The Municipal Market in 2014 - CDFA€¦ · Puerto Rico bonds are not for the faint of heart. Risk is signifi cant, & unless fi nances and liquidity improves, we recommend caution

MUNICIPAL BOND MARKET MONTHLYJANNEY FIXED INCOME STRATEGYNovember 22, 2013

JANNEY MONTGOMERY SCOTT

www.janney.com

© 2013 Janney Montgomery Scott LLC

Member: NYSE, FINRA, SIPC

MUNICIPAL MONTHLY • PAGE 1

TOM KOZLIK Municipal Credit [email protected]

ALAN SCHANKEL Managing [email protected]

See page 17 for important information regarding certifi cations, our ratings system as well as other disclaimers.

CONTENTS PAGE

MUNICIPAL MARKET IN 2014 1

SECTOR CREDIT OUTLOOKS 7

THE STRENGTH OF NEW YORK CITY 8

PHIL SD FIGHTS CHARTER SCHOOLS 8

REG. PROPOSAL EXCLUDES MUNIS 9

THREAT TO TAX-EXEMPTION DELAYED 10

ECONOMIC POLICY UNCERTAINTY 11

TECHNICAL MARKET DATA 12

SELECT RATING CHANGES 13

STATE ISSUER RATINGS 14

MUNICIPAL RATING DEFINITIONS 15

JANNEY MUNICIPAL PUBLICATIONS 16

DISCLOSURE 17

The Municipal Market in 2014• We highlight fi ve events/issues that we think will garner signifi cant attention in 2014:

• 1. Investors should expect more DC interference. There are a few fi scal deadlines worth watching.

• 2. Moody’s downgrades will continue to exceed upgrades and the divergence between S&P’s ratings will widen.

• 3. The potential for higher interest rates has increased for 2014, but it seems Janet Yellen will continue accommodative strategies, at least for now.

• 4. We believe that U.S. economic growth will be much lower in coming years, potentially causing credit deterioration to some municipal market credits.

• 5. 2013 was a transformative year for Puerto Rico, and 2014 is sure to be pivotal. Puerto Rico bonds are not for the faint of heart. Risk is signifi cant, & unless fi nances and liquidity improves, we recommend caution.

• New York City has withstood major events yet it still possesses some of its highest underlying ratings ever. What changes will mayor-elect Bill de Blasio bring about?

• The School District of Philadelphia has limited funding above the charter cap for area charter schools. There is a work around, but S&P views this situation as uncertain and has taken some negative rating actions as a result.

• A regulator proposal meant to strengthen the liquidity positions of large banks eliminates mu-nicipal bonds as a High Quality Liquid Asset. This could weaken demand for municipals and raise costs for issuers over time.

• The threat to the municipal bond tax-exemption has been delayed. It is very unlikely that signifi -cant legislative attention is paid to tax reform, limiting the potential for change to the municipal bond tax-exemption before the 2014 mid-term elections.

• The Index of Policy Uncertainty did in fact jump, as we expected, during the Debt Ceiling Debate 2. Several readers asked for an update.

• Fitch placed its “BBB-” Puerto Rico underlying rating on “Rating Watch Negative”; Puerto Rico’s COFINA sales tax bonds were downgraded by Moody’s & had their outlook lowered by S&P; Hawaii’s outlook was raised by S&P; Tennessee’s outlook was lowered by S&P; The NY State Thruway Authority was downgraded by Moody’s and S&P; Chicago was downgraded by Fitch; The Philadelphia School District was downgraded by Fitch; and new S&P local GO criteria is expected to raise ratings on 30% and lower ratings on 10% of local GO issuers.

WHAT ARE THE EVENTS/ISSUES THAT WILL HELP SHAPE 2014?A Walk Down Memory Lane

There have been some defi ning events/issues that have driven municipal market activity and have been the central topic of conversation among market participants and investors in recent years. Investor interest focused in 2010 on how issuers were recovering in the wake of the Great Reces-sion. The issue for much of 2011 was clearly Meredith Whitney’s prediction, which proved massively overblown. In the summer of 2012, a very few number of California distressed communities made news and received a signifi cant amount of attention. Some thought this might trigger a wave of bankruptcies and defaults but they did not. This year began with the Fiscal Cliff last minute agree-ment and investor worry about its effect on the market and municipal issuers. 2013 is ending with the near term memory of the Debt Debate Part 2 and the recent political maneuver that kicked the issue of federal spending further down the road. The Detroit, MI Chapter 9 bankruptcy fi ling made headlines in 2013 as did the spread widening of Puerto Rico related bonds. Fallout related to these

MUNICIPAL BOND MARKET MONTHLYNovember 22, 2013


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There have been some defi n-ing events/issues that have driven municipal market activity and have been the central topic of conversation among market participants and investors in recent years.

two issuers will likely play out over the coming years, and specifi cally into 2014.

