Diary
Prepa Inches Toward Litigation
By Michelle Kaske
Puerto Rico’s bankrupt power utility and bondholders may face off in court Wednesday in the wake of Hurricane Fiona’s damage after mediation talks over the agency’s $9 billion debt restructuring ended last week without a deal.
US District Court Judge Laura Taylor Swain ordered a hearing for Wednesday on the commonwealth’s push to start litigation after months of court-supervised mediation failed to produce a debt-cutting plan for Puerto Rico’s Electric Power Authority, called Prepa. The island’s financial oversight board filed a potential litigation schedule late Friday even though it still wants to continue negotiations with creditors.
The breakdown in the debt talks comes as Puerto Rico slowly restores power after Hurricane Fiona grazed the island Sunday, dumping heavy amounts of rain and causing catastrophic flooding, according to the National Hurricane Center. The storm triggered an automatic shutdown at power plants that cut electricity to the entire island of 3.1 million people.
The court may choose to delay Wednesday’s hearing because of Hurricane Fiona and will assess the timing early this week, Swain wrote in a court filing Sunday morning.
Prepa’s restructuring hinges on how it can reduce its obligations sufficiently so that island residents — 44% of whom live in poverty and suffer from chronic blackouts — are able to repay while at the same time compensating creditors, some of whom haven’t been paid in eight years.
“The parties’ respective positions on what is reasonable in the context of Prepa’s rates and needs, and on their legal rights have resulted in a currently unbridgeable gap on the economic terms of a restructuring,” lawyers for the oversight board wrote in their filing late Friday.
Litigation will prolong a five-year bankruptcy that’s already been set back by earlier hurricanes, the commonwealth’s own bankruptcy and the pandemic. Resolving Prepa’s finances and strengthening its power grid are crucial in providing reliable electricity and boosting Puerto Rico’s economy.
Prepa began skipping principal and interest payments in 2017 when its bankruptcy began. In the two years before then, the utility was only able to make such payments because certain creditors and bond insurance companies extended loans.
In response to the board’s litigation request, a group of ad hoc bondholders and bond insurers early Monday asked Swain to end Prepa’s bankruptcy or appoint a receiver that would raise electricity rates to cover the utility’s operating and debt costs, according to court documents.
If Swain declines to allow a receiver for Prepa, the bondholders and insurers want the court to impose a Nov. 1 deadline for the board to file a debt restructuring plan, with a confirmation hearing to be held no later than May 1.
“Prepa largely continues to do business as usual — declining to charge its customers an amount sufficient to pay the debt service that it is contractually obligated to pay, not collecting from government entities that are years overdue on their bills, failing to move forward with putting FEMA funds to work, and faltering on improving its historically abysmal operational track record,” lawyers for the creditors wrote in Monday’s filing to the court.
A key disagreement in the negotiations is whether Prepa’s bonds are backed by the utility’s gross revenue or repayment is secured only through a so-called sinking fund held by the bond trustee, according to court documents. Bondholders believe they are entitled to Prepa’s gross revenue.
Under the board’s proposed schedule, hearings for a summary judgment could be held as soon as January or as late as April.
—with assistance from Jim Wyss
Headlines
A gauge of US homebuilder sentiment declined for a ninth straight month in September as mortgage rates continued to climb, further accelerating the housing-market cool-down. The National Association of Home Buyers/Wells Fargo gauge decreased by three points to 46. Homebuilder sentiment has fallen every month this year, the longest stretch of declines in data back to 1985. “The housing recession shows no signs of abating as builders continue to grapple with elevated construction costs and an aggressive monetary policy from the Federal Reserve,” NAHB Chief Economist Robert Dietz said in a statement.
US home values declined the most since August 2011 last month as soaring mortgage costs pressure buyers to hesitate over making a purchase. The typical home value fell 0.3% in August from a month earlier, following a 0.1% decrease in July, online housing marketplace Zillow Group said in a report Monday. The spike in mortgage rates in recent months has raised the monthly mortgage payment on a typical newly purchased home — including insurance and taxes — to $1,643, a jump of 83% from August 2019, Zillow said.
Tens of thousands of techies will frolic through kitschy national park-themed decorations in San Francisco’s downtown this week as Salesforce’s annual Dreamforce conference returns in full after two pandemic years. It will easily be the largest conference the city has seen since early 2020, said Joe D’Alessandro of the San Francisco Travel Association. Company and city leaders are touting the event as a symbol of pandemic recovery, with the estimated $40 million of revenue that Dreamforce will generate for the city and a new $25 million donation to city schools. But, the downtown that conference attendees will be coming back to is still marked by the pandemic. Office vacancy rates are higher now than after the great recession, population has slipped more than any other major US city, companies have left the region for cheaper tech hubs and persistent work-from-home leaves the streets a bit emptier. Read the full story here.
