municipal bond market monthly - Janney Montgomery Scott LLC

Municipal Bond Market Monthly janney fixed income strategy May 1, 2015

Contents

PAge

Pension Obligation Bonds

1

What are POBs?

3

POB Case Studies: IL & NJ

6

State Issuer Ratings

9

Municipal Rating Definitions

10

Janney Municipal Publications

11

Disclosure

12

Are Pension Obligation Bonds as Bad as Some Critics Say? • Pension obligation bonds (POBs) are as bad as some critics say. They introduce market and political risks that require luck, discipline, and planning in order to simply have a neutral effect on credit. It is more common for there to be negative or meaningfully negative credit outcomes for issuers who sell POBs. • We usually consider POBs a noteworthy credit negative when assessing the overall credit profile of a state or local government. • The Government Finance Officers Association recommended that state and local governments should not issue POBs in a recent best practices report, while calling them “very speculative”. • Inside we further uncover details about the shenanigans such as pension contribution holidays and the human/asset liability mismatch that politicians use in conjunction with POBs to kick the decision making can down the road to future administrations and taxpayers. • New Jersey was downgraded to A2 by Moody’s and Puerto Rico was downgraded to CCC+ by S&P.

Pension Obligation Bonds Intro of Non-Governmental Risks at Best, Meaningfully Negative for Credit at Worst

Tom Kozlik

Municipal Credit Analyst 215.665.4422 [email protected]

Alan Schankel

Managing Director 215.665.6088 [email protected]

See page 12 for important information regarding certifications, our ratings system as well as other disclaimers. JANNEY MONTGOMERY SCOTT www.janney.com © 2015 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC

Municipal Monthly • Page 1

The concept of pension obligation bonds (POB) is one of the more ambiguous and misunderstood in a nuanced sector that is often very misunderstood. It is very difficult for an issuer to achieve a positive credit outcome after issuing POBs. Neutral credit outcomes after the issuance of POBs are possible, but risks exist and should not be ignored by issuers or investors. There is the strong potential that the end effect results in a negative hit to an issuers’ credit profile, occasionally resulting in or contributing to a rating downgrade. Meaningfully negative outcomes usually occur when POBs are sold by an issuer that is already distressed or not fiscally balanced before issuance. In this case a POB issuance is likely only going to help further damage the issuer’s credit profile. Likely Outcomes for Issuers’ Credit Profiles from Pension Obligation Bonds

POSITIVE

NEUTRAL

NEGATIVE

MEANINGFULLY NEGATIVE

Difficult to Achieve

Possible, but Risky

Strong Potential

Sometimes

Source: Janney Fixed Income Strategy and Research (FISR).

The municipal credit rating agencies currently view pension obligation bonds as having a neutral to negative effect on an issuer’s credit quality. Our opinion is not as bullish. For an issuers’credit profile to remain neutral after the issuance of POBS it would require a significant amount of: • LUCK (to achieve targeted returns, especially at this point in the business cycle); • DISCIPLINE (to not treat POBs as a deficit financing) and; • PLANNING (to not treat the pension plan as a line of credit). In general, we do not think that POBs are a fiscally responsible path governments should be taking. We think POBs introduce non-governmental risks into an issuers’ credit profile in the best of cases, and create conditions that could lead to a meaningful or significant amount of credit deterioration and rating downgrades in a negative or a worst case scenario. We also, in almost all situations, believe POBs will add to the burden of future taxpayers.

Municipal Bond Market Monthly May 1, 2015

Pitter-Patter About Pension Obligation Bonds

It is very difficult for an issuer to achieve a positive credit outcome after issuing POBs.

Date

Topic

Source

Notes

Jan 2015

GFOA recommended state & local governments not issue POBs

GFOA

Speculative strategy

2/5/2015

Risky Pension-Bond Strategy Considered in Kansas

WSJ

Proposed $1.5B issue

3/3/2015

PA Gov Tom Wolf proposed POBs in 1st budget

3/9/2015

Pension Obligation Bonds are Always the Wrong Choice

MMA

Problems w/ POBs

3/10/2015

KY State Senate Passes Bill to Study Teacher Pension Plan

KY Senate

Delays $3.3B POBs

3/10/2015

In Defense of Pension Obligation Bonds

4/17/2015

Pros and Cons of Pension Obligation Bonds

Gov. Office Proposed $3B issue

Bond Buyer Challenges criticisms MAGNY

Balanced opinions

Source: Noted above & Janney Fixed Income Strategy and Research (FISR).

