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In Memoriam:

Bill Smith, Champion of Municipal Restructurings

William P. (Bill) Smith, a Partner in McDermott Will & Emery’s Restructuring & Insolvency Practice, who spent 24 years at the firm, passed away last week on March 17 after a lengthy battle with cancer. He was a preeminent lawyer in the area of municipal, health care and tax-exempt restructurings.

Over the course of his long tenure at McDermott, Bill established and spear-headed a national tax-exempt restructuring practice, recruiting and mentoring numerous municipal restructuring lawyers, including his long-time McDermott partners, Nathan Coco, Jay Kapp and Megan Preusker.  Bill and his team have been involved in nearly every significant municipal bankruptcy and insolvency proceeding in the past two decades, including Detroit, San Bernardino, Jefferson County, AL and Puerto Rico.

“Bill really was a giant in the restructuring industry having worked as a trusted counsel to financial institutions, borrowers, bondholders, bond insurers, debtors and trustees in cases across the United States. We will miss him dearly, but we are better—and certainly wiser— for having had the privilege to call him our Partner, colleague and friend for so many years,” said David L. Taub, Head of the Firm’s Financial Institution practice.

Jim Colby, senior portfolio manager and senior municipal strategist at VanEck, said, "Bill Smith was anything but another man named “Bill Smith” from the phone book. His common sense approach to municipal finance and contract law was praised and appreciated by all who interacted with Bill on any variety of matters requiring his expertise. And Bill was, at the same time, confident of his craft and capable of hammering through complex issues in the common language of Longshoremen. It was a trait that I believe put many of us at ease as well as looking forward to a Bill Smith Logic Treatise 101, no matter what the topic. Maybe just me, but did anyone else enjoy his use of language? I will forever think of Bill as an oversized Leprechaun, with a smile on his face and a scotch in his hand."

Bill was recently awarded the 2019 All-Star Analysts' Lifetime achievement award by Smith’s Research and Gradings.

"The accompanying description in the evening’s program summed up what many of know so well about Bill, 'His wise counsel is blended with a dry sense of humor and a sometimes snarky response to unrepentant defaulted bond issuers.'  Indeed, his wit was perhaps just as legendary as his expertise. Bill accepted this award via video to a group of more than 300 colleagues and, characteristically so, brought the house down," said Ira Coleman, Chairman of McDermott Will & Emery.  "As a voracious reader, he also had an encyclopedic knowledge that wowed us all. We will miss him dearly."

His work was also recognized by Chambers USA, IFRL 100, Who’s Who Legal and by the Best Lawyers in America 2001 to 2020, Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law.

Bill graduated from Cornell University with a BA and from the University of Cincinnati College of Law with a JD. He was a member of the Ohio and Illinois bar.

 

 

 

 

 

 

 

 

 

All About You

Anyone who had the privilege of working with Mr. Smith on a restructuring will tell you that he made the process a lot less painful for bondholders. Once engaged, he adroitly took up his tools and set to work, reviewing all of the documents, checking all of the filings, and many times preparing to replace the corporate trustee. Mr. Smith did his homework.

However, Mr. Smith came to the first bondholder meeting with a clean slate. His first question was "what do you want to do?" Then, he shut up and listened.

A smart bondholder committee might ask Mr. Smith what he thought was possible under the terms of the indenture. One time, a bondholder asked Mr. Smith to perform heart surgery on the president of a private hospital — by going through the sphincter port.

Mr. Smith demurred by suggesting bondholders didn't want to get their hands dirty and modestly suggested that his time and the shareholders money would be better spent seeing at who's behest the corporate trust was working.  And, replacing a bond trustee is not an easy task — it requires expertise and experience, which Mr. Smith provided.

He was always a gentleman and a professional. After a particularly salty session with bondholders, I asked him about the IQ of some of the bondholder members, to wit he replied, "My clients are the smartest people in the world — why else would they hire me?"

