Municipals end flat to firmer as week’s final deals price; PREPA restructuring sparks chatter

By Sheri Kasprzak

New York, Sept. 3 – Municipals rounded out the Thursday session on a mixed note even as Treasuries were boosted by higher jobless claims and international turmoil, market sources said.

Yields on top-rated municipals were flat to 1 basis point lower, traders said.

Meanwhile, the 10-year benchmark Treasury note yield fell by 2 basis points to close at 2.18%, the 30-year bond yield fell by 2 bps to 2.95%, the five-year note yield fell by 3 bps to 1.49%, and the two-year note yield fell by 1 bp to 0.71%.

PREPA plan spurs talk

A day after the Puerto Rico Electric Power Authority announced a tentative agreement to restructure $9 billion of debt, the market was abuzz about the plan – and what it means for the distressed commonwealth’s future.

“The proposed recovery plan agreed to by the Puerto Rico Electric Power Authority and certain bondholders, announced yesterday, furthers our view that a restructuring of the issuer’s debt obligations remains probable,” said a statement from Fitch Ratings Thursday.

“The prevailing forbearance agreements between PREPA and some creditors have provided it with temporary relief. However, the proposed plan, if executed, would confirm the concerns we raised in June 2014 that bondholders will not receive the payment of interest and principal as originally scheduled.”

Fitch’s report noted that it’s still waiting to see if the authority will address long-term rating concerns about net cash receipts and operational challenges.

The ratings agency downgraded the authority’s net revenue bonds to CC from BB in June 2014.

Broader restructuring ahead

The commonwealth’s government group is working on a broader restructuring plan for other portions of its $72 billion of debt, and that proposal is expected for release on Sept. 8.

“We do not know what this proposal will look like or exactly which bonds among multiple issuers will be included, and any proposal will be only a starting point since bondholders are unlikely to consent to haircuts without significant negotiations and probably legal action,” said Alan Schankel in a note Thursday.

“The PREPA agreement, if successfully finalized and executed, will demonstrate that consensual agreement is possible, which could reflect well on future negotiations.”

Valparaiso bonds price

Among the larger deals pricing in this slow week was a $143,035,000 offering of multi-school board corporation unlimited tax first mortgage bonds from the City of Valparaiso, Ind.

The bonds (//AA+) were sold through City Securities Corp.

The bonds are due 2018 to 2035 with 3% to 5% coupons.

Proceeds will be used to finance school capital projects.

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