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Fitch Public Finance Finds Solutions

Laura Porter, Head of U.S. Public Finance has been at Fitch for almost 15 years, primarily focusing on U.S. state and local government credit analysis. In her new role, which she began in March, she is responsible for not just state and local credit ratings and research but also the work of Fitch's other expert analytical groups, which cover: colleges and universities, hospitals, housing authorities, life plan communities, not-for-profit institutions, and public power and water and sewer utilities.

Ms. Porter's expanded role provided a good opportunity to step back and assess Fitch's core strengths and position in the market. Ms. Porter said, "I believe that our biggest competitive advantage is our experienced analytical team, so I am focused on making sure we make the most of their skills. We have specifically designed criteria to allow those experienced analysts to apply their analytical judgement — to tell the story of the credit — and that is something that I will continue to prioritize."

Ms. Porter wants to ensure the analytical team's work best expresses the rating agency's opinion in a way that is most useful to the market. She said, "I want all of our analytical communication to be insightful, forward-looking, and as clear as possible, both in terms of how we arrived at the rating and what could change it."

Ms. Porter has a rich background in public finance. She joined Fitch in 2005 after working as a vice president in the tax-exempt securities division at Morgan Stanley. Her work in public finance investment banking was primarily focused on New York City and the Long Island Power Authority.



Refinitiv's 3Q 2019 Rankings

According to Refinitiv's Deals Intelligence report, municipal bond volume totaled $267.5 bln. during the first nine months of 2019, up 12% compared to last year and the strongest opening nine-month period for municipal bonds since 2017. By number of issues, 7,310 municipal bonds were brought to market during the first nine months, a 15% increase compared year ago levels. Compared to the second quarter of this year, municipal bond proceeds increased 15% during the third quarter of 2019, while number of issues decreased 6%.

Refunding activity totaled $90.6 billion during the first nine months of 2019, a 19% increase compared to the first half of 2018. New money offerings totaled $176.9 billion, a 6% increase compared to a year ago and the largest opening nine-month period for new money municipal bonds since the first half of 2010. Revenue bonds totaled $150.6 billion, a 4% increase compared to last year. General obligation bonds, increased 20% during the first nine months of 2019 and accounted for 44% of first nine months 2019 municipal bond proceeds, the highest first nine month percentage since 2014.

Bond issuers in California, New York and Texas accounted for a combined 37% of the US municipal bond market during the first nine months of 2019, down slightly from 38% a year ago.

B of A Merrill Lynch held onto the number one underwriter slot with a 16.3% market share, Morgan Stanley took the number two slot with 10% share. Bond insurance, led by AGM achieved a 5.8% penetration rate of the total new issuance in the first nine months of 2019.



2019 Q3 Upgrades and Downgrades

Smith's tracked 562 ratings upgrades and adjustments for the first nine months of 2019 affecting $241.5 billion in outstanding long-term municipal debt.  The tallies for the same period during 2018 were 635 ratings changes affecting $205.4 billion in outstanding debt. The majority of issues upgraded during the first nine months occurred in the G.O. category with 242 upgrades, affecting $173.9 billion in outstanding debt. The Healthcare sector saw 46 upgrades, affecting $15.5 billion. There were 79 upgrades in the Utilities sector affecting $14.5 billion in outstanding debt.

Smith's tracked a total of 314 downgrades and ratings adjustments in the first nine months of 2019, affecting $75.7 billion in outstanding long-term municipal debt. The totals for the same period in 2018 were 421 ratings changes and $122.8 billion. The majority of the issues downgraded were in the G.O. sector with 120 issues, totaling $32.8 billion. Smith's tracked 54 downgrades in the Education Sector, with $4.5 billion outstanding, and 51 downgrades in the Healthcare category with $11.9 billion outstanding.




