Saturday, December 27, 2014

Backfire: Philly effort to keep financial troubles quiet

"A walking zombie"?

Backfire: Philly effort to keep financial troubles quiet

Mish Shedlock, of Sonoma, Calif.-based Sitka Pacific Investments, is telling his clients that Philadelphia "is effectively bankrupt," that defaults are around the corner, that city borrowing costs are "likely to soar," and that "the city is nothing but a walking zombie now."
Mish Shedlock, of Sonoma, Calif.-based Sitka Pacific Investments, is telling his clients that Philadelphia "is effectively bankrupt," that defaults are around the corner, that city borrowing costs are "likely to soar," and that "the city is nothing but a walking zombie now."

Philadelphia's closed-door two-day meeting with 100 bond underwriters and other would-be lenders keeps generating unwelcome publicity for the nation's brokest big (million+ resident) city.

"Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the [Philadelphia debt] conference, then retail is at a distinct disadvantage," scolds Cate Long for Reuters here

That follows Bloomberg's Romy Varghese report: "Philadelphia Mayor Michael Nutter, whose municipality has the lowest credit rating of the five most-populous U.S. cities, will address investors at a conference financed by underwriters and closed to the public and the press.

"The invitation bills [the upcoming] meeting as a chance to hear 'Philadelphia leaders and investors discuss building the city’s future.'... Philadelphia is hoping to attract investors for the city, which is rated three steps above junk by Standard & Poor’s. The city and its authorities have $8.75 billion in outstanding debt as of September, according to bond documents," which also shows Philadelphia has less than 50 cents set aside for every $1 it expects to pay current and future retirees.

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Bond-watchers speculate the city may use the meetings to test schemes for easing its pension-funding and tax-policy failures -- maybe a new wave of asset sales, or cuts to future pensions, which city unions say need to be the subject of negotiations; or selling another billion-dollar pension funding bond, though the last one, in the late 1990s, went badly

"Tours of city assets are set for the second day of the conference, including the Philadelphia Gas Works, the largest municipally owned natural-gas utility in the U.S. The city plans to hire a broker to steer the sale of the system, which may fetch as much as $496 million, according to Lazard Ltd.," Bloomberg added. Though Ryan Connors, utility analyst at Janney Montgomery Scott, warned in a report last week that a PGW sale will be politically difficult.

There's a lot at stake for Philly's lenders: "Wells Fargo & Co. and Jefferies & Co. were underwriters of the city’s $127 million tax- and revenue-anticipation notes offered in December," noted Bloomberg. Wall Street and London giants like Barclays, Citi, Goldman Sachs, hometown banks like Janney Montgomery Scott and minority and boutique players round out the list of firms pocketing fees from the city's continuous borrowing.

"Philadelphia, where more than a quarter of the population of 1.5 million lives in poverty, carries ratings by the three major companies that are the lowest for the top five most populous cities. It’s rated BBB+ by Standard & Poor’s, three steps above noninvestment grade. Fitch Ratings puts it one step higher, at A-, while Moody’s Investors Service ranks it two levels higher, at A2," Bloomberg added.

The Inquirer's Bob Warner added in this Tuesday story: "News organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city's municipal bonds. The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center," where Comcast executive vice president David L. Cohen will address the bond people.

Cohen, who helped reorganize and expand the city's debt when he was chief of staff to then-Philly Mayor Ed Rendell 20 years ago, will be joined by Citizens Bank's (corrected) Dan Fitzpatrick (a successor to Cohen as board chairman of the Phily chamber of commerce), Center City District boss Paul Levy, tech promoter Bob Moul, Moody's Analytics economist Ryan Sweet, U.C. Science Center head Steve Tang, Drexel president John Fry, senior officials from Penn and Temple, Mayor Nutter, PGW, Airport and Water (but not School District) officials, city finance chief Rob DuBow, treasurer Nancy Winkler and budget director Rebecca Rhynhart, among others.

"In our view, when the City of Philadelphia speaks to investors about the issuance of public bonds and the city's fiscal condition, that's important public business," Inquirer editor William K. Marimow told Warner.

"Your decision to have this discussion hidden from public view perpetuates distrust and cynicism among not only voters and the taxpaying public, but distrust of the City of Philadelphia by investors in infrastructure, bonds and other aspects of public finance," Bloomberg News lawyer Charles J. Glasser Jr. told the city in a letter also signed by the Inquirer, AP and other news media.

"It's an informational session where the city will be talking about its assets and its fiscal condition," city finance chief Rob DuBow told Warner in defense of the underwriters-only policy. "It was never intended to be a public meeting." He said the Comcast space wasn't big enough for all the bond people who want to be there, even without reporters.

"The city's biggest financial problems are already well-known: unsettled contracts with three of the four municipal unions, a $5 billion unfunded liability in the city's pension fund, an ongoing debate over whether to sell the Philadelphia Gas Works, and massive deficits at the Philadelphia School District," Warner added. "There is no mention of the School District in the agenda for the upcoming investor conference, posted on the city treasurer's website at http://www.phila.gov/investor/ ."

"Sam Katz, the former [muni bond] adviser who now chairs PICA, the state board overseeing city finances, said investor conferences were typically designed to permit candid conversation" between city officials and bond buyers and sellers:"You might want to say something to them that you don't want to say publicly."

Still, "where the city's headed is very much the public business," and the public would be better served if the meeting were televised, Katz added.

By closing the meeting, the city and its advisers have managed to draw more attention to its problems. It doesn't help sell bonds, especially to small and retail investors, when news accounts result in up-country investment advisors like Mish Shedlock, of Sonoma, Calif.-based Sitka Pacific Investments, telling his clients that Philadelphia "is effectively bankrupt" and likely to default, that city borrowing costs are "likely to soar," and that "the city is nothing but a walking zombie now." 

Like Katz suggests: Let the public watch. Better to bore potential retail bond investors, than leave them to be alternately starved and terrorized.

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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