michael comes, cfa - munis: chicago, detroit, puerto rico and more

©Copyright 2015 Cumberland Advisors

®. Further distribution prohibited without prior permission.

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

[email protected]

mailto:[email protected]


®. Further distribution prohibited without prior permission. 2

Source: BLS

Private Sector Employment has Stabilized

Private Sector Employment

250

270

290

310

330

350

370

390

350

450

550

650

750

850

950

Total Private - State (000s) Government - State (000s)



Service Sector

Source: BLS

Service Sector has Recovered since the Recession

70

90

110

130

150

170

190

210

350

400

450

500

550

600

650

700

750

Private Service-Providing - State (000s) lhs Manufacturing - State (000s) rhs



Housing Market Remains Strong

4

$95,000

$100,000

$105,000

$110,000

$115,000

$120,000

$125,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Median Value Owner Occupied HomeSource: Census Bureau



-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

85+

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-5

Men

Women

Source: Cumberland Advisors, Census Bureau

Population Pyramid

Population Pyramid resembles those of Japan and Western Europe



Adjusted Debt-GDP

Adjusted Debt-GDP Tells A Different Story

Centralized Government compared to U.S. States

Source: National Public Finance Guarantee



Liquidity: Low, but Improving

0

20

40

60

80

100

120

2009 2010 2011 2012 2013

Days Cash on Hand

Puerto Rico U.S State Median

Source: Puerto Rico Annual Disclosures, Investortools, Inc.



Annual Financing Gap: Puerto Rico

Annual

June 30, 2011

Annual

June 30, 2011

Annual

June 30, 2011

Sales Tax Revenue 1,129,006 1,144,659 1,170,748

Personal Income Tax Revenue

Corporate Income Tax Revenue

Fuel Tax Revenue

Total Tax Revenue 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

Revenue Over Expense (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)



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.

9 Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call



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

10 Source: Comments of Dominic Frederico, CEO of Assured Guaranty, on 2Q Earnings Call



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



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



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



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.

14

michael comes, cfa - munis: chicago, detroit, puerto rico and more

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