Momentum toward exiting the Title III bankruptcy process continues, but how to pass some remaining hurdles is not entirely clear. Importantly, the oversight board has reached consensual agreements with overwhelming majorities of creditors holding bonds of the remaining bond indentures to be restructured: the General Obligation, the Electric Power Authority (PREPA) and the Highway Authority. While the proposed restructuring agreements of these three entities have substantial support from most of the key constituencies, execution will involve some complexities; in some cases, the Puerto Rican Government will need to pass new legislation.
As the board and government move through debt restructuring over the balance of the year, investors should brace for some uncertainty, with inevitable political posturing likely generating negative headlines and possible delays. But we do see substantial momentum building behind these three agreements. Ultimately, successful emergence from Title III for the remaining credits would provide a positive psychological and technical boost for the high yield municipal market overall.
Higher Education: Small Private Colleges, Universities Vulnerable
The higher ed sector has shown more resiliency and greater flexibility than expected at the pandemic’s outset. Federal stimulus helped, with institutions receiving nearly $80 billion.
However, small private colleges and universities in demographically challenged regions face more risk of severe ratings pressure and credit concerns than larger institutions with robust balance sheets and student demand. Lacking strong market differentiation and with perceived tuition rates higher than local public universities, small institutions have experienced relatively steeper enrollment losses over the past year.
Federal stimulus will help many smaller institutions ride out the next one to three years. However, given market dynamics accelerated by the pandemic, viability will demand mergers, partnerships, program rationalization, and revenue diversification.
Senior Living: Due Diligence Critical
Covid-19 raised significant questions about high-density communal living arrangements for seniors. The pandemic pushed occupancies down sector-wide, especially in assisted living and skilled nursing.
The sector has been slow to rebound and governmental support has been minimal. Balance sheets and liquidity are suffering. In some cases, the pandemic’s actuarial impact will not be obvious for years, and underfunded future health-care expenses will generate future stress.
The sector still has few barriers to entry, but many speculative, highly levered, and developer-driven deals face competition after opening. And the sector’s bondholders are finding that regulators, keen on defending resident refund rights, are making it harder for continuing care retirement communities to stay solvent.
Demographics remain positive. But success requires making informed choices about which deals will rebound; are not overly levered or in overly competitive markets, and have adequate resources to meet future actuarial needs.
John Miller is head of municipals at Nuveen.