Michael Riley: Don’t Pay
Wednesday, May 14, 2014
I am taking this week away from the RI Pension Commission and the worsening Municipal Pension Crisis to instead focus for a moment on the EDC 38 Studios debt and the decision the General assembly will soon have to make regarding paying this tranche of $12.4 million. Yesterday, S&P and Moody’s predictably warned that they have placed Rhode Island General Obligation debt on negative watch.
Here is last years’ statement just prior to the first $2.5 million vote in the appropriations. And here’s yesterday’s by S&P.
These actions are expected
No one should be surprised at the ratings agencies’ actions this year. Hopefully, when the General Assembly soon votes that this payment should NOT take place, we will see the actual Rating reaction by S&P and Moody’s. If they downgrade Rhode Island General Obligation (GO) Bonds to junk, even below the debt of Puerto Rico (as they promise), then RI residents and individual investors may sell their GO bonds at crash prices to people like me, based solely on Moody’s and Standard & Poors’ ratings.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTSo they rate us “junk.” Then what?
Perhaps in a few weeks, when those bonds are trading at investment grade prices, there should be a federal investigation into those unnecessary investor losses. Maybe the individuals who suffered losses when junk bond ratings scared them into selling to opportunistic investors like me should then go to the SEC or even the justice department with complaints or inquiries. Then the rating agencies will be appropriately asked “what justification was there to rate Rhode Island General Obligation Debt below Puerto Rico,” as SJ Advisors has warned the agencies will do. SJ Advisors has produced a lengthy report that, in my analysis, substantially overstates the worst case scenario cost using questionable risk premia assumptions, questionable comps and an unexplained discount rate for determining the present value of potential costs to tax payers. While the scenario analysis format in the report is acceptable for a range of outcomes, the outcomes are not specifically weighted by probability, as a rigorous analysis would normally provide. In sum, the SJ Advisors report is unconvincing.
So why do voters overwhelmingly want to default?
I‘ve seen a few online polls where generally the results are 20% pay and 80% do not pay. One reason: taxpayers are unwilling to pay off a bond that today is still mired in investigations and possible criminality. They see the obfuscation, and know one of the parties involved is under investigation. The second reason is that they are clearly not legally obligated to pay.
I estimate at least a dozen times in this highly unusual private placement memorandum the investors are told that the State of Rhode Island is in no way obligated. This private placement went to accredited investors ONLY. They had to have a net worth of $1 million dollars beyond their residence to read the docs and participate. The investors signed off on the 336 pages describing the risk and received 7.5%, part of which was spent on an insurance policy from Assured Guaranty, who in turn made clear that they were not assigning any accuracy at all to the PPM.
Wrapping it up
So, just who exactly is Moody’s trying to protect with these potential “punishing ratings” that could, in fact, turn out to be horribly wrong and unjustified? Who then will be responsible for what SJ Advisors estimates as a $200 million dollar loss in market value (3 times the bond issue in question) that resulted from RI General Obligation bonds being rated junk?
I don’t believe Moody’s really thinks RI GO debt is a worse credit than Puerto Rico. I think they are overreacting, or more likely manipulating, in order to scare off other entities across the country. And they can do so because we are such a small state with a very weak Governor. Remember that Moody’s and S&P are quasi government approved entities. They are trying to flex their muscles against the smallest State in the Union. Have they never heard of a “one-off” situation, which is trading vernacular for unusual or separate and apart from the norm? Are they unaware of the corruption involved in Rhode Island and as yet uninvestigated regarding this specific bond? No responsible credit analyst truly believes RI General Obligation Debt will default before Puerto Rico. That would simply be an unprofessional analysis. My prediction is, if the payment is voted down in the GA and our GO debt is then downgraded to “junk," then the market participants will step in and buy RI GO bonds. Those bonds will trade, in very short order, significantly above junk rating and return to investment grade prices. Rhode Island has far larger issues affecting investor attitudes and rating agencies that include 1) the “corrupt state” impression we have cultivated and 2) the massively underfunded State and Municipal Pensions plans that Mr. Chafee’s Commission completely ignores.
A major reason on the horizon to be worried about a more permanent and significant downgrade is the potential reversal of pension reform. I estimate this cost at over $5 billion, starting with $600 million over 3 years. Those potential costs dwarf any “potential worst case” loss due to 38 studios, as described by the governors hired guns. If we had a real Governor, he would stand up for the Taxpayers and the State of Rhode Island and stand up against threats by rating agencies.
Related Slideshow: PAC Spending in the 2014 Rhode Island Governor’s Race
With Election Day now just months away, GoLocal took a look at PAC spending in the Rhode Island gubernatorial campaigns.
Who is giving to who -- and how much? And what's worth more, the money or the grassroots support?
Below is look at recorded PAC giving by the candidates in their campaign finance reports for the 2013 calendar year, by quarter. Candidate Todd Giroux has an affadavit for an annual filing exemption.