This is after all a very ambiguous and misunderstood concept as we noted above. We cannot deny that under the right circumstances and as a piece of a pension reform package, POBs could be a valuable tool for state and local government issuers. And it is important to acknowledge that there are some issuers who have (so far) used them responsibly. The trouble is that there is always the potential for the strategy to back-fire. In many cases, the risks are out of an issuers’ control. Market risk is an example of something out of an issuer’s control. Too often the inherent risks involved and the potential for political “shenanigans” that accompany POBs often far outweigh the neutral benefits for potential issuers. Why is There Such a Controversy Over POBs? A positive, or even neutral credit outcome [after POB issuance] requires: luck, discipline, and planning.

The decision for a state or local government to issue pension obligation bonds (POB) is a controversial one, and it should not be taken lightly. POBs are controversial because issuers and much of the market for that matter are still deciding whether they are a feasible pension financing & arbitrage instrument, a harmful Wall Street devised product, or a tactic used by distressed and procrastinating governments to punt off into the future the need to make decisions in the here and now. We believe investors need to be aware of competing opinions of this controversy because POB issuance is on the uptick, high profile proposals exist, and it is very likely issuers will try to gain market access at a greater pace in the near term. This topic also requires close scrutiny because there are many interested and persuasive parties who stand to benefit. Recent POB Related Proposals and Commentary

The GFOA recommended state & local govts NOT issue POBs in a “best practices” advisory, while calling the use of POBs “very speculative.”

JANNEY MONTGOMERY SCOTT www.janney.com © 2015 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC


There has been a pitter-patter of proposals and commentary in recent months about pension obligation bonds. Credit deterioration and/or negative rating actions have been occurring in the states of Kansas, Kentucky, and Pennsylvania partly as a result of dwindling pension assets (mostly because of underfunding) when compared to rising liabilities. These states are considering selling billions of dollars of pension obligation bonds to shore up pension funding levels and balance their budgets in the short term. Recommendations and commentary from varying sources have accompanied discussions about these potential high-profile bond sales and the wisdom behind the policy and fiscal influences underlying the decision to sell POBs. The recent recommendations and commentary related to POBs that we have seen recently include: • The Government Finance Officers Association (GFOA) recommended state and local governments NOT issue pension obligation bonds in a “best practices” advisory communication released in January. The GFOA called the use of POBs “very speculative.” • The conclusion from a report by Municipal Market Analytics (a third party independent municipal research provider) titled, “Pension Obligation Bonds are Always the Wrong Choice” left no wiggle room as to their opinion about POBs. MMA believes, “An issuer’s sale of POBs illustrates a willingness to use long‐term debt to cover near‐term deficits and/or a reckless employment of operating leverage. The use of POBs is thus a solid reason to consider a rating downgrade, all else being equal.” • A sell-side source published special commentary in The Bond Buyer the day after MMA’s report was circulated to readers. “In Defense of Pension Obligations Bonds” agreed with some of the negatives about the taxable debt, and acknowledged that somtimes POBS are used as a type of


deficit financing, but the piece more strongly argued in favor of the POB strategy and added that POBs help, “create a visible and fixed repayment plan to tackle unfunded pension liability.” Our commentary is important for issuers, policymakers, voters and investors as they all will grapple with vital decisions regarding POBs in coming years.

• The Municipal Analysts Group of New York (MAGNY) sponsored a panel with some participants arguing in favor and others against POBs. Who is right? Should state and local governments consider them as options? What should investors factor into their analysis if an issuer sells or considers the sale of a POB? Our commentary is important for issuers, policymakers, voters, and investors as they all will grapple with vital decisions regarding POBs in coming years. It appears there is a growing amount of support for the issuance of pension obligation bonds from issuers. This is because budgets are still tight despite the economic recovery and payments for pensions are typically growing as a % of issuers’ budgets at the same time resources are dwindling. Fiscal difficulties are more structural than cyclical for many of these state and local governments, and the structural imbalances generally exist because revenues are not keeping pace with expenditure demands. It seems likely that POBs are being suggested or advised as a short-term budget fix. We think policymakers need to do a better job of analyzing and understanding the pros and cons of not only the near term as it relates to the issuance of POBs but also what fiscally irresponsible practices POBs propagate.

What

are

Pension Obligation Bonds?

POBs are an exotic type of bond issuance that has been used sparingly over the last 30 years by state and local government bond issuers, primarily to shore up the unfunded portion of their pension liabilities and/or forego revenue increases and expenditure cuts in some cases. Oakland, CA first sold $222 million of tax-exempt pension obligation bonds back in 1985. Soon after federal legislation took away the tax-exempt option; now POBs are issued on a taxable basis. POBs are an exotic type of bond, used sparingly over the last 30 years by state & local governments primarily to shore unfunded pension liabilities.

Pension Obligation Bonds Issued from 1985-2015

$30

$20

$10

An initial problem inherent in the POB strategy is the performance of the assets the bond proceeds are invested in may not achieve the required returns.