On the Biggest Stage

Mr. Smith worked on restructuring the largest municipal bankruptcy cases in history. His leadership role in the Jefferson County Alabama bankruptcy catapulted him to the top of his profession. At the center of the case were court-mandated capital improvements to a regional sewer system, which eventually pushed the highly indebted Jefferson County over the edge. The county’s sewer revenue bonds went into default in April 2008; the general obligation bonds followed in September. The $4 bln. in municipal bonds was the largest case in history and it was finally settled in 2011.

In 2013, the Chapter 9 municipal bankruptcy of the City of Detroit created events of default for $18 bln. in par value of municipal debt.  In accordance with Public Act 72 of 1990, the state government's Local Emergency Financial Assistance Loan Board appointed Kevyn Orr emergency financial manager of Detroit following a declaration of financial emergency. Jones Day earned $11 mln. working for the City and the Bond Insurance companies played the lead roles representing bondholders. Mr. Smith provided investors with extremely valuable advice about how Mr. Orr's corporate-style bankruptcy would work in the municipal bankruptcy court.

On June 15, 2015, Governor Padilla of Puerto Rico announced its debt was unpayable. The first thing Goldman Sachs Asset Management did was hire Mr. Smith to represent the firm's investments in Puerto Rico Electric Power Authority (PREPA) bonds. In 2016, President Obama signed PROMESA, which created a federal oversight board for the restructuring of Puerto Rico's debts. In August 2018, a debt investigation report of the Financial Oversight and Management Board for Puerto Rico reported the Commonwealth had $74 billion in bond debt and $49 billion in unfunded pension liabilities as of May 2017.

Spiotto and Smith

Mr. Smith started his career at Chapman & Cutler in Chicago. He worked for James Spiotto, a partner at Chapman in-charge of municipal restructurings. It was a powerhouse of a team, which included Mr. Spiotto, Mr. Smith, Anne Acker and others.

When Mr. Smith left Chapman to join McDermott Will & Emery, Mr. Spiotto basically stopped talking to him. It was real old school Chicago-style rules.  It didn't help that not long after Mr. Smith left, he recruited Mr. Coco to leave Chapman and join him at McDermott Will & Emery.

Yet, with your correspondent, Mr. Spiotto would privately ask about Mr. Smith and took no small amount of pride in his accomplishments. Sadly Mr. Spiotto passed away a few weeks before Mr. Smith.  When told of the loss, Mr. Smith sent a text saying Jim was the smartest guy he ever worked with.

Personally, I think Jim was actually rushing to the pearly gates of St. Peter in order to secure his rightful place ahead of Bill. That's just how competitive they were.

Family and Friends

A couple of years ago, while working with Mr. Smith on the complete restructuring of a small private college, he appeared to be more contemplative than usual.  Complete idiocy went without comment and financial advisors were allowed to waste large amounts of time. He wasn't exactly taciturn, but it finally reached the point where I had to ask him: "What's on your mind?"

Mr. Smith said, "If you have to know, it is my daughter's wedding. She is getting married this summer in Europe. There will be a moment when I am going to be with her, alone, before we walk down the aisle and I am going to have to say something. I am not sure what to say."

It was winter and he had plenty of time to consider and make a decision.

After he returned from the wedding and summer vacation, we had a chance to catch-up.  I asked, "So what did you finally decide to say?"

He quipped, "It is best to apologize often and forgive quickly."

Please join me in extending our sympathies to his beloved wife Kiki, their family and loved ones. There are no immediate plans for a service, but their home address is as follows:

747 E Deerpath Rd

Lake Forest, IL  60045

 

 

Coronavirus and Market Meltdown

This is the end. The Bull Market is Dead.  Long Live the Bear Market. People will simply need to get over the fact that declining interest rates will not bail them out of bad credit/investment decisions.

