Munis: Chicago, Detroit, Puerto Rico and More Puerto Rico-An Economy Held Hostage by Politics September 2015
Michael Comes, CFA Portfolio Manager & Vice President Research Michael.Comes@cumber.com
ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
Private Sector Employment Private Sector Employment has Stabilized 950
390
370
850
350 750 330 650 310 550 290
450
270
350
250
Total Private - State (000s)
Government - State (000s)
Source: BLS ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Service Sector 750
Service Sector has Recovered since the Recession
700
210
190
650 170 600 150 550 130 500 110 450
90
400
350
70
Private Service-Providing - State (000s) lhs
Manufacturing - State (000s) rhs
Source: BLS ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Housing Market Remains Strong $125,000
$120,000
$115,000
$110,000
$105,000
$100,000
$95,000 2005
Source: Census Bureau
2006
2007
2008
2009
2010
2011
2012
2013
2014
Median Value Owner Occupied Home
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Population Pyramid Population Pyramid resembles those of Japan and Western Europe 85+ 80-84 75-79 70-74 65-69 60-64 55-59
50-54 45-49
Men
40-44
Women
35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-5 -8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Source: Cumberland Advisors, Census Bureau ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Adjusted Debt-GDP Adjusted Debt-GDP Tells A Different Story Centralized Government compared to U.S. States
Source: National Public Finance Guarantee ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Liquidity: Low, but Improving
Days Cash on Hand 120 100 80 60 40 20 0 2009
2010
Puerto Rico
2011
2012
2013
U.S State Median
Source: Puerto Rico Annual Disclosures, Investortools, Inc. ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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Annual Financing Gap: Puerto Rico Annual June 30, 2011 Sales Tax Revenue
Annual June 30, 2011
Annual June 30, 2011
1,129,006
1,144,659
1,170,748
8,279,118
8,028,704
8,244,567
Total Revenue
15,307,468
15,244,255
15,773,369
Total Expense
19,278,137
21,108,141
21,513,373
Personal Income Tax Revenue Corporate Income Tax Revenue Fuel Tax Revenue Total Tax Revenue
(3,970,669)
(5,863,886)
(5,740,004)
Capital Grants and Contributions
457,725
152,591
110,249
Net Government Transfers
230,551
219,794
246,908
Total Change in Net Assets
(3,282,393)
(5,491,501)
(5,382,847)
CA Financing Gap
(1,210,471)
(3,239,556)
(2,953,470)
Revenue Over Expense
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Path to Fiscal Stability Gray economy estimated at 25% of total output • Puerto Rico collects only 56% of the sales taxes due on all taxable transactions. – At current tax rates, 100% collection would increase revenues by approximately $1 billion annually, 1/3 of amount needed to plug annual financing gap
• By instituting reforms, Puerto Rico could stabilize its fiscal condition without impairments to general government creditors.
Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Chapter 9: Not a Solution Chapter 9 for sake of Political Expediency is not a solution • Not a ‘get-out-of-jail free card’ • Passage of Chapter 9 and determining if insolvency standard has been met could take years – Think Harrisburg bankruptcy or San Bernardino
• Chapter 9 Restructuring – Hurts Commonwealth’s credibility with investors – Restricts market access for decades
Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Government Dysfunction • Puerto Rico is not so much problem as is the dysfunction of government • Been a recent shift in support by Governor for honoring Puerto Rico debt • Has resulted in credibility crisis – Commonwealth unable to sell $750 million in PRASA debt in late August – Governor has stated publicly that government debt is “not payable.”
Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Spreads Remain Elevated Barron’s Puerto Rico Article Published
S&P Downgrade to Junk
Initial Restructuring Legislation Passed
Puerto Rico governor states debts “not payable”
Source: Municipal Market Analytics, Bloomberg ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.
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Closing Thoughts Health of economy better than headlines suggest Liquidity and debt crisis on governmental level can be solved
Chapter 9 not a solution Recent about-face from governor on debt repayment Investors still trading bonds flat based on expected impairments
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Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.
ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.
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