It is always dangerous to predict what might garner attention in a coming year, but we are going to live dangerously and do just that. Sure, we expect the legal proceedings in Detroit will carry into 2014 and beyond, and will hopefully offer some clarifi cation at some point for bond holders and the municipal market at large. But largely, we think attention in 2014 will be focused on topics sur-rounding and related to these themes:

• More D.C. interference,

• Continuation of mostly negative rating actions (by Moody’s) and further divergence from S&P,

• Strong potential for more interest rate increases and/or spikes,

• Lower U.S. economic growth that could weaken municipal credit profi les, and

• Puerto Rico.

2013 began with the Fiscal Cliff last minute agreement and investor worry about its effect on the market and mu-nicipal issuers.

Largely, we think attention in 2014 will be focused on fi ve themes.

Year Major Factors/Infl uences

2014• More DC interference; • Even more still mostly negative rating agency actions (S&P rating divergence);

• Likelihood of a trend to higher interest rates (or spikes) • Lower U.S. growth; • Puerto Rico

2013• D.C. interference; • Lehman-like yield spike; • Detroit, MI;

• Puerto Rico; • Moody's U.S. state outlook to "Stable"; • Housing market recovery

2012

• No municipal market meltdown in 2012 either; • States managing well, some locals still at risk;

• California outliers • Lowered transport. sector credit outlooks; • Puerto Rico

2011• U.S. rating downgrade; • Whitney's prediction fails to materialize;

• Creation of Sequestration; • We highlighted that local govt is strong despite outliers • Threat to the tax-exemption

2010• Whitney's overblown prediction; • No state debt crisis (CA is not Greece);

• Inexpert advice about municipal credit; • Harrisburg, PA

A Walk Down Memory Lane

Source: Janney Fixed Income Strategy.

Upcoming Important Fiscal Deadlines Worth Watching

Source: Janney FIS.

Dec 16, 2013-Congress will begin a recess that will last until the end of 2013

Jan 15, 2014-The CR funding the govt expires & automatic sequester

cuts take effect for FY14

Feb 3, 2014- Pres to unveil FY15 budget proposal to

Congress- will likely be late

2013 Dec 2014 Jan Feb

Dec 13, 2013-House and Senate budget conference

comm. presents fiscal recommendations- No Grand

Bargain expected

Feb 7, 2014- Govt hits the latest debt ceiling on

this date, emergency measures can buy a few

months



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Investors should expect even more DC interference when the calendar turns to 2014.

More D.C. Interference

Investors should expect even more DC interference when the calendar turns to 2014. While not as dire as the end of 2012, the dates above, most which fall at the beginning of 2014, offer Washington D.C. political actors plenty of opportunities to fumble the political and fi nancial football. Financial markets and the municipal market specifi cally have become more accepting of the way Washington does business and now expect a low amount of communication and mostly last minute fi xes. There is currently no “Grand-bargain” on the horizon, at least at the moment. We currently do not see this as a reason for investors to stay out of the market. If anything, the uncertainty reinforces our recommendation to stick to high quality municipal issues.

Moody’s Rating Trends Will be Mostly Negative, Still

The pace of Moody’s downgrades has continued in 2013, as the rating agency continued to hand out more downgrades that upgrades. In 2014, we expect downgrades to continue to outpace up-grades but at a slightly lower rate, and we expect that downgrades as a % of all revisions to lighten somewhat. Municipal issuers will continue to grapple with lower U.S. growth and other factors that are mostly resulting in lower overall spending. Some issuers will be able to continue to make adjustments. But others have been squeezed tightly since the economic downturn. For some, credit deterioration will occur and ratings will be lowered as a result. Tom Kozlik

Rating Action Divergence - Is it a Stealth Recalibration?

There is a strong divergence of opinion among rating agencies about the creditworthiness of the municipal sector if rating actions are a measure. Since 2008, both Moody’s and Fitch have lowered more ratings than they increased in each of the 19 successive quarters. S&P in contrast applied more upgrades than downgrades in all but three post 2008 quarters. Given the ongoing post-recession fi nancial pressures endured by state and local issuers, as well as issuers in non-core sectors such as higher education and healthcare, it’s diffi cult to understand the optimistic record of S&P rating changes.