$0

Source: 1985-2013 data from Munnell, Alicia H., Jean-Pierre Aubry, and Mark Cafarelli. 2014. “An Update on Pension Obligation Bonds.” State and Local Plans Issue in Brief 40. Chestnut Hill, MA: Center for Retirement Research at Boston College. 2014 and 2015 data from Thomson Reuters and Janney FIS.

Generally a key factor cited for the issuance of POBs rests on the assumption that the taxable bond proceeds, when invested, will achieve a rate of return greater than the costs of the bonds. This is a strong selling point in the current rate environment because taxable borrowing rates are at or near all-time lows.



An initial problem inherent in the POB strategy is the performance of the assets the bond proceeds are invested in may not achieve the required returns. This consideration is subject to timing and market performance- two factors that are all but out of the control of state and local issuers. This is where the luck part comes into the analysis- strong arguments can be made that timing and market performance can be controlled- we think issuers, policymakers, and voters need to think about this argument very skeptically because in most cases issuers have no control and can get themselves into


Example of How Issuers Can Arbitrage Pension Obligation Bonds in Their Favor

Timing and market performance are important when considering POBS.

Source: Addressing the National Pension Crisis: “It’s Not a Math Problem” by Public Financial Management 2013.

trouble because of timing. Issuers, like Puerto Rico who sold POBS just before the Great Recession, were hurt by market declines.

• Case Study of Bad Market Timing: In 2008, Puerto Rico sold almost $3 billion of pension obligation bonds to help shore up the Employees Retirement System. Investment proceeds have not met expectations and the system has even used some proceeds to pay current system benefits and expenses. See pages 142-143 in the recent Puerto Rico financial data disclosure. • Counterpoint- Evidence Shows Positive Returns: In order to present a fair and balanced picture, we think we should highlight data results from a Center for Retirement Research at Boston College (CRRBC) found in a July 2014 report, which shows that, “as of February 2014, the majority of POBs have produced positive returns due to the large market gains that followed the [2008] crisis. Only the bonds issued at the end of the market run-up of the late 1990s, and those issued right before the crash in 2007, have produced a negative return; all others are in the black.” Average Internal Rate of Return on Pension Obligation Bonds

2.0% Data shows that returns can be positive, if an issuer gets the timing correct.

1.0%

1.5% 0.8%

0.0% -1.0% -2.0% JANNEY MONTGOMERY SCOTT www.janney.com © 2015 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC


-2.6%

-3.0% 1992-2007

1992-2009

1992-2014

Source: Munnell, Alicia H., Jean-Pierre Aubry, and Mark Cafarelli. 2014. “An Update on Pension Obligation Bonds.” State and Local Plans Issue in Brief 40. Chestnut Hill, MA: Center for Retirement Research at Boston College.


Puerto Rico sold POBS at one of the worst times possible, just before the World Financial Crisis, which collapsed equity market valuations (and most securities) and depressed POB proceed returns. That being said, data from the CRRBC cites study results which overall are more positive, but still warn of the dangers of bad timing. We think it is most likely that the optimal issuance window for a POB has passed and may not be again be ideal until after the next economic contraction.

It is important that when using the POB strategy that the total asset gains meet or exceed the total costs of the bond arbitrage. We have noted that timing plays an important role here. Readers should keep in mind that asset values have made exceptional gains in recent years. The point during the business cycle at which an issuer sells POBs is very important. We think it is most likely that the optimal issuance window for a POB has passed and may not be again be ideal until after the next economic contraction. Timing When Selling Pension Obligation Bonds is Important

We are most likely at this part of the business cycle

Outside of the above mentioned arbitrage opportunity we think the more likely reason issuers have considered and will increasingly consider selling pension obligation bonds is to achieve some level of budgetary relief.

A pension contribution holiday is when an issuer takes a break from making its annual required pension contribution.

Source: Addressing the National Pension Crisis: “It’s Not a Math Problem” by PFM 2013 & Janney FISR.

Another Reason Issuers Sell POBs - To Kick the Can Further Down the Road Outside of the above mentioned arbitrage opportunity we think the more likely reason issuers have considered and will increasingly consider selling pension obligation bonds is to achieve some level of budgetary relief. This is certainly the case in Kansas, Kentucky, and Pennsylvania. Political actors are trying to balance budgets and deliver (or even increase) services to voters. The problem is that expenditure demand, in many forms, is rising faster than revenues. Political actors should come clean and address the driving forces behind their structural imbalances. Arguments can be made that a POB strategy, if followed by regular, diligent and full pension contribution payments and supported by benefit reforms, is advantageous. The problem is that this is hardly ever the case. In most situations, POBs are sold so issuers can avoid making necessary policy decisions that will result in near term voter disapproval. Many issuers have sold or are considering POBs in order to avoid important policy decision that will be unpopular with voters. In other words, they are usually sold to “kick the can down the road.” This will result in negative credit consequences and negative consequences to constituents in future years. In fact, we often see a relationship between the POB strategy and what are referred to as pension contribution holidays. Pension Contribution Holidays



