Hayman Capital's Kyle Bass Provides CNBC Interview On Japan, Europe And Munis

Watch, listen, learn. Also, here's a link to Bass's/Hayman's most recent annual letter.

Intro and Japan:


Europe:


Munis and Meredith Whitney:

Munis, Munis, Munis

Long-time TILB readers know that we are very concerned about the muni-market (click here for our coverage of the bankruptcy filing for Harrisburg, Pennsylvania - that fine state's capital city).

Certain states, like Texas and Virginia, appear to be in fine shape and are resonable credits (though you aren't getting paid enough to care, in our opinion). We'll call citizens of these states Future Subsidizors. Other municipalities - like California, New Jersey and Illinois (aka Future Subsidizor Supplicants) - will go through stress or outright distress.

Many of these Future Subsidizor Supplicants may at some point be great investments, if you know what you're doing. But the vast majority of the muni-market lender base (which is largely doctors and lawyers retail investors) have no idea what they are doing - nor do their advisors (e.g., muni mutual funds or private wealth advisors).

In the last few days the muni-market has become spooky. Examples - a small town outside Detroit, Michigan called Hamtramck has begun the process of seeking state permission to file for bankruptcy (link here). Additionally, some much bigger munis (like the state of California - which would be one of the largest sovereign issuers in the world if it were a standalone country) have pulled some offerings due to "tepid demand". At some point these municipalities are going to have to start issuing again in order to fund their deficits and - TILB supposes - many will have to fund at rates that far exceed their budgeted cost. This of course will lead to further strain on those government budgets, leading to higher interest rates, further budget cuts, more local economic straing, yet further strain on those government budgets, leading to higher still interest rates, etc., etc. ad nauseum...default (or restructure).

Beware. Skillful investors willing to take an active role in helping these munis "solve" their debt problems will be able to make money (Jenny Hedge Fund Manager will buy California's debt at 40c and selling back to Cali at 60c, thus making itself a quick 50% while helping Cali reduce that issuance by 40%), but Johnny Retail is about to get rolled.

Caveat Emptor - get ready for more Schwarzies.

Below are some excerpts from today's Wall Street Journal A1 page (all emphasis added):

America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.

The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn—and unlike the federal government, most are barred constitutionally from running deficits.

"The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers," Tom Dresslar, a spokesman for the California State Treasurer, said late Wednesday. He added that the state decided to cancel another $267.3 million bond sale it planned to price next week "in light of market conditions."
California's $10 billion bond sale this week was seen as a test of access for governments to the bond markets, and the middling interest signaled that municipalities could have to pay more to attract investors. The state further jolted the market by delaying the close of the bond sale, citing a lawsuit filed Tuesday that challenges a separate tactic the state is using to raise funds.

"California's timing unfortunately couldn't be worse," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management. "This creates a fear among individual investors and probably could hurt the state in terms of paying a higher borrowing cost than if they'd done a deal at a different time."

After pouring billions into municipal bond funds most of the year, investors pulled $115 million out of the funds last week, the Investment Company Institute said Wednesday. That was the first weekly outflow in seven months, ICI said.

The fragility of government finances was also evident in a move by Moody's Investors Service to downgrade the city and county of San Francisco, as well as the city of Philadelphia, and by a request by Hamtramck, a small Michigan city, for permission to file for bankruptcy.

California, facing a projected $25 billion shortfall through June 2012, aimed this week to sell $10 billion in so-called "revenue anticipation" notes. Over three days, it reported total orders of about 60% of that amount, or $6.06 billion, for the securities, according to the Treasurer's office. In September 2009, California sold 75% of a similar offering to retail investors. The remainder of an offering is typically bought by big institutional investors.

...

The short-term notes mature next May and June and yield 1.25% and 1.5%, roughly what California paid a year ago, though higher than other states. "It's still an incredibly low rate, and it's an awful lot of bonds," said Matt Fabian, senior analyst at Municipal Market Advisors. [TILB note: Basically commercial paper for California - keep not extending maturities and rolling it short Cali, it will work out just fine...]