In early 2010, both Moody’s and Fitch executed recalibration efforts that led to rating increases for many municipal issuers – changes that were not included in the rating change data and so are not refl ected in the graph. It is perhaps understandable that in the quarters following the April 2010 Moody’s and Fitch recalibration actions, S&P’s upgrade to downgrade ratios might refl ect more upgrades, in kind of a stealth recalibration, but it is more challenging to rationalize the continuing trend, 3 ½ years out. Overall, state and local government tax revenues have only recently returned to pre-recession levels, and in some areas, governments continue to struggle. S&P is currently apply-ing a revised methodology for reviewing local government issuers such as cities counties and towns.

The pace of Moody’s down-grades has continued in 2013, as the rating agency continued to hand out more downgrades that upgrades.

There is a strong divergence of opinion among rating agencies about the credit-worthiness of the municipal sector if rating actions are a measure.

Ratio of Moody’s Downgrades to Upgrades in 2013 Remains Consistent With 2012

Source: Moody’s and Janney FIS.

0%

25%

50%

75%

100%

0

100

200

300

400

1Q07 2Q08 3Q09 4Q10 1Q12 2Q13

Downgrades (Left) Upgrades (Left) Downgrades as % of All (Right)



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We expect S&P to continue leading the other rating agen-cies with rating upgrades.

The rating agency anticipates that 30% of the 4,000 impacted issuers will receive upgrades com-pared to only 10% facing downgrades, so we can expect S&P to continue leading the other rating agencies with rating upgrades. Alan Schankel

A Trend of Higher Interest Rates or Potential Yield Spikes

The municipal bond market, in addition to most other fi xed income sectors, really struggled this past summer. During the middle of 2013 – from May 1 through June 24th – municipal benchmark yields experienced a “Lehman-like” move when they rocketed up 114 basis points, the fastest increase since the 2008 Lehman Brothers bankruptcy fi ling. We wrote extensively about this in the August 21, 2013 Municipal Bond Market Monthly in the section titled, Trials and Tribulations- Technical Market Commentary. One of the most important factors going forward where this topic is concerned is that there is a growing chance that this could occur again. Additionally, there is also an increasing chance that the Fed could take its foot off of the gas and start to taper asset purchases. Higher inter-est rates targets are growing increasingly possible too. However, as a result of Janet Yellen’s recent comments, we are currently expecting the Federal Reserve to continue its accommodative policy, at least in the near term.

The municipal bond market, in addition to most other fi xed income sectors, really struggled this past summer.

There is also an increasing chance that the Fed could take its foot off of the gas and start to taper asset pur-chases.

Source: Moody’s, S&P, Fitch and Janney FIS. Ratios are net total upgrades compared to downgrades.

S&P has a More Optimistic View of Municipal Credit than its Competitors

-1

1

3

5

7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Moody

S&P

Fitch

15:1

Municipals Experienced a “Lehman-Like” Move in the Summer of 2013

1.50

2.00

2.50

3.00

3.50

3.00

3.50

4.00

4.50

5.00

Jan Mar May Jul Sep Nov

MMD AAA (10 YR) 2008 %- Left

MMD AAA (10 YR) 2013 %- Right

Lehman's Chp 11 filing rocked and then froze

the market back in 2008

The market jolt from May 2013 to July 2013

was "Lehman-like"

Source: Thomson Reuters and Janney FIS.



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Less growth gives issuers one more reason to have to tem-per spending habits.

Where is U.S. Growth Going to Come From?

Economic data, especially data at the beginning of 2013, was indicating to investors that the coun-try’s growth trajectory was trending positive; however, most would argue two main points: that the economy is better, not sustainably healthy, and that growth prospects while stable are still not going to measure up to historical trends. Historical GDP growth has averaged between 3%-4%. Near term forecasts for the next few years coming from the Federal Reserve and other views range from just under 2.0% to 2.5%, assuming the more optimistic scenarios. This could have an impact on municipal credit broadly, mostly to the downside. Less growth gives issuers one more reason to have to temper spending habits. Consequences will likely result in credit deterioration and potential rating downgrades. Tom Kozlik

A Transformative Year for Puerto Rico

2013 was a transformative year for Puerto Rico and next year is sure to be pivotal. Moody’s lowered the general obligation rating to Baa3, a notch above high yield, in December 2012, with Fitch and S&P following suit in March. A new governor and administration took offi ce on January 2, 2013, inheriting a $2.2 billion budget defi cit for FY 2013 and a structurally unbalanced budget for the subsequent fi scal year.