A pension contribution holiday is when an issuer takes a break from making its annual required pension contribution. Often this occurs because an issuer thinks there is already enough money in its plan, and sometimes it occurs because the issuer needs to use the money elsewhere (usually for budgetary relief). Problem is that it is much easier to take one, two or multiple pension holidays, if a plan’s funding level has been artificially bolstered with POB proceeds. Such holidays defeat the purpose of the POB strategy and ultimately creates a larger fiscal hole in the state or local government’s credit profile. The potential for this to occur is one of the leading reasons for our negative leaning view on POBs.


Political Shenanigans are a Credit Negative

The issuance of POBs by itself does not strengthen or weaken an issuer’s financial position.

The issuance of POBs by itself does not strengthen or weaken an issuer’s financial position. On day one: POBs replace a relatively flexible liability in the form of pension obligations and shifts it to a rigid unbending fixed rate bond obligation. State and local government credit profiles can be negatively impacted when investment returns are not as high as the bond costs and when issuers decide to take pension contribution holidays- or irresponsibly run up issuer debt levels without realizing it. Even in situations where high quality issuers sell POBs, a key concern of ours is mostly political. This political related risk takes the form of the above mentioned pension contribution holiday but also in the form of benefit enhancements. It is much easier for a state or local government to take a pension contribution holiday when the plan is funded at a higher level. Also, it was very common for political actors to support benefits or benefit enhancements, as a way to close labor agreements and to garner favor with targeted voters. We remained concerned about this possibility. There has been and still is a system and political culture that rewards politicians who make unsustainable promises to targeted voters without regard to what the promises or benefits will cost taxpayers in the medium to long run. This is called the “human/asset liability mismatch,” according to a policymaker interviewed by Patrick McGuinn for his research paper on Pension Politics. McGuinn’s interviewee expanded on the concept by explaining, “The asset is being able to give away a benefit of value now when the bill does not come due until 15-20 years later when you are not going to be around. It is easier to trade a COLA increase now that helps you balance the budget.”

“The Shenanigans in Illinois and New Jersey have more to do with politicians behaving irresponsibly than with understating liabilities or with union power,” Alicia Munnell.

Alicia Munnell, in her research, highlights that pension funding problems are usually the result a lack of fiscal discipline. Examples of this lack of discipline can be found throughout the country, but we highlight a few examples in our case study section. Munnell finds that, “The Shenanigans in Illinois and New Jersey have more to do with politicians behaving irresponsibly than with understating liabilities or with union power,” in her book titled, State and Local Pensions: Now What?

Case Studies About Pension Obligation Bonds Illinois (A3/A-/A-)

We found evidence of pension insolvency dating back to 1917 in Illinois.

The state of Illinois possesses the poorest credit quality and as a result the lowest ratings in the U.S. state sector from Moody’s, S&P and Fitch. Although the Land of Lincoln possesses a large and diverse economy and includes the third largest city in the U.S., it also possesses a significant pension funding shortfall. Investors should keep in mind that the 2008 Recession was not the tipping point for Illinois’ fiscal & pension problems. Fiscal stress did not build up just because of higher levels of benefits politicians used to influence elections in the 1990s. The history of fiscal stress went back much farther. In fact, we have found evidence in a report to the State General Assembly that describes the “condition of the State and municipal pension systems as ‘one of insolvency’ and ‘moving toward crisis’ because the ‘financial provisions [were] entirely inadequate for paying stipulated pension when due.” This was written in 1917, the same year Eddie Collins and “Shoeless” Joe Jackson helped the Chicago Sox beat the New York Giants in the World Series. Further attention was paid to the topic by the General Assembly in 1919, 1945, and from 1947 through 1969 in regular reports all of which found Illinois pension funding practices to be inadequate. In recent years, however, Illinois’failure to address its fiscal balance and pension funding shortfall has State of Illinois Pension Obligation Bond Financings



Sale Date 02/23/11 01/07/10 06/05/03 Total

Amt ($) 3,700 3,466 10,000 17,166

Source: Financial statements and Janney FISR.