...

At the same time, concerns have been mounting over whether, after the double whammy of 2008 market losses and the economic downturn, municipalities will be able to maintain their reputation for always paying their bondholders.

Average yields on 30-year municipal bonds rose 0.13 percentage point Wednesday to 4.77% and are up roughly 0.5 percentage point in recent weeks. Yields on 5-year bonds rose 0.06 percentage point to 1.58% on Wednesday.

About $700 million worth of bond sales were pulled this week, according to Thomson Reuters. That is roughly 3% of the week's planned sales, according to data from Ipreo. Many of the bond sales were to refinance outstanding debt at lower rates, meaning the governments didn't need the money.

But postponed deals are atypical, market watchers say, and they attribute them to investor demand for higher interest rates amid a glut of bonds as well as the impact of the move in 30-year Treasurys.

...

Moody's cited "continued weakness of the city's finances" in its downgrade of Philadelphia, affecting $3.85 billion in outstanding debt. Rob Dubow, the city's finance director, said, "We understand we face fiscal challenges, and we have, but for us the timing is odd, because we feel like we have stabilized." As for San Francisco, the bond rater said the "city ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior ten years."

A spokesman for San Francisco's mayor said the ratings downgrade was "not unexpected" given the challenging economy, and that the city still had a better rating than many other local governments.

As a brief aside, this whole thing is very sad. Most municipalities could handle their debt if they were willing to make hard choices. However, in a culture where homeowners now making "strategic defaults" on their mortgages, it does not surprise us that rather than cut back on trash service or government size, our municipalities are choosing to renig on their contractual and moral obligations to their lenders.

We think lenders - broadly - are not requiring enough compensation for this sea-change in risk.

Pennsylvania State Capital Misses Loan Payment

As regular readers know, we've been fascinated by the comings and goings in Harrisburg, PA - Pennsylvania's capital city. Harrisburg has withheld payment on a loan obligation to Covanta for a waste-to-energy incinerator financing that Covanta provided (Covanta being a large waste-to-energy operator and thus a partner to municipalities all over the US).

Today, Harrisburg announced that for the third time this year, on Thursday April 1, 2010, it will not meet its legal obligation to Covanta (sadly, not an April Fool's joke). Covanta, chaired by Sam "Gravedancer" Zell, has not yet put Harrisburg into default and is considering its options. Bloomberg article below [emphasis added]:

Harrisburg, Pennsylvania, to Miss Incinerator Loan Payment
2010-03-30 20:17:19.538 GMT

By Dunstan McNichol
March 30 (Bloomberg) -- Harrisburg, Pennsylvania, the capital of the sixth-most-populous U.S. state, will miss an April 1 loan payment to Covanta Holding Corp., said Michael Casey, the city's interim business manager.
Harrisburg faces $68 million in debt service payments this year connected to a trash-to-energy incinerator that Fairfield, New Jersey-based Covanta operates. The payments on the $282 million in incinerator debt are about four times what the city of about 47,000 raises through property taxes, according to its budget.
The city is scheduled to pay Covanta $637,500 April 1. The payment is the fifth installment on a $20.7 million Covanta advance the city guaranteed in 2008 on behalf of the incinerator's manager, the Harrisburg Authority. Covanta runs 64 waste-to-energy facilities in the U.S. and abroad, according to its 2009 annual report.
"We have the cash, but we do not plan to pay them on the first of April," Casey said in a phone interview today. [TILB - Sam Zell is getting Angry!] "They are working with us on a forbearance program for the rest of the year," meaning a plan to give the city some leeway on debt payments, he said.
Casey said the city is talking with the authority, Dauphin County, a guarantor of some of the bonds, and Hamilton, Bermuda- based Assured Guaranty Municipal Corp., their insurer [TILB - Wilbur Ross is getting Angry!], on a plan to restructure the debt while the city draws up a recovery strategy.