Last week, the municipal bond market did things that  were unprecedented, which sent trading into uncharted waters. Michael Schnetner, CFA, Managing Director at RW Baird, summed it up:  "To get a sense of just how unusual the moves were last week we examined MMD data going back to June 1981 and found that twice last week the increase in rates were larger than 99.9% of all daily observations. Wednesday's 28 bps backup in the 10-Yr MMD yield was the 12th largest one-day increase on record. That rate move was followed by a 42 bps increase in the 10-Yr MMD yield which was the 3rd largest one-day increase in rates. Combined, the two-day increase of 70 bps in the benchmark rate is tied for the largest on record going all the way back to Oct. 1981 when the yield on 10-Yr ‘AAA' munis was over 10%.

"The dislocation in the municipal market has resulted in an environment where relative value measures are equally as historic. Daily tracking of the 10-Yr ‘AAA' muni-Treasury ratio reveals that at one point last week the benchmark M/T exceeded 200%, the highest level in the history of the index, eclipsing even the stratospheric levels witnessed during the onset of the 2008-09 Great Financial Crisis. The ratio ended the week at 167.7%, greater than all but twelve daily closing instances. As of Friday's close short ratios offered even greater relative value in excess of 228% of the yield on similar-maturity Treasury securities. For perspective, the average 2-Yr M/T ratio since Jan. 2010 is 89.7% and the average 10-Yr ratio is 91.4%, affording municipal investors significant margin of safety without the need to move materially down the credit spectrum.

 

Special Report: Basics of Federal Bailouts

The Hill is filled with lobbyists seeking to get a share of the federal bailout program.  It is rumored to be $2 trillion worth of pork filled pages.  With the Dow down more than 10%, Brent Crude Oil off more than 24%, and the VIX rocketing to 85, the real conversation should be about the basics of bailouts.

A growing concern of Smith's Research & Gradings is moral hazard.  SRG has written extensively about the never ending conservatorship of Government Sponsored Enterprises (GSE) such as Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Mortgage Assurance Corporation). The U.S. taxpayer has never received a fair rate of return on the cost of providing a 100% government guarantee on the Fannie/Freddie paper. As a result, Fannie and Freddie have actually expanded their market share during the bankruptcy (conservatorship), which has lasted more than 10 years.

While SRG does not believe or espouse "Economic Darwinism”, we do believe in the necessity of disruption and destruction as part of capitalism — otherwise we would still be making buggy whips (and internal combustion engines).  It is not the role of government to bailout failing companies.

But, the reality is the Federal government is going to be working on bailing out individuals, companies, and entire industry sectors.  The government can play a role in avoiding unnecessary costs associated with bankruptcy.  For example, the government can maximize returns by shortening the time it will take to restructure.

 

Special Edition: Oil Price Plunge

Crude oil prices fell further on Wednesday, with WTI prices falling to 18-year lows, after the Energy Information Administration's latest weekly inventory report that estimated a 2-million-barrel build for the week to March 13. The agency reported that at 453.7 million barrels, crude oil inventories in the United States were 3 percent below the five-year average for this time of the year.  WTI finished the day at $20.83, which was down $6.50 or 23.78%.

Goldman Sachs' Jeffrey Currie got the oil price plunge correct when he reported oil would hit $20 a barrel.  He says this time the crisis could be worse than it was in 2014, when Saudi Arabia also upped production in an attempt to kill shale. "The biggest difference is that these producers are all in a much weaker position,” Mr. Currie told the Financial Times. "Their balance sheets are weaker, their stock prices are lower.”

If the current price trends continue through the end of the year, many shale producers will go under, analysts predict, and production will start declining, eventually contributing to a rebalancing of the market.

The size of the drop in oil prices needs to be viewed in context of the past month, which started with crude oil reaching $53.38 in late February.

For the record, the price of oil has very little to do with supply and demand models based on fair and efficient markets. Oil prices are set by a cartel of oil producing countries, a.k.a. OPEC. These countries actually meet regularly to set the price of oil and divide up the profits by allocating the amount of oil each country will be allowed to pump.

 

 

 

 

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President Barack Obama vetoed legislation that the U.S. Congress passed to build The Keystone XL Pipeline.  The Senate failed to override the veto.

