November 2015 Geo Scores, Underwriters’ Thoughts on MCDC, an Update on Puerto Rico

November 30th, 2015

This week we review our proprietary DIVER Geo Score, highlight the best and worst performing States as well as provide you a link to get the scores themselves.  We summarize Underwriters’ responses to the SEC’s MCDC initiative and provide an update on economic growth in Puerto Rico.

November Geo Scores

Tomorrow, we will release the most recent DIVER Geo Scores for States, counties and cities. 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.


The DIVER Geo Scores are available here.

Over the last year, the economy of the State of Florida has shown the most improvement.  New Jersey’s economic growth continues to be tepid when compared with other States.

Two of the larger bond sales this week are from the State of Kansas and the Commonwealth of Massachusetts.  The economy in Kansas is among the worst performers over the last year. The performance of the economy in Massachusetts has been average.

Where Things Stand Since MCDC

So far the SEC has released two rounds of Cease and Desist Orders to Underwriting firms related to its MCDC Initiative.  The SEC has confirmed there will be a third round and there is speculation it will be released soon, with Orders to Issuers to follow.

The orders released so far have cited the following kinds of behaviors:

– Annual Financials/Audits filed late or not at all

– Missing Operating Data

– Lack of “Failure to File” notices

– Missed filing for a particular Issue or associated CUSIPs

– No statement in new issue OS regarding prior 15c2-12 compliance

In addition to monetary penalties, the Cease and Desist Orders require that each Underwriting firm hire an “Independent Consultant” to review their policies and procedures.   We have observed several different responses from firms as they await the report of their Independent Consultant.

Some firms began to make changes to their 15c2-12 policies and procedures after the SEC published its Exam Alert in ’12. Others made changes in the wake of their efforts to prepare MCDC responses.  Many of these firms are asking themselves “Did we go far enough?”

Of the firms that did not make changes in response to the SEC Exam Alert, some firms are adopting a “we are good” approach, despite large SEC fines and citations for problems with relatively recent deals.   Other firms are being more proactive: updating policies and procedures and ensuring compliance.

The recommendations of the Independent Consultant retained by each firm will be key for how firms respond to their Orders and how they underwrite prospectively. The SEC has not provided a defined roadmap for the Independent Consultants and, based on conversations with market participants, Independent Consultants appear to be taking different approaches to their work.

While its too soon to tell what changes Issuers will make in response to potential MCDC Cease and Desist Orders, data on filings indicate that Issuers are making more filings now than the did before MCDC.  So far this year, the number of filings made is 17% higher than in ’13 prior to MCDC.


For Puerto Rico Economy, The Whole is Apparently Greater than Sum of the Parts

The most recent Economic Activity Index (GDB-EAI) released by the Puerto Rico GDB indicates that the Puerto Rico economy grew 0.95% for the last 12 months.

According to the GDB, the GDB-EAI is an indicator of the “general economic activity” of Puerto Rico, “developed following a methodology similar to that used by the Conference Board” which “follows a standard procedure to adjust the data for seasonality and volatility factors.”   The GDB points out that the GDB-EAI is “highly correlated to Puerto Rico’s real GDP not only on levels, but also on the annual growth rates.”

As we pointed out in a recent Commentary, investors should not expect to see timely disclosure of the true financial condition of the Commonwealth of Puerto Rico or its various issuing entities.  The lack of financial information and the importance of the economy to the Puerto Rico credit story, make the monthly GDB-EAI a potentially valuable indicator.

October was the second month in a row that the index showed strong improvement in the Puerto Rico economy.  If accurate, this improvement in the GDB-EAI is good news.


The GDB-EAI is comprised of four components:  Employment, Electric Power Generation, Gasoline Consumption, and Cement Sales.  When the GDB changed the calculation methodology for the index last summer we observed:  “The GDB-EAI is best viewed as a helpful, but somewhat imprecise indicator of the condition of the economy of Puerto Rico.”

The imprecision of the index as an economic indicator is highlighted this month.    The 0.95% improvement in the overall GDB-EAI is greater than the improvement in any of its components.  The strongest individual component, total non-farm payroll was up 0.5%.  The cement sales component was down -14.4%.



Have a great week

Michael Craft, CFA