Asset Sales

That plan will include selling unspecified city assets, raising the county's trash-dumping fees at the incinerator and refinancing a portion of a $34 million working capital loan that is scheduled to be paid in full in December, Casey said. Mayor Linda Thompson isn't considering a bankruptcy filing, he said.
"And frankly, we see no need of it, the way things are going," he said.
Covanta is cooperating with the city and is awaiting its recovery measures, Jim Klecko, regional vice president for Covanta, said in a telephone interview today from his office in Lancaster, Pennsylvania.
"They have given us a real good feeling that they don't expect to go into bankruptcy," he said.[TILB - "a real good feeling"? How about the cash they are withholding from you??]
In addition to the debt service, the city owes another $12 million in payments on eight series of bonds and notes of its own, according to budget documents.
Thompson didn't return messages seeking comment today.

Missed Payments

Covanta, whose chairman is Tribune Co. owner Sam Zell, reported annual revenue of $1.55 billion in 2009.
The city has missed two payments on the incinerator debt this year. [TILB - oops!]
On March 1 the authority tapped debt service reserves to cover $2 million in payments due on its Series 1998A and 2003 Series A, B and C bonds after Harrisburg failed to honor its guarantee, according to March 8 notices to bondholders. A $425,000 payment, for which there is no such reserve, is due May 1, according to a schedule prepared for the City Council by Cincinnati-based Management Partners Inc., which was hired by Pennsylvania to develop a recovery plan for the city.
Dauphin County, where Harrisburg is located, has sued the city seeking $15 million, including reimbursement of $8.9 million in incinerator swap and debt service payments it has made on the city's behalf since last year, according to the county's legal complaint. [TILB - We love the county vs. city dynamics]
City Controller Dan Miller, who has advocated seeking Chapter 9 municipal bankruptcy protection instead of selling assets, said he doesn't think the city has enough cash to make the Covanta payment along with $4 million in city bond payments and a $1 million payroll that are also due April 1.
"I think we're going to have trouble making those payments, let alone the $600,000 to Covanta," he said in a telephone interview from his office in Harrisburg today. Harrisburg's credit rating was slashed to five levels below investment grade in February by Moody's Investors Service. [TILB - If you cut five levels at once, it implies you weren't paying attention. These don't arise out of left field.]

For Related News and Information:
For Pennsylvania Municipal Issuer data: SMUN PA .
To see U.S. state finances at a glance: MIFA .
Pennsylvania 2020 G.O. bond: 70914plc DES .

--Editors: Mark Tannenbaum, Walid el-Gabry

To contact the reporter on this story:
Dunstan McNichol in Trenton, New Jersey, at +1-609-394-0737 or dmcnichol@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or
mtannen@bloomberg.net.

Harrisburg. Pennsylvania Makes Official Its March Toward Default

As we discussed last week, Pennsylvania's state capitol city - Harrisburg - is insolvent. This week, Harrisburg makes it official by passing a budget that excludes paying their financing obligations. Chapter 9 feels right around the corner...

Reuters provides the story. Article included below [emphasis and comments added]:

PHILADELPHIA, Feb 14 (Reuters) - Harrisburg, Pennsylvania, moved a step closer to defaulting on a bond payment when its city council passed a 2010 budget that does not include $68 million in debt repayments on an incinerator.

Without the debt provision in the $65 million budget, the state capital may miss a March 1 payment of $2.072 million, a rarity for a municipal bond issuer. [TILB: a "rarity" indeed, although we suspect that like homeowner mortgage default, this will become less rare over the next few years]

Joyce Davis, a spokeswoman for Mayor Linda Thompson, confirmed the council's decision -- taken at a special session on Saturday -- and said the mayor is not commenting for now on the implications of exclusion of the debt payments from the budget.