Impressive Accomplishments

As the July 1 start to a new fi scal year approached, the administration and legislature enacted signifi -cant measures, raising new revenues to narrow the budget gap, and reforming the Commonwealth’s woefully underfunded employee pension system. Additionally, an increase in the petroleum tax and a 60% bump in water rates, if projections are realized, will provide enough additional revenue to put the public corporations on a self sustaining fi nancial footing, limiting or eliminating the need for liquidity support from the Treasury or Government Development Bank. Impressive as these accom-plishments are, severe economic headwinds persist and continue to cloud Puerto Rico’s prospects, and the market has taken a dim view of the creditworthiness of Puerto Rico issuers. The economy has been depressed since 2006, and although there were some signs of stability in 2012, recent months have seen the GDB Economic Activity Index numbers recede to the lowest levels in at least 10 years.

But Yields Rose Sharply

The summer was a diffi cult time for bonds in general, but as September brought some stability to the yields of most municipal issuers, Puerto Rico yields rose sharply, with the differential between the yields of a 10 year Puerto Rico GO index and the benchmark AAA municipal index widening from

2013 was a transformative year for Puerto Rico and 2014 is sure to be pivotal.

Impressive as these accom-plishments are, severe eco-nomic headwinds persist and continue to cloud Puerto Rico’s prospects.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2005 2006 2007 2008 2010 2011

US GDP QoQ % Change US GDP YoY % Chng

U.S. Economic Growth

Source: Bureau of Economic Analysis and Janney FIS.



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290 basis points in January to 620 basis points recently. Although Puerto Rico general obligation bonds retain investment grade ratings, current yield levels are consistent with high yield municipal bonds with ratings in the B and BB categories.

The fi nancial measures taken by the government in June have not been fully realized, but through the fi rst four months of FY 2014, revenues are generally on target. Another notable improvement on the government’s part is the increase in disclosure and dissemination of timely fi nancial information, although there remains room for more improvement. The sharp spike in yields, which rose to as high

The Puerto Rico economy has been depressed since 2006 & recent months has seen the GDB Economic Activity Index numbers recede to the lowest levels in at least 10 years.

Puerto Rico bonds have been trading in a range closer to high yield municipal bonds.

If Puerto Rico continues to meet revenue projections and moves closer to bringing the 2014 budget in on target, investor sentiment will im-prove.

Puerto Rico is Trading in a Range Closer to High Yield Municipals Now

Source: Thomson Reuters and Janney FIS.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2-Jan 6-Feb 13-Mar 17-Apr 22-May 26-Jun 31-Jul 4-Sep 9-Oct 13-Nov

10 Year AAA Index Yield10 Year PR GO Index Yield

Janney Puerto Rico Related Municipal Credit Coverage

Report Title Date Comments Publication

Municipals: Puerto Rico Update 11/4/2013 The Puerto Rico roller coaster (of yields) FI Weekly

Island Visit and COFINA Comments 10/4/2013Sales & use tax revs are growing despite the weak

economyNote

Accomplishments & Challenges 9/13/2013Better fi scal shape, headwinds persist & market

skepticalNote

PR Highway & Trans- A Bumpy Road 6/13/2013PRHTA solvency is questionable without more

revenueNote

The Clock is Ticking 6/3/2013Leaders have grasp on challenges, follow-through

criticalNote

On the High-Yield Precipice 4/2/2013 Much needed to prevent further downgrades Note

Little Progress in Puerto Rico 2/27/2013Default not imminent, fi nances to get worse before

they improve.MBMM

Puerto Rico's Downgrade 12/18/2012 Moody's 2 notch downgrade was unexpected Note

Puerto Rico Update 11/1/2012We remain cautious, but wider spreads improve risk/

rewardNote

Puerto Rico Yield Update 8/24/2012Credit spreads have widen signifi cantly since our

July reportNote

Puerto Rico's Debt Overload 7/27/2012Debt challenges fi scal stability, investors should limit

exposureNote

COFINA- PR Sales Tax Fin. Corp 5/21/2012COFINA bonds are the strongest credits among PR

issuersNote



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as 10% (GO) in early October, brings into question the Commonwealth’s market access, a key ele-ment underlying Fitch’s recent placement of the BBB- GO rating on watch for downgrade.

