, and the bankruptcy plan for US Airways. The plan tried to effectively repudiate US Air's commitment to Pittsburgh Airport.
Aboard the good ship Muniland in 1998, Dan Keating, director of the municipal bond department at Bear Stearns & Co., was quick to note the huge $7 billion deal for Long Island Power Agency (LIPA) didn't mean the market was going to set any volume records for the year. Yet, many aboard Muniland came to view the smooth sailing of the LIPA deal(s) as a good omen.
At the half-way mark, officers on the desks in Muniland reported volume had reached about $150 billion in long-term par value — about 150% of 1994's entire year volume (The Year That Almost Wasn't).
Yet, professionals cautioned the number of current refundings and advance refundings might not increase dramatically because 1992 was a huge year for refundings (The Bond Insurers' Big Bonanza). With rates expected to decline below 5% on the long end of the Treasury curve, Smith's would encourage Regulars to ponder the price and recent performance of bond insurance stocks.
October 15, 2018, Vol. XXVI, Issue 18 Municipal Edition
The Global Economic Doctor
October 1, 2018, Vol. 3, Issue 16
Still America First
Summary: Although there is talk that the "America First" investment strategy is fading, we are not fully convinced. Not yet, at least. U.S. stock markets reached into record territory in September — again. It is hard to argue with a continuous show of strong economic growth, robust corporate profits and a confident American consumer. Equally important, the September FOMC meeting demonstrated that the U.S. central bank is likely to progress along a well-signaled, gradually-rising trajectory.
The 10-year yield for Treasury bonds has been tracking above 3.0%. The Fed is likely to raise rates again in December and is indicating more on tap for 2019. If that happens, where else will investors find better yields? Europe will probably remain close to zero, as will Japan. Who knows where the Bank of England will be in dealing with Brexit. U.S. corporate and municipal bonds and, for that matter, equities are likely to be the right place for investor money through year-end and into 2019. (We have concerns about the FANGs due to regulatory tightening in Europe and increasingly in the U.S.)
The continued attraction of the America First strategy does not ignore that there are risks. Indeed, the next downside step — whenever it comes — has the potential to be a really, really big one due to the build-up in U.S. debt. According to the U.S. Treasury Department, the country's total debt as of August 31, 2018 was $21.4 trillion, which (according to the Federal Reserve Bank of St. Louis), made total public debt as a percent of GDP to 105.2%. Total public sector debt to GDP stood at 62.9% as of Q4, 2007. The bulk of the debt increase came during the Obama years, but it has continued upward since the Trump administration entered office. Needless to say, this is where raising interest rates too quickly by the Fed could get problematic, especially if the central bank missteps, stalling the economy and having increased interest payments for the government.
And there are other risks to consider – October's Conservative Party conference in the UK could see some unexpected developments (perhaps the ouster of Prime Minister May) which would greatly complicate the Brexit process; Brazil goes to the voting booths in a very uncertain contest with no clear-cut frontrunners; and Italy's proposed budget could further roil markets. In the U.S., the November 2018 mid-term elections raise uncertainty to a backdrop of the shameful, circus-like Kavanaugh nomination process.
While some worry about the above-mentioned risks is merited, none of these — at this point — are likely to be a game-changer for the U.S. economy.
One of the last bits of data to come from September was the University of Michigan Consumer Survey, which noted, "Consumer sentiment remained at very favorable levels in September, with the Index topping 100.0 for only the third time since January 2004." Although we may be reaching the peak of the growth cycle in 2018, there still appears to enough gas to power the engine of growth into 2019
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