The council also defeated a plan to sell city assets to help pay down the debt which is guaranteed by the city on behalf of the Harrisburg Authority, a separate municipal entity that owns the incinerator. Council members also rejected Thompson's plan to raise property taxes and water rates.

The $2.072 million payment is the latest installment on a $300 million bond owed on the construction of the incinerator. An additional $637,000 is due on April 1.

City Controller Dan Miller said last year's payments on the incinerator were made from a debt service reserve fund that is now depleted.

Debt payments on the incinerator total $68 million in 2010, or more than the city's general fund budget of about $60 million, Miller said.

Miller said on Feb. 9 he would "not be surprised" if Harrisburg fails to meet the March 1 payment.

Asked whether the city may file Chapter 9 bankruptcy as a way to get its debts under control, Miller said that was a "possibility."

The tax-exempt municipal bond market, which states, cities and municipalities use to raise the funds to build roads, schools and hospitals, is viewed as very safe with a far lower default rate than the corporate bond market.

Just 54 municipal bond issuers rated by Moody's Investors Service defaulted on their debt between 1970 and 2009, the agency said on Thursday. The average five-year historical cumulative default rate for investment-grade municipal debt was 0.03 percent in the period, compared with 0.97 percent for corporate issuers.

The recession has raised concerns of an increase in defaults as states, cities and towns struggle to balance budgets as required by law in all states except Vermont.

So far, however, those fears have not been realized and ratings agencies have played down the likelihood of a spike in defaults.

Fitch Ratings in January cautioned cities against using the threat of bankruptcy as a weapon to win concessions from labor unions. Even talk of bankruptcy can become self-fulfilling and undermines investor confidence in the market, it said.

Pennsylvania's Capital City, Harrisburg, Faces Bankruptcy

Somehow we missed this news during January. Hopefully it continues to develop toward a filing.

Awesomely, Pennsylvania's capital city - Harrisburg - is insolvent and on the brink of filing for Chapter 9 bankruptcy.

As reported in this link to WGAL's website, you can see that Harrisburg's new mayor is dealing with all sorts of tough decisions in her first few weeks in office.

TILB's advice to Mayor Thompson: take a page from Arnold's book and start issuing your own scrip. Seems like s no-brainer.

Emphasis added [and comments added in brackets]

WGAL.com
Harrisburg Facing Bankruptcy; Mayor Proposes Tax Hike, Leasing Assets
Official: Incinerator Primary Cause Of Financial Woes

HARRISBURG, Pa. -- After just a few weeks in office, Harrisburg Mayor Linda Thompson is facing financial problems that could put the city in bankruptcy before the year is out.

City officials blame the incinerator facility, now over $228 million in debt, for the city's financial troubles.

That's not an option she even wants to consider at this point, but any successful plan must solve the financial drain of the city's incinerator.

The incinerator is currently $288 million in debt and is the primary cause of Harrisburg's financial problems.

Officials said it doesn't begin to produce the revenue needed to pay off the debt of repairing and operating the facility over the years.

Former City Council vice president Dan Miller said it's been a financial drain for decades.

"It's such a problem because for 25 years, the true problem of the incinerator has never been addressed," said Miller. "It's been refinanced repeatedly and pushed down the road, always waiting for someone else to solve the problem."

Now, he said, the city must solve the problem.

Miller said he believes the city should consider going into Act 47, the first step before bankruptcy. That would allow the city to negotiate with the people it owes to come up with realistic plans to settle debts.

Miller said raising taxes and other fees, or selling off revenue-producing city assets like the parking garages and water and sewer operations, will only create new problems.

Mayor Thompson Proposes Budget Amendments
Thompson addressed City Council Tuesday night with her own plans to fix the financial crisis.

City council member Wanda Williams said Thompson's proposed tax hike is "an outrageous amount" to increase any taxes. [TILB - I love this! "We can't cut spending" and "we can't sell our precious assets" and "we can't raise taxes"! Guess what you can do, loser: File BK.]

Thompson is proposing to increase water rates by 40 percent and cut overtime funding for the police and fire department.

