In the face of many uncertainties including;

a)  controversial fuel tax hike.

b) a forthcoming 2.9 blln dollar bond issued by the PR IFA.

c) release of the PREPA business plan. 

d) the implementation of a new tax system.

...Puerto Rico bonds (including bonds backed by Sales and Use Taxes) have been trading down.

Ironically, the Sales and Use Taxes (as reported by the GDB) have been growing steadily. A strong case can be made that these bonds (COFINA bonds backed by the Sales and Use Taxes) are undervalued.

Relative to the Sales and Use Tax revenues, the General Fund revenues don't look so good.

The GOP won a majority in the senate and gained more of a majority in the House. Although a resounding victory, the GOP did not gain the 60% majority needed to block a filibuster. Two thirds majority is needed to over ride a veto.The GOP victories do, however, increase the odds of a Republican president. Only if the GOP gains control of all three branches do we believe major personal income tax reform is possible.

We do believe that tax reform will be discussed as part of any new growth initiatives and will likely include simplification of the code and lower tax rates. In both the Camp and Portman proposals, the existing tax structure will be consolidated into two brackets; one at 10% and one at 25%.  The Camp proposal includes a 10% surcharge for high income earners. Even the GOP can't agree agree on the best reforms. We will be watching for new developments here.

More realistically, corporate tax reform is something all branches of government believe should be changed. The US Government estimates that US corporations are not repatriating over one trillion dollars of foreign made profits. European corporate tax policies only tax profits made in the "territory". The US system taxes repatriated foreign profits at a rate equal to the US rate minus the foreign rate.  US companies are merging with foreign companies (inversions) so that they can loan foreign profits to their US branches and get around paying the US taxes. 

At 35%, the US corporate rate is one of the highest in the world (average European rate is 20%). This rate will likely come down and some of the deductions eliminated. Property and Casualty companies and Banks each own approximately 10% of the municipal bond market so any reduction in the corporate tax rate will make the tax exemption worth less to them.

As the markets wait for the the PREPA Best Practices Report (Nov 15 deadline) and new Business Plan (Dec 15 deadline) there has not been much good news to report. The first quarter tax collections were 36 million short of budget. In addition, the Treasury recently lost a court case requiring them to repay Doral Bank 230 million in pre paid taxes; another  non budgeted expense. To make matters worse, the GDB published a report suggesting that their liquidity would fall below 1 billion in June 2015 if 1 billion of HTA loans were not refunded. The GDB is scheduled to hold an investor conference call on Thursday, October 30 and they will likely announce a more formal plan of issuance. 

The San Joaquin Transportation Agency refinanced 1.4 billion dollars of debt yesterday. Interestingly, as part of their refinancing, the Agency tendered for their outstanding non call zero structures. The table below summarizes the maturities, amounts, and yields of their tender. Needless to say, this is an example of another issuer that believes their outstanding zeros are too cheap.