Issuer State of Illinois State of Illinois State of Illinois


Rather than raise revenues or decrease spending Illinois used 20% or $2 billion of the POB proceeds to make annual pension plan contributions in 2003 and 2004.

been exacerbated by the issuance of POBs. Illinois sold three POB issues, with the $10 billion 2003 sale as the most notable. Illinois had the largest unfunded pension liability among all U.S. states even back in 2002, just before the $10 billion POBs sale. Its unfunded pension liability was about $35 billion and its funded ratio was about 53%, at the time. The $10 billion POB issue was used from the outset, not surprisingly, as deficit reduction financing- a tool only the most distressed governments utilize. Rather than raise revenues or decrease spending, Illinois used 20% or $2 billion of the POB proceeds to make annual pension plan contributions in 2003 and 2004. For FY10, the Governor proposed a personal (50% higher to 4.5%) and corporate income tax hike to try to shore up finances but was met with resistance. This is one reason why the next POB in the amount of $3.5 billion was sold in 2010. Again, it was more of a deficit financing, as was the 2011 issue, which also went to pay for pension contributions. This is a perfect example of what Munnell was referring to when she wrote about “shenanigans” used by politicians. New Jersey (A2/A/A) Along with Illinois, the Garden State should be very well known by now as another state-sector poster child for fiscal procrastination and political shenanigans when it comes to pension related expenditures. New Jersey maintains a significant structural imbalance that is likely to worsen in coming years. This imbalance goes back to the early 1990s when political actors instead of balancing the state’s budget by raising revenues or cutting spending started to utilize uncommon and unsustainable methods to balance its books. This situation was exacerbated by the issuance of POBs and the pressures POBs allowed political actors to conceal.

New Jersey regularly takes pension contribution holidays in order to help balance it operating budget- a significant credit negative, especially after the sale of POBs.

New Jersey sold two pension obligation bonds under The Pension Bond Funding Act of 1997 (P.L. 1997, c.114). The first was for about $2.5 billion back in 1997. This mainly allowed the state to reduce further the amount of money it was contributed to its pension plans. We consider the circumstances of this and the 2003 issue like stealth deficit reduction financings. In all, NJ sold almost $3 billion of POBs. This helped bring the state’s pension fund to a funding level that was 100% as recently as 2003. The problem is that New Jersey has not once contributed its required contribution to its pension plans in the last17 years. It regularly takes pension contribution holidays in order to help balance it operating budget- a significant credit negative, especially after the sale of POBs. Political actors, instead of reigning in spending, have helped the state’s structural imbalance grow. Moody’s indicates that, “As of fiscal 2015, the gap between the actuarially required contribution and the state’s actual contribution has grown to approximately 10% of budget, compared with 4% in fiscal 2008.” State of New Jersey Pension Obligation Financings

Sale Date 03/07/03 06/26/97 Total Hamden, CT will not regain structural balance unless it takes the difficult steps toward raising revenues and cutting expenditures.



Amt ($) 375 2,541 2,916

Issuer New Jersey Economic Dev Auth New Jersey Economic Dev Auth

Source: State of NJ Debt Report and Janney FISR.

Hamden, CT (Baa1/A+/BBB+) Hamden has been experiencing significant structural, not cyclical fiscal problems and this has been the case for years. In contrast to the GFOA’s advice Hamden went ahead and sold $125 million of pension obligation bonds in February 2015. Before the financing, the pension plan for the town of about 60,000 was about 10% funded. After the financing, the funding ratio is expected to be about 37%, which is still very low. The town has a sizeable tax base with above average wealth levels, but its finances are not structurally balanced and the town has historically underfunded its pension plan. Moody’s indicated in its February 9th report, “The town has not contributed the full ARC for its pension plan since 1993, a practice that Moody’s considers equivalent to deficit financing.” It is not a surprise that the ongoing financial flexibility of the town is likely to remain constrained as it seeks solutions to regain structural balance. But, it will not regain structural balance unless it takes the difficult steps toward raising revenues and cutting expenditures. POBs were not the answer here, they are only a sign of fiscal stress and policymaker’s inability to balance the city’s finances.


Pension Obligation Bonds are as Bad as Some Critics Say

In most cases the issuance of pension obligation bonds amounts to nothing more than a stealth deficit reduction financing.

If issuers of pension obligation bonds (POBs) are lucky enough to get the market timing correct with their investments, continue to make 100% of their required pension contributions, follow through on extensive pension reform, and if a few other stars align, then the issuance of pension obligation bonds can be considered an effective strategy. But, this is rarely ever the case. In most situations, issuers use POBs to provide short-term budget relief, a strategy to kick the can down the road and pass difficult choices on to future decision makers. In most cases, the issuance of pension obligation bonds amounts to nothing more than a stealth deficit reduction financing, but without the oversight and recovery plans often required for official deficit reduction bond financings. The issuance of POBs is even more problematic because of the political nature of pension (other explanation) benefits promised by political actors for support. This political tit-for-tat is often overlooked, but it needs to be strongly considered by interested parties such as investors, state and local government issuers, policymakers, and voters. From a short term credit perspective, POBs provide budgetary breathing room. But this short term relief is often an illusion. The reality is that POBs increase issuer leverage (the potential for), add to issuer’s required fixed costs and insert speculative market risks state and local governments often are not equipped to assess or manage. Many rationalize their utilization with good intentions, but they are often sold by issuers with mounting fiscal problems. We usually consider POBs a noteworthy credit negative when assessing the overall credit profile of a state or local government. They are typically an indicator of a state or local government’s inability to balance revenues and spending levels- or of a current or imminent structurally imbalanced budget. Such fiscal status will result in credit deterioration, rating downgrades, and an issuer’s inability to properly delivery services to its constituents effectively and efficiently.