Keystone XL Pipeline is a proposed 1,179-mile (1,897 km), 36-inch-diameter crude oil pipeline beginning in Hardisty, Alberta, and extending south to Steele City, Nebraska. Keystone proponents describe the pipeline as a critical infrastructure project for the energy security of the United States and for strengthening the American economy.

Along with transporting crude oil from Canada, the Keystone XL Pipeline would also support the significant growth of crude oil production in the United States by allowing American oil producers more access to the large refining markets found in the American Midwest and along the U.S. Gulf Coast.

 

 

 

Moody's Investors Service announced it will recalibrate its ratings of U.S. municipal bond issues and issuers to its global rating scale beginning in mid-April. The purpose of the recalibration is to enhance the comparability of credit ratings across Moody's-rated universe.

All municipal scale ratings will be recalibrated to the global scale according to a newly issued methodology. And, the global scale ratings will replace all outstanding municipal scale ratings. Approximately 70,000 sale-level ratings will be subject to the recalibration.

Once Moody's U.S. municipal ratings have been recalibrated, they will represent Moody's credit opinion on the global scale for all rated municipal issues and issuers. Any subsequent changes in credit quality will be reflected through upgrades or downgrades on the global scale.

 

 

 

Puerto Rico's new administration has disclosed that the Fiscal 2005 General Fund operating budget is potentially exposed to a combined $800 million of revenue shortfalls and spending pressures vs. initially budgeted amounts.

The revenue shortfalls reportedly relate mainly to disappointing new initiatives, as opposed to shortfalls in "core" income and excise taxes, although year-to-date tax revenue details have not been made available. On the spending side, the pressures are said to be mainly due to payroll costs in the departments of education and public safety. At this point, specific measures have not been identified to close the sizable budget gap.

 

 

Moody's lowered the rating on the Santa Rosa Bay Bridge Authority to "Baa3" from "Baa2" and Fitch IBCA downgraded the issuer to "BBB-" from "BBB". The downgrades affect $94.9 million dollars in debt and primarily reflect the slower than expected ramp-up of traffic on the new bridge, which has negatively affected the gross revenues securing the bonds.

Moody's reported that since opening in May 1999, toll revenues have fallen far short of original forecasts, with July 1999 revenues at 49% and January 2000 revenues at 67% of forecast.

Given the slower than expected ramp-up, and the less established commuter base crossing the bridge, Moody's felt there may be greater price sensitivity at the bridge than originally projected. The anticipated toll increase in 2002, during ramp-up, may negatively affect the demand for trips across the bridge, further slowing ramp-up beyond current projections.

 

 

March 18, 2020, Vol. XXVIII, Issue 4  Municipal Edition

 

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The Global Economic Doctor

 

Scott B. MacDonald, Ph.D.

March 18, 2020

 

The Risk of a Long Downdraft

Summary: While considerable attention is being given to the impact of the coronavirus on financial markets and resources are being marshalled to tackle the threat of a recession, the U.S. economy is being hit hard by both supply and demand shocks. Global supply lines, already disrupted by the U.S.-China trade war, have been under considerable pressure by the shutting down of China's industrial sector, a development that has cascaded into the U.S. At the same time, the coronavirus has shut down the consumer side of the U.S. economy. Social distancing is revenue-shrinking for many companies, large and small. Important efforts are in motion to limit the downside, including the Trump administration's stimulus legislation (ranging between $800 billion and $1.2 trillion); the Federal Reserve's ultra-accommodative monetary policy (down to near-zero rates) and its return to quantitative easing; and the public-private effort to find a medical solution. Despite all of this, there is a risk of getting caught in a long economic downdraft — An economic reboot from both supply and demand shocks is not easy to achieve. Although we are hopeful that the U.S. recovery will be quick, the reality is that the pace of recovery could well be slower than anticipated, largely due to the effect of economic activity disruption on infrastructure throughout the country.  Simply stated, as human activity is brought to a near-halt and fewer people show up to work, there are concerns about the maintenance of industrial facilities, refineries, ports, roads and public utilities. Not every job can be done from home.

 

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