Puerto Rico ruling won't rock special revenue credit on the mainland, Fitch says

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The ripple effects of Puerto Rico's bankruptcy may be less onerous for state special revenue credits than some investors thought.

Fitch ratings said in a report Monday that a March court ruling that payment on Puerto Rico special revenue bonds is optional is unlikely to apply to special revenue debt on the mainland. That ruling by the 1st Circuit U.S. Court of Appeals had prompted Fitch to place seven special revenue ratings on negative watch — including four large school districts in California and Chicago.

“U.S. states do not have the ability to file for bankruptcy, so the concept of special revenue debt contained in the municipal bankruptcy code is not applicable to them, and the ruling has no impact on state-level debt,” Fitch said in a press release on Monday. “Granting this ability would require either an amendment to Chapter 9 of the U.S. Bankruptcy Code or a new federal law that pertains to states, either of which could be subject to legal challenge and neither of which seems likely in the foreseeable future.”

Fitch asserted that for the ruling to affect states, Chapter 9 would need to be amended, which would require an act of the U.S. Congress.

“Fitch is not aware of any current or recent Congressional proposals that address this issue … It is Fitch's understanding that, in addition to Congressional approval, all states would have to amend their own laws to create a uniform right to file for bankruptcy. Fitch believes at least some states would resist this effort. This creates a significant hurdle to enactment.”

Puerto Rico bonds were trading mixed on Monday.

According to the MSRB’s EMMA website, among actively traded securities on Monday, the Puerto Rico Sales Tax Financing Corp.’s restructured Series A-1 revenue zeros of 2051 were trading at high price of 16.817 cents on the dollar, a low yield 5.63%, in 35 trades totaling $36.11 million. This compares to a high price of 16.94 cents, a low yield of 5.606%, in 57 trades totaling $36.94 million on Friday.

The COFINA restructured Series A-1 capital appreciation revenue zeros of 2046 were trading at high price of 22.792 cents on the dollar, a low yield 5.53%, in 31 trades totaling $8.18 million. This compares to a high price of 22.61 cents, a low yield of 5.56%, in 59 trades totaling $1.22 million on Friday.

The COFINA restructured Series A-1 revenue 5s of 2058 were trading at high price of 99.229 cents on the dollar, a low yield 5.045%, in 25 trades totaling $1.07 million. This compares to a high price of 99.314 cents, a low yield of 5.04%, in 37 trades totaling $30.74 million on Friday.

The COFINA restructured Series A-2 revenue 5s of 2058 were trading at high price of 95.125 cents on the dollar, a low yield 5.296%, in 21 trades totaling $19.74 million. This compares to a high price of 95.375 cents, a low yield of 5.28%, in 48 trades totaling $51.66 million on Friday.

The Commonwealth public improvement Series 2008A refunding 5s of 2022 were trading at high price of 72.875 cents on the dollar in 13 trades totaling $1.07 million. This compares to a high price of 72.532 cents in one trade of $100,000 on May 14.

Primary market
This week’s supply is estimated at $5.2 billion in a calendar comprised of $4.3 billion of negotiated deals and $947 million of competitive sales.

Action kicked off on Monday as RBC Capital Markets priced for retail the New York State Environmental Facilities Corp.’s (Aaa/AAA/AAA) $126 million of Series 2019A state revolving funds revenue bonds, 2010 Master Financing Program, green bonds. The issue will be priced for institutions on Tuesday.

Also on Tuesday, Goldman Sachs is expected to price the Arkansas Development Finance Authority’s (B3/B/NR) $487 million of industrial development revenue bonds for the Big River Steel project.

Raymond James & Associates is set to price the Polk County School District, Fla.’s (Aa3/NR/NR) $162 million of sales tax revenue bonds on Tuesday.

And George K. Baum is expected to price the Springfield R-XII school District, Mo.’s (Aa2/AA/NR) $148 million of general obligation school building bonds.