From a short term credit perspective POBs provide budgetary breathing room.

We usually consider POBs a noteworthy credit negative when assessing the overall credit profile of a state or local government.




State and Other Select Issuer Ratings (Apr 29, 2015)

State

Alabama Alaska Arizona (*) Arkansas California Colorado (*) Connecticut Delaware Dist. of Columbia Florida Georgia Hawaii Idaho (*) Illinois Indiana (*) Iowa (*) Kansas (*) Kentucky (*) Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska (*) Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota (*) Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota (*) Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming (*)

Rating Aa1 Aaa Aa3 Aa1 Aa3 Aa1 Aa3 Aaa Aa2 Aa1 Aaa Aa2 Aa1 A3 Aaa Aaa Aa2 Aa2 Aa2 Aa2 Aaa Aa1 Aa2 Aa1 Aa2 Aaa Aa1 Aa2 Aa2 Aa1 A2 Aaa Aa1 Aaa Aa1 Aa1 Aa2 Aa1 Aa3 Caa1 Aa2 Aaa Aa2 Aaa Aaa Aaa Aaa Aaa Aa1 Aa1 Aa2 NR

Moody's Outlook

Stable Negative Positive Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Positive Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Positive -

Last

4/16/2010 12/16/2014 11/26/2013 4/16/2010 6/25/2014 4/16/2010 1/20/2012 4/30/2010 8/2/2013 4/16/2010 4/16/2010 5/17/2011 4/16/2010 6/6/2013 4/16/2010 4/16/2010 4/30/2014 6/2/2014 4/16/2010 6/4/2014 7/19/2013 4/16/2010 3/28/2013 7/30/2013 4/16/2010 7/19/2013 4/16/2010 4/16/2010 3/24/2011 4/16/2010 4/16/2015 7/19/2013 6/16/2014 1/12/2007 4/16/2010 3/16/2012 4/16/2010 4/16/2010 7/21/2014 2/19/2015 10/6/2014 12/7/2011 5/27/2010 12/7/2011 4/16/2010 4/16/2010 4/16/2010 7/19/2013 7/19/2013 7/9/2010 11/20/2014 -

Rating AA AAA AAAA A+ AA AA AAA AAAAA AAA AA AA+ AAAA AAA AA AAAA AA AAA AA+ AAAA+ AA AAA AA AAA AA AA A AA+ AA+ AAA AAA AA+ AA+ AA+ AACCC+ AA AA+ AA+ AA+ AAA AAA AA+ AAA AA+ AA AA AAA

S&P Outlook

Positive Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Negative Stable Stable Negative Negative Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable

Source: Moody’s; S&P; Fitch and Janney FIS. (*) Denotes a Lease or Issuer Credit Rating. Municipal Monthly • Page 9

Last

11/27/2013 1/5/2012 12/23/2011 1/10/2003 11/5/2014 7/10/2007 3/9/2015 2/22/2000 3/21/2013 7/12/2011 7/29/1997 11/22/2014 3/30/2011 6/23/2014 7/18/2008 9/11/2008 8/6/2014 1/31/2013 2/13/2015 5/24/2012 5/7/1992 9/16/2011 6/17/2014 9/29/2011 11/30/2005 2/16/1994 5/5/2008 5/5/2011 3/10/2011 12/8/2014 9/10/2014 11/26/2014 7/23/2014 6/25/1992 12/13/2013 7/19/2011 9/5/2008 3/10/2011 9/25/2014 4/24/2015 6/18/2014 7/11/2005 3/25/2011 11/5/2013 9/27/2013 6/7/1991 11/10/2014 11/11/1992 11/12/2007 8/21/2009 8/15/2008 5/3/2011

Rating AA+ AAA NR NR A+ NR AA AAA AAAAA AAA AA AA AAAA AAA None A+ AA AA AAA AA+ AA AA+ AA+ AAA AA+ NR AA+ AA+ A NR AA+ AAA NR AA+ AA+ AA+ AAB AA AAA AA AAA AAA AAA AAA AAA AA+ AA+ AA NR

Fitch Outlook

Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Negative Stable Stable None Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Stable Negative Stable Stable Positive Stable Stable Stable Stable Stable Stable Stable Stable -