At the meeting, Thompson also proposed what she called tough decisions, which include:
A 20 percent property tax increase
Cutting costs for trash collection
Merging Harrisburg dispatch with the Dauphin County 911 center

Thompson said her cuts would save the city about $8 million. She said her proposals will close the nearly $4 million gap in the budget, allow the city to make payroll next month and help ease the financial pain of the incinerator debt.

But not everyone is happy with the mayor's recommendations.

"I'm disturbed by it," said one taxpayer. "To me, a property tax increase as well as a water rate increase would be something I find objectionable." [TILB - while we totally agree, Johnny Taxpayer needs to recognize that these are symptoms of the debt and spending problem. It's like getting herpes from unprotected but enjoyable sex and then saying you find the sores "objectionable".]

Thompson said she is also considering selling or leasing the city's assets, including parking garages and City Island. [TILB - Honestly, this is a great idea...I mean, other than the fact that this is a horrible time to sell these sorts of assets. Maybe some public REIT with overpriced equity financing will provide the necessary bid. Why should municipalities be in the business of managing parking garages anyway?]

City council will look into the mayor's budget proposal at Thursday's budget and finance committee meeting.

Expect more of this sort of thing.

WSJ Acknowledges California IOUs As A Currency; Schwarzies Take A Place On The Podium Next To Clamshells

As California announces a budget that gets them out of crisis...for nine months...it is likely that Schwarzie issuance will soon take a temporary respite (TILB already predicted that this budget will not hold for a variety of reasons).

It is at this juncture in history that the WSJ has decided to reflect on the implications of Schwarzies. The article even goes so far as to employ an uncited use of our phrase "Schwarzenegger Scrip" (we challenge you to find a similar reference older than ours to said currency). The Journal talks about where Schwarzies stand amongst the various scrips that were issued by state and local municipalities during the Great Depression, including certain places that issued clam shells with hand written denominations (if only TILB could have been there reporting...).

Ironically, clam shell currencies held their real value much better than our shitty fiat dollars (lovingly referred to by TILB as "Bernankes"). Per the WSJ:

Two towns in California -- Crescent City and Pismo beach -- circulated scrip printed on clamshells. [The] 10-cent note was issued by the Crescent City Chamber of Commerce. It's worth about $500 today.

And do you know why it held its value (obviously a 5000 bagger is better than "holding its value", even adjusted for dollar debasement/inflation)? Two related reasons explain the return: 1) novelty, which we do not hope for modern currencies to replicate; and 2) scarcity. Sadly, Comrades Obama, Bernanke and Geithner do not seem to fully appreciate the latter reason (or, perhaps more accurate and frightening, they do understand). Rather than talking about holding the volume of dollars somewhat stable, they speak of dropping freshly minted dollars on the populous from the cargo bed of helicopters.

Gold, a currency that has been accepted throughout time fairly universally, allows natural supply/demand forces to function as its central bank. In essence, gold has a built in scarcity function - finding, mining, refining, certifying, and establishing a reputable "brand" are expensive. As such, these functions (which increase gold supply) occur in modest, fairly stable amounts over time, leading to a dependably scarce, value protecting, and widely accepted currency.

The article goes on to inform us that California State Controller Chiang may continue to issue a few more Schwarzies as the implications of the budget are digested:

Since California ran out of cash early this month, it has issued more than 194,000 IOUs, with a total value of $1.03 billion. They are redeemable in U.S. dollars on Oct. 2, or sooner if the state comes up with the money. The legislature on Friday approved a plan to close a $24 billion budget gap, but officials say it could still take a few weeks to analyze the state's cash situation and resume giving creditors checks instead of promises.

Prediction: the state will not come up with the money sooner than Oct. 2nd. Paying them off early would be a negative arbitrage and thus they'd never do it.

If they had half a brain and a good sense of humor, they'd finance old Schwarzies with new Schwarzies and really establish them in circulation.