Riley: RI Investment Adviser “Sell Providence RI Bonds”

Tuesday, October 20, 2015

michael G. Riley, GoLocalProv MINDSETTER™

As an investment advisor in Rhode Island I have a fiduciary responsibility to advise my clients as to the safety of investments. I am not designated as a Federally recognized ratings agency like Fitch, Standard and Poors, Knoll or Moody’s. I am responsible for the best interest of my clients. As we role out Beach Street Investment Services LLC for the average Rhode Island investor we seek to properly allocate and invest portfolios balanced by risk vs reward with unique “Defined Outcome Strategies”. Our goal is to manage $500 million in Rhode Island individual retirement funds using our strategies and commonsense prudent investment advice.

As our first broad based recommendation to Rhode Islander Investors to sell all Municipal securities directly or indirectly supported by the tax revenue of Providence, Rhode Island. We believe Providence is in dire financial straits and if it weren’t for legislation passed in 2011 when a run on Muni’s was a concern due to the bankruptcy in Central Falls. The Legislation designated first lien on tax dollars to municipal bondholders in the event of municipal bankruptcy. We don’t think the state or the citizens of Providence can or will absorb the potential costs of a Providence bankruptcy. With such a high likelihood of bankruptcy in Providence it doesn’t make sense to risk the large devaluation in Providence Obligations resulting from bankruptcy.

Why do we think Providence is in severe trouble?

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A major indicator of cash flow problems was the recent “write off” a possibly illegal loan from the pension fund to the city of approximately $63 million dollars. Even with that write of the city is now into the fourth month of Fiscal 2016 without having contributes one penny in $71.5 million that was appropriated to pay to the pension fund in Fiscal 2016. The city contributed nothing, in fact it is only now contributing half of what they owed and defaulted on for Fiscal 2015 ending June 30 2015. The Mayor Elorza recently announced that Providence ended the year in the hole once again adding to its structural deficit.

What would happen to Providence Bonds in bankruptcy?

Currently a 10 year AA rated Muni Bond yields about 2.25% and representative 10 year Providence general obligation yields 3.2%. 743787W33 is the cusip number for the 5% coupon bonds expiring in 2026. We are recommending the sale of all the maturities issued in 2013 series A by the City of Providence. Between $39 and $40 million was issued. If Providence does as we expect and files for bankruptcy we would expect these bonds to lose at least 25% of their value and yield more than Detroit did during its recent bankruptcy. We would hope that investors would avoid this significant risk for which they are not currently being adequately paid.

We also believe that the City of Providence misled municipal bondholders as to the financial condition of the city and the health of its badly underfunded pension system. We have reported this to federal authorities and State Attorney General Peter Kilmartin.

How high could yields go?

Detroit’s bankruptcy caused yields on bonds issued by the city to skyrocket to record highs, meaning prices declined to record lows. The yield jumped from 8.39% in mid-May to 16% in mid-June. The default included unlimited general obligation bonds, which were previously thought to be “untouchable” by default.

We don’t want this tragedy to happen to Rhode Island investors in general and certainly not to any of our Beach Street Financial’s clients. We strongly recommend the immediate sale of any Providence GO bonds and an immediate review of all Rhode Island State Obligations that could be impaired by a Bankrupt Providence.

Please check with your advisor to determine if you own these bonds.

Here is what Fitch said recently

In last year’s summary of Fitch’s rating of a $24 million refunding Fitch said the following:

“REVENUES INSULATED FROM CITY BANKRUPTCY: Although a city bankruptcy is not expected (Fitch rates Providence's general obligation (GO) bonds 'BBB'/Outlook Negative), Fitch would not expect tax increment revenues supporting the bonds to be subject to disruption or diversion in the event of a bankruptcy filing by the city in accordance with the definition of special revenues under Chapter 9 of the U.S. bankruptcy code. “

Moody’s Baa1 rating was assigned to last year’s Providence $23.67 million in GO refunding bonds. How would they have rated these bonds if Moody’s knew the numbers inside the offering were phony? What would they say if Providence was proved to be lying about pension assets and purposely overstating the health of the pension plan?

We asked Moody’s twice and received no comment.

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Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.

Riley: RI Investment Adviser “Sell Providence RI Bonds”

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