September 29, 2014
This week we examine the impact of MCDC on disclosure volumes, highlight efforts by State officials to improve local government transparency and update our Puerto Rico economic activity chart.
MCDC Induced 15c2-12 Filings Allow Us to Estimate Historical Compliance
Based on conversations with market participants (and the volume of email alerts in my inbox), it is clear that issuers and underwriters are working hard to take advantage of the leniency for prior 15c2-12 omissions offered by the SEC’s MCDC initiative.
Since April, there have been 12,000 more filings than during the same period last year. The increase has been concentrated in the Annual/Audited Financial and Failure to Provide Information categories. We expect the numbers to remain elevated through December when the window for issuers and obligors to self-report closes.
15c2-12 Financial and Operating Disclosure Document Filings
Source: MSRB, DIVER Data Solutions
While some of the longer-term implications of the MCDC initiative are uncertain, we believe that the effort of catching up and a desire to ensure future compliance will lead to a permanent increase in 15c2-12 filings (and hopefully the availability of more and better information for making municipal bond investment decisions).
So how bad was 15c2-12 compliance and how big an ongoing increase can we expect? If we assume that all of this year’s increase in filings was attributable to “cleanup” and “catch-up”, and assume that everyone who should file will file, we can estimate the percentage of required filings that were actually made in previous years.
Adding together 340,000 filings actually made with the extra 12,000 means that over the last five years, there were 352,000 potential filings to be made. The extra 12,000 filings made this year represent just fewer than 4% of these potentially required filings from the last 5 years.
By this estimate (which is admittedly using preliminary data and numerous simplifying assumptions), issuers and underwriters made 96% of required 15c2-12 filings during the last five years.
State Officials Increasing Transparency of Local Government Finances
Responsible State officials are increasingly aiding the municipal bond market by providing transparency into the financial data of local governments in their states.
Last week, the California State Controller, John Chiang, made a presentation to MAGNY that featured a new website allowing access to financial data for 58 counties and 450 cities in California. This website provides tools to access historical data and facilitates comparisons between municipalities. Future plans call for inclusion of pension data and expansion to development districts.
Also last week, the New York State Comptroller, Thomas DiNapoli, released 2013 updates to the Fiscal Stress Monitoring System for New York State counties, cities, towns, villages, and school districts. The focus of the NY site is monitoring fiscal health of the municipalities using a “Fiscal Score.” The Fiscal Score grades a municipality or a scale of 0% to 100% (lower is better) and is calculated based on 7 to 10 financial variables.
Credit quality is a function of both financial variables and economic and demographic conditions. We created the chart below to combine the financial information contained in the Fiscal Score and with our DIVER Geo Score which measures relative economic strength.
For the counties covered by the NYS Comptroller, we plot the DIVER Geo Score on the X-axis and the Fiscal Score on the Y-axis (inverted scale). The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.
DIVER Geo Score and NYS Comptroller Fiscal Score
(54 New York State Counties)
Source: NYS Comptroller, DIVER Analytics-Filter Module, DIVER Data Solutions
Most of the counties in New York show both strong credit and economic metrics. These are the data points in the upper right hand corner of the chart. Nassau, Suffolk, and Rockland are notable because all three have below average credit profiles despite some of the highest Geo Scores in the nation.
Puerto Rico Economy Continues to Shrink
Late last week the Puerto Rico GDB released its Economic Activity Index. The index posted a -1.1% decline. The average of Philly Fed Coincident Index for the fifty States also released last week was +3.0%.
In Puerto Rico, private sector employment components were positive with construction employment was up 6.6%. Public sector employment continues to decline (-1.0%). Electric power generation was down -4.1% and cement sales were down 22.4%.
The best that can be said about the Puerto Rico economy continues to be, “at least the rate of decline has stabilized.”
Puerto Rico Economic Activity Index
(% change last 12 months)
Source: Puerto Rico GDB, DIVER Data Solutions
While much of the real action in Puerto Rico is happening in the PREPA negotiations behind a Non Disclosure Agreement, the health of the economy will be an important factor in the long-term resolution of Puerto Rico’s issues.
This week, the Lumesis team will be in Boston and at the BDA National Fixed Income Conference in Chicago.
Have a great week,
Managing Director, Credit, Lumesis, Inc.
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