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

  — by Tom Kozlik








5 Years  Ago

10 Years Ago

15 Years Ago

20 Years Ago

According the the National League of Cities' latest annual survey of city finance officers, fiscal conditions are improving as the Great Recession recedes. However, local fiscal health has not yet fully returned to pre-recession levels. While tax revenues continue to improve, increases in service costs, long-term infrastructure needs, employee wages, and pension and health care obligations, along with decreased levels of state and federal aid, continue to constrain the fiscal outlook.

In 2014, 80 percent of city finance officers report that their cities are better able to meet fiscal needs than in 2013. More city finance officers report improved conditions this year than in the history of the survey, which began in 1985. Although this finding reflects improvements in fiscal health, optimism is relative to the broad impact of the recent recession in cities nationwide.

The survey findings confirms Fitch Ratings' expectations about the state of city finances nationally, according to Amy Lasky, a Fitch Managing Director in a recent report.

The House Financial Services Committee, by a large majority, passed a bill that would make it easier for investors to sue the credit rating agencies and make them more accountable.

The legislation, titled the Accountability and Transparency in Rating Agencies Act, passed by a vote of 49 to 14. The full House and Senate must approve the measure for it to become law.

The bill "aims to curb the inappropriate and irresponsible actions of credit rating agencies, which greatly contributed to our current economic problems."

According to Rep. Kanjorski (D-PA), the bill enhances the accountability of Nationally Recognized Statistical Rating Organizations (NRSROs) by clarifying the ability of individuals to sue them.  The rating agencies wouldn't be able to use as a defense against civil anti-fraud actions the fact that the Securities and Exchange Commission or the states don't regulate credit ratings or ratings methodologies.

James Spiotto, partner at Chapman & Cutler, leads one of the top bankruptcy/restructuring practices in the nation.  We asked Mr. Spiotto about the airline industry and the implications for municipal credit quality.

Essentiality of purpose is one of the fundamental credit assumptions associated with municipal revenue bonds. Over the past decade, rating agencies have increasingly emphasized cashflows supporting timely payment of debt service. The problem in the air line sector is the departure from mortgage revenue bond financing structures to doing it on an off balance sheet basis, with an unsecured general corporate pledge. It's how we end up in bankruptcy court with leases without a security interest. I am predicting a move towards mortgage secured obligations and away from unsecured corporate style debt claims in airport financing. Airports who desire not to lose control over their operations will recognize that revenue and mortgage financing does not threaten their control but enhances their ability to obtain financing. 

With less than 100 days until the new millennium, Moody's Investors Service provided investors with an update on Y2K compliance in the health care sector. Moody's wrote,"Since nearly 50% of hospital revenue comes from either of the governmental payers -- Medicare and Medicaid -- one of the biggest issues facing not-for-profit health care providers continues to be the status of the Federal Health Care Finance Administration's (HCFA) readiness for the year 2000."

Regulars may recall HCFA received a  failing grade from Congress when it didn't satisfy the GAO standards of compliance. HCFA has made great strides over the past six months and it is now up to speed. "Despite this update, Moody's still has concerns regarding the impact of outside vendors due to the interdependent nature of billing systems and the many different layers of intermediaries that process and submits claims"


November 11, 2019, Vol. XXVII, Issue 20  Municipal Edition









The Global Economic Doctor


Scott B. MacDonald, Ph.D.

November 12, 2019


If everyone is moving forward together, then success takes care of itself.

— Henry Ford


Markets, Risks and the U.S. Economy: Still Moving Along

Summary: There has been considerable concern as to where the U.S. economy is heading. In August and September market pundits were pointing to recession, pushed along by a deepening trade war with China, a pending trade war with Europe and tough times in agriculture and manufacturing. In October sentiment shifted, with investors taking U.S. markets upwards, hitting new records in early November. European and Asian markets have also got an uplift. Although risks abound, the ability of the U.S. and Chinese governments to reach a trade deal has given the market hope and, if consummated, could help pull the global economy towards firmer terrain. The past few months may go down as a “recession scare”, but the real thing remains further out on the horizon.

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