Last

5/3/2010 1/7/2013 3/4/2015 7/2/2013 4/13/2006 4/5/2010 8/23/2013 4/13/2006 6/15/2011 4/5/2010 6/3/2013 10/15/2014 4/5/2010 None 11/8/2012 4/5/2010 1/23/2013 4/13/2006 4/5/2010 4/2/2013 7/7/2011 11/15/2013 4/13/2006 4/5/2010 4/5/2010 4/5/2010 9/5/2014 6/25/2014 4/13/2006 4/11/2011 4/5/2010 4/5/2010 9/23/2013 3/26/2015 7/18/2011 4/13/2006 8/1/2014 4/5/2010 4/5/2010 4/13/2006 4/5/2010 4/13/2006 7/19/2013 7/8/2011 4/5/2010 -


Municipal Credit Rating Scale and Definitions

Rating Agency

Investment Grade

Sub-Investment Grade

Moody's

S&P

Fitch

Definition

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca

AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C

AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B B-

Exceptionally strong credit quality and minimal default risk. Upper medium grade and subject to low credit risk. Upper medium grade and subject to low credit risk. Upper medium grade and subject to low credit risk. Strong credit quality and subject to low default risk. Strong credit quality and subject to low default risk. Strong credit quality and subject to low default risk. Subject to moderate risk and possess some speculative characteristics. Subject to moderate risk and possess some speculative characteristics. Subject to moderate risk and possess some speculative characteristics. Weak credit quality with speculative elements and substantial credit risk. Weak credit quality with speculative elements and substantial credit risk. Weak credit quality with speculative elements and substantial credit risk. Very weak credit quality, very speculative with high credit risk. Very weak credit quality, very speculative with high credit risk. Very weak credit quality, very speculative with high credit risk. Extremely weak credit quality and subject to very high credit risk. Extremely weak credit quality and subject to very high credit risk. Extremely weak credit quality and subject to very high credit risk. Highly speculative and are in or near default with some prospect for recovery. Lowest class of rated bonds and may be in default with little prospect for recovery. Lowest class of rated bonds and may be in default with little prospect for recovery. Issuer is in default and/or has failed to make a payment.

D Source: Moody’s; S&P; Fitch and Janney FIS.


D

CCC

CC C RD/D


Janney Municipal Bond Market Publications

Title

Puerto Rico Downgrades, Looming Payment Another NJ Downgrade Municipals: Flows and Ratios Municipal Credit Analyst Survey Pricing Discipline Remains Puerto Rico's Cloud Darkens Need for Highway Infrastructure Favorable Supply Demand, No Ratio Relief More Downgrades for Puerto Rico Stabilizing U.S.- Improving Muni Credit? Tobacco Bond Update Public Pension Funding Cloud Puerto Rico: Update Atlantic City: Appointments/Downgrades Narrow Credit Spreads Justify Credit Risk? U.S. State Fiscal Health Update (PA State) Everything Investors Need to Know Holders and Taxes Little Clarity From Stockton & Detroit How Far Should Investors Chase Yield History of Federal Asst & Recent Gridlock U.S. State Fiscal Health Update (NY State) Puerto Rico Debt Grows, Economy Contracts Less Breathing Room for Tobacco Bonds Cracks in the States/Local Govt Deterioration Your Municipal Bond Portfolio Mid-Year Municipal Market Review/Outlook Detroit Water and Sewer Update Parsing the PREPA News U.S. State Fiscal Health Update Steady as She Goes This Summer is Different Are S&P's Local Govt. Ratings Too High? Puerto Rico: It All Goes Back to Economy OPEBS v Pension Primer A Brief Pension Primer Inertia - Not Best Response to Rate Concerns What a Difference a Year Makes Puerto Rico - Post Visit Update Supply Constraints The Rime of Municipal Bond Issuance Tobacco Bond Update Municipal Default Update Atlanta Hartsfield Jackson Int Airport Municipal Airport Sector New Jersey Downgraded Municipal Market Technical Review Tax Day Reminder of Muni Value U.S. State Fiscal Health Update The Bond Insurers- Now There are Three Chp 9 Bankruptcies Remain Low Heavy New Issue Week Comes and Goes Size of Municipal Market Shrinks Again Our Annual Municipal Sector Credit Reviews Municipals: Positive but Tepid Demand Source: Janney Fixed Income Strategy.