Demand for municipal bonds has continued to be strong, fueled in part by a 19th consecutive week of hefty flows into mutual funds but also by strong reinvestment demand which will accelerate in the months ahead, according to Patrick Luby, senior municipal strategist at CreditSights.

"If the plodding pace of new issue supply continues, there will be insufficient new issue bonds available to provide replacements for bonds getting redeemed in the summer months," he said. "At the current rate, May volume would be down significantly versus last year."

Currently, new issue volume for the month is on track to be down 30% versus May of 2018. However, it would be about 3% higher than for the first 5-months of last year and is annualizing at around $315 billion.

Luby also noted that the global amount of negative-yielding debt hit a multi-year high last Friday; so traditional muni bond investors may have to contend with increased competition from offshore buyers looking for credit diversification and positive yields.

"Yields may look low to municipal investors but the market value of negative-yielding debt hit $10.6 trillion on Friday —that's up 85% since last October and the highest since Sept. 2016, making the positive yields and strong average credit quality of munis more attractive to non-U.S. investors."

Month-to-date, the BAML ICE Municipal Index has now returned 1.00% and leads the Treasury and Corporate Bond Indices, which have returned 0.79% and 0.36%, respectively.

Monday’s bond sale

Click here for the NYS EFC retail pricing

Last week's actively traded issues
Revenue bonds made up 53.14% of total new issuance in the week ended May 17, down from 53.79% in the prior week, according to IHS Markit. General obligation bonds were 42.23%, up from 41.23%, while taxable bonds accounted for 4.63%, down from 4.98%.
Some of the most actively traded munis by type in the week were from Puerto Rico, Missouri and Florida issuers.

In the GO bond sector, the Puerto Rico Commonwealth 8s of 2035 traded 33 times. In the revenue bond sector, the Missouri Health and Educational Facilities Authority 4s of 2054 traded 33 times. In the taxable bond sector, the Miami-Dade County aviation 3.555s of 2034 traded 37 times.

Secondary market
Munis were mixed on the MBIS benchmark scale Monday, which showed yields falling one basis point in the 10-year maturity and rising less than a basis point in the 30-year maturity. High-grade munis were stronger, with yields down by one basis point in the 10-year maturity and by less than a basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year muni GO and the 30-year muni yield remained unchanged.

Treasuries were weaker as stock prices traded lower.

The 10-year muni-to-Treasury ratio was calculated at 71.3% while the 30-year muni-to-Treasury ratio stood at 84.7%, according to MMD.

“Today’s ICE Muni Yield Curve is hovering within one basis point from Friday’s levels,” ICE Data Services said in a Monday market comment. “High-yield is also stable and the taxable sector is 0.6 basis points higher led by the five-year."

Previous session's activity
The MSRB reported 32,246 trades on Friday on volume of $11.31 billion. The 30-day average trade summary showed on a par amount basis of $12.44 million that customers bought $6.03 million, customers sold $4.24 million and interdealer trades totaled $2.16 million.

New York, California and Texas were most traded, with the Empire State taking 13.187% of the market, the Golden State taking 12.469% and the Lone Star State taking 9.257%.

The most actively traded security was the Puerto Rico Dales Tax Financing Corp. restructured A-2 revenue 5s of 2058, which traded 47 times on volume of $51.27 million.

Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were lower, as the $36 billion of three-months incurred a 2.335% high rate, down from 2.360% the prior week, and the $36 billion of six-months incurred a 2.340% high rate, off from 2.355% the week before. Coupon equivalents were 2.388% and 2.407%, respectively. The price for the 91s was 99.409764 and that for the 182s was 98.817000.

The median bid on the 91s was 2.310%. The low bid was 2.280%. Tenders at the high rate were allotted 36.88%. The bid-to-cover ratio was 2.94. The median bid for the 182s was 2.310%. The low bid was 2.280%. Tenders at the high rate were allotted 94.05%. The bid-to-cover ratio was 2.82.

Gary E. Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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