New York City’s Rikers Island jail complex is on pace to exceed last year’s number of deaths in custody, and some advocates and officials say it’s time for a federal judge to appoint a third party to run the troubled facilities. The city’s Department of Correction is under a court mandate to reform Rikers, but critics say there are few signs of progress in the seven years since the shakeup was ordered: The system continues to struggle with violence, allegations of abuse and neglect of prisoners, high absenteeism among staff, and other issues.
Data Watch
Primary market: The biggest sales expected to price today include a $522.9 million issue for the San Diego Unified School District CA and $45.2 million in Thurston County WA GOs.
Secondary market: MSRB par amount traded: $13.5 billion; PICK par value offered: $11.9 billion.
Most active: The most-traded issue on Monday was the Tuscaloosa AL 4.25% GO warrant due in 2047: 100 trades totaling $3.4 million.
In the pipeline: New Mexico, $288.8 million severance tax revenue bonds, at auction 9/28; Minnesota, $332.4 million general fund appropriation bonds, at auction.
AAA Callable Yields
| TERM | CURRENT | PREVIOUS |
| 1 Year | 2.51 | 2.47 |
| 2 Year | 2.53 | 2.49 |
| 5 Year | 2.57 | 2.52 |
| 10 Year | 2.87 | 2.84 |
| 20 Year | 3.41 | 3.40 |
| 30 Year | 3.61 | 3.60 |
*assumes 5% coupon, 10-year par call.Source: Bloomberg
Benchmark States 10-Year Yields
| STATE | YIELD | SPREAD/AAA |
| CA | 3.10 | 23 |
| FL | 3.09 | 22 |
| IL | 4.35 | 148 |
| NY | 3.05 | 18 |
| PA | 3.19 | 32 |
| TX | 3.07 | 20 |
Insight
Issuers Pull Back on Sales
By Danielle Moran
US states and cities are pausing debt sales before this week’s crucial Federal Reserve policy decision as they seek to avoid potential volatility at a time when yields are already approaching the highest level in years.
Roughly $1.7 billion of long-term munis may hit the market this week, about 80% below this year’s average, data compiled by Bloomberg show. And issuers seem reluctant to commit to sales going forward: Scheduled supply for the next 30 days began the week at $4.9 billion, the least since Jan. 4. On Monday, the figure climbed to $5.5 billion.
It’s not just munis. Bond sales are stalling in the US investment-grade primary market as well, driving home how borrowers of all stripes are sidestepping potential turbulence as they wait to see how markets absorb the Fed’s expected rate increase on Wednesday.
“I haven’t seen this kind of wait-and-see attitude,” said Charles Stavitski, executive vice president in public finance at Roosevelt & Cross Inc. “People are very much concerned about the results of the Fed meeting.”
The Fed is forecast to lift its key rate by 75 basis points on Wednesday for the third straight meeting to combat soaring inflation, but much of the focus will be on what Fed Chair Jerome Powell signals for the coming months.
The 10-year Treasury yield, the benchmark for much of global borrowing, eclipsed 3.5% on Monday for the first time since 2011, showing there’s no letup as of yet to the pain for bondholders.
Some state and local issuers scheduled sales to get ahead of the Fed meeting. Last week’s muni calendar totaled nearly $9 billion — above the weekly average for this year.
Norwood, Massachusetts, outside of Boston, sold $96.2 million of debt last week, choosing that timing in part because of the Fed, said Meg LaMay, director of finance for the town.
The sale went toward cash-flow needs for a school construction project, but getting it done before this week was an “added benefit,” she said. “There was a consideration that rates are increasing and time is of the essence.”
Muni yields have surged in 2022, with benchmark 10-year rates hovering around 2.86%. The rate reached 2.95% in May, the highest since 2013, part of a broad bond-market slump. The Bloomberg Municipal Bond Index is down 10% this year, on track for the worst annual performance in decades.
“Given what the Fed has been doing recently, that was top of our mind and we were interested in getting into the market ahead of this week’s announcement,” said Richard Dreher, chief financial officer for the Pennsylvania Turnpike Commission.
Wednesday’s Fed decision was “certainly” a consideration when deciding when to price the $255 million of bonds the commission sold last week, he said.
Original Source: https://newsletters.briefs.bloomberg.com/document/ALHnhzrzWY7XAh-njrNc.Q–_4sz4tvejf32zub9cw6/data-watch