Date

April 27, 2015 April 20, 2015 April 13, 2015 April 6, 2015 March 23, 2015 March 19, 2015 March 16, 2015 March 9, 2015 February 23, 2015 February 10, 2015 February 9, 2015 February 3, 2015 February 2, 2015 January 29, 2015 January 26, 2015 January 7, 2015 December 16, 2014 December 15, 2014 November 3, 2014 October 27, 2014 October 15, 2014 October 1, 2014 September 29, 2014 September 22, 2014 September 16, 2014 September 5, 2014 August 27, 2014 August 25, 2014 August 18, 2014 August 12, 2014 August 11, 2014 August 4, 2014 July 14, 2014 June 30, 2014 June 23, 2014 June 16, 2014 June 12, 2014 June 9, 2014 June 5, 2014 June 2, 2014 May 22, 2014 May 19, 2014 May 12, 2014 May 12, 2014 May 9, 2014 May 5, 2014 April 28, 2014 April 15, 2014 April 11, 2014 April 9, 2014 March 28, 2014 March 17, 2014 March 10, 2014 February 28, 2014 February 24, 2014

Pub

Notes

Weekly Price activity indicates default probability beyond PREPA Weekly We see more NJ deterioration ahead Weekly Demand effect on flows and M/T Ratios Monthly Pensions are the topic analysts most concerned about Weekly A review of U.S. State credit spreads Note Restructure and/or default is likely for most credits Weekly Am Society of Engineers Gave U.S. a D+ Weekly Hefty muni issuance but no ratio relief Weekly PR bond trading levels hardly budged, despite downgrades Monthly There is an uneven level of recovery for muni credits Weekly We remain cautious on the tobacco sector Note Largest cloud overhanging public finance Weekly PR economy continues to contract, debt load grows Note We reviewed significant events in Atlantic City, NJ Weekly Carefully consider the risk reward Note Credit deterioration likely without policy shifts Monthly 2015 Municipal Market Preview Weekly Banks increasing holdings; State taxes back on track Weekly There were no hard precedents set in Chp 9 cases. Weekly Narrowing spreads reduce risk/reward proposition Monthly No patterns, cannot count on federal assistance Note NY upgrades reflect momentum, stresses remain Weekly Challenges remain, new debt offering expected Weekly Investors should be very cautious of 2006 & 2007 vintage Monthly State & local govts credit quality is slowly deteriorating Note Credit quality and duration are important for portfolios Monthly Municipal credit quality is high, but falling Weekly 30% of bonds tendered, but an important step Weekly PREPA reached agreement with stakeholders Note More downgrades lurk for some U.S. state credits Weekly Municipals continue to show stability, credit is improving Weekly Volume indicators are lower this year Monthly We have become increasingly skeptical of S&P Weekly Puerto Rico's economy continues to contract Weekly OPEB is funded on a pay as you go basis Weekly Update on pension funding Note Investors are concerned about potential for rising rates Weekly M/T Ratios have stabilized since last summer Note April revenue miss increases budget balance Weekly Summer supply and demand collision Monthly Municipal Issuance will drop in 2014 & in coming years Weekly Trends in the tobacco sector remain negative Weekly Municipal defaults remain low compared to other sectors Note Key takeaways from our closer look at ATL Note Headwinds have receded in Airport sector Weekly NJ spreads have remained steady since the downgrade Weekly M/T Ratios have been declining Note Let municipal help alleviate the pain of higher taxes Note A new spending paradigm for state governments Note Upgrades for Assured and National Monthly Review Chp 9 bankruptcies, RI willingness Weekly Heavy calendar and Puerto Rico issuance Weekly Fed data indicates amt. bonds is gradually diminishing Monthly Still have "Cautious" outlooks on 6 (of 11) sectors Weekly Modest mutual find inflows


Analyst Certification We, Tom Kozlik and Alan Schankel, the Primarily Responsible Analysts for this report, hereby certify that all of the views expressed in this report accurately reflect our personal views about any and all of the subject sectors, industries, securities, and issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Definition of Outlooks Positive: Janney FIS believes there are apparent factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades. Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades. Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrades. Definition of Ratings Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in terms of total return Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset class in terms of total return Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return Benchmarks Asset Classes: Janney FIS ratings for domestic fixed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the “Barclay’s U.S. Aggregate Bond Market Index” as a benchmark. Treasuries: Janney FIS ratings employ the “Barclay’s U.S. Treasury Index” as a benchmark. Agencies: Janney FIS ratings employ the “Barclay’s U.S. Agency Index” as a benchmark. Mortgages: Janney FIS ratings employ the “Barclay’s U.S. MBS Index” as a benchmark. Investment Grade Credit: Janney FIS ratings employ the “Barclay’s U.S. Credit Index” as a benchmark. High Yield Credit: Janney FIS ratings for employ “Barclay’s U.S. Corporate High Yield Index” as a benchmark. Municipals: Janney FIS ratings employ the “Barclay’s Municipal Bond Index” as a benchmark. Disclaimer Janney or its affiliates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income Strategy & Research (Janney FIS). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney FIS publications change. Janney Fixed Income Strategy does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. For investment advice specific to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Consultant and/or your tax or legal advisor. JANNEY MONTGOMERY SCOTT www.janney.com © 2015 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC


municipal bond market monthly - Janney Montgomery Scott LLC

municipal bond market monthly - Janney Montgomery Scott LLC

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