Dude, stop looking so desperate!
Moody’s Investors Service poked fun at Detroit when it concluded that “desperate times call for desperate measures” in its review of the bankrupt city’s attempt to invalidate $1.45 billion of pension obligation Certificates of Participation (COPs). Noting that it is “extremely rare and unusual” to repudiate (in other words, cancel) debt, Moody’s adds that COPs investors could get some of their money back because it was used to shore up the city’s pension fund liability and is technically still sitting there in the investment fund.On the plus side, Moody’s says some creditors may actually benefit from the move, “simply by making more funds available for unsecured creditor recovery” because the city wouldn’t have to include repayment of the $1.45 billion debt in its reorganization plan. Still, if the bankruptcy judge sees fit to return that money to investors, the pension fund status would be severely weakened and pensioners would likely take the hit. In any case, Moody’s concludes that whatever the decision, Detroit’s situation is so unique it should not have an impact on the broader municipal market.
On a related note, Detroit's legal argument for the claim is that the city’s issuing COPs violated Detroit’s legal cap for its debt level. Never mind that legal disclosures at the time stated the contrary and Detroit actually set up governmental subsidiaries to hold that debt (instead of the city acquiring it) to make sure that the reform would pass muster. As Wells Fargo's Natalie Cohen puts it in her analysis, “The takeaway here is simple: interest rates go up, and interest rates go down. A borrower that does not have the fiscal capacity to absorb such changes (in either direction) or the ability to post collateral when an interest rate assumption moves the wrong way perhaps should not engage in complex swap transactions.”
You’ve got to accentuate the positive
Fitch Ratings Agency reported last week that downgrades in the U.S. public finance sector are – happily – decreasing. The number of downgrades decreased to 189 in 2013 from 198 the previous year. Additionally, the number of ratings with a Negative Outlook at the end of 2013 remained flat while the number of Positive Rating Outlooks increased to 85 from 61 a year ago.So that’s the positive. What else? Well, downgrades are still outnumbering upgrades as the number of upgrades at the end of 2013 was 101 (up from 84). Downgrades have outnumbered upgrades in each of the last five years. But Fitch notes it’s important to recognize “that downgrades account for a small percentage of total public finance rating actions” as most rating actions (85 percent) during the year were affirmations.
Puerto Rico: it was only a matter of time
To anyone who was surprised by Puerto Rico’s downgrade to junk bond status the other week, well, Municipal Market Advisors’ Matt Fabian feels sorry for you. To Fabian, the downgrade was the inevitable end to credit ratings agencies' string of negative outlooks for the commonwealth. “Puerto Rico’s persistent economic downturn and unsustainable debt load had simply become too weighty for the agencies to ignore,” Fabian writes in his weekly market brief. “The simple truth is that the evident lack of cash (and market access to get more) by definition had made the island’s long‐term credit rating ‘speculative’ quality months before,” he adds.He also notes that anyone with an investment advisor who didn’t see that one coming should perhaps think about getting a new investment advisor. Seeing as there was still a big post-downgrade flurry of activity, Fabian concludes that many investors were likely unprepared for what occurred. “The problem, as always,” he says, “is that most municipal bonds in individual accounts are ultimately overseen by non‐specialist advisors who have only a poor understanding of the risks and granularities involved in municipal lending.”