2014 Year is Critical

If Puerto Rico continues to meet revenue projections and moves closer to bringing the 2014 budget in on target, investor sentiment will improve. If further action is needed it must be taken promptly. The administration and Government Development Bank can enhance investor confi dence by con-tinuing and further improving fi nancial disclosure efforts. Plans to issue between $500 million and $1.2 billion in new debt using Sales Tax Bonds (COFINA) can be delayed for a while, but if market access is not achieved before the June end of the current fi scal year, liquidity concerns will increase. The Commonwealth has recently relied on short term bank loans for funding and liquidity, but that strategy is not sustainable and often weakens the creditworthiness of outstanding debt, as was the case, for example, with an August 2013 Highway and Transportation Authority two year note issue ($400 million), which is secured by certain tax and fee revenues which would otherwise be available revenues to secure outstanding bonds. Furthermore, the interest rate on the notes rises after the fi rst year, becoming punitive in the fi nal six months before maturity if not repaid earlier.

Not for the Faint of Heart

An investment in Puerto Rico bonds is not for the faint of heart. Risk is signifi cant, and the investor mix has recently widened to include nontraditional investors such hedge funds. Although an addi-tional investor segment is positive, the interests of hedge funds and similar investors are not always aligned with those of individual retail investors. Unless and until the Commonwealth fi nds itself on a more solid fi nancial and liquidity footing, we recommend caution in investing or holding bonds of Puerto Rico issuers. Alan Schankel

JANNEY MUNICIPAL SECTOR CREDIT OUTLOOKS AND REVIEW

We did not make any changes to our Municipal Sector Credit Outlooks in 2013. While Moody’s did see fi t to raise its outlook on state governments to “Stable” from “Negative” at the end of the summer, Janney maintained a “Stable” outlook on U.S. states throughout the Great Recession and during the U.S. economy’s recovery. We think going forward investor focus should to be on the local government sector, as many locals continue to the fi gure out how to do more with less and grapple with lower state aid levels. There is also the potential for change in New York City as we highlight in more detail on the following pages.

An investment in Puerto Rico bonds is not for the faint of heart. Risk is signifi cant, and the investor mix has recently widened to include nontradi-tional investors such hedge funds.

Unless and until the Com-monwealth (of Puerto Rico)fi nds itself on a more solid fi nancial and liquidity foot-ing, we recommend caution in investing or holding bonds of Puerto Rico issuers.

We think going forward in-vestor focus should to be on the local government sec-tor, as many locals continue to the fi gure out how to do more with less and grapple with lower state aid levels.

Janney Municipal Sector Credit Outlook and Review

Source: Barclays Capital as of October 31, 2013 Janney FIS.

SectorJanney Credit

Outlook

Last Month Change

Barclay's 12 Month

ReturnKey Sector Trends

Recent Janney Sector Review

Municipal Bond Index - - -1.72% Barclay's Muni Index, 46k issues -

State Government Stable Same -1.56% Moody's raised outlook back to "Stable" Jun 2013 MBMM

Local Government Cautious Same -1.55% Budgets squeezed, pension related downgrades Jun 2013 MBMM

School Districts Cautious Same - Credit deterioration will continue, but remain limited Jun 2013 MBMM

Airports Cautious Same -1.85% Enplanements slightly higher, funding questions Feb 2013 MBMM

Health Care Cautious Same -1.53% Reimbursement uncertainty, margins pressured Feb 2013 MBMM

Higher Education Cautious Same -1.66% Enrollment declines equal fi nancial stress Oct 2013 MBMM

Housing Stable Same 0.14% Some benefi ts for HFAs from higher interest rates May 2013 Note

Public Power (Elec.) Stable Same -2.29% Essential purpose nature enhances stability Feb 2013 MBMM

Tobacco Cautious Same N/A More downgrades, consumption dropping Aug 19th Weekly

Toll Facilities Cautious Same -1.85% Activity is leveling off, but still near 2004 levels Feb 2013 MBMM

Water and Sewer Stable Same -2.23% Essentiality factor, system upgrades looming Feb 2013 MBMM



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High quality issuers are those who have been dealing with the new economic environ-ment with their fi nancial eyes open and those who plan and budget on a conservative ba-sis.

Municipal Bond Market Recommendation - Stick to High Quality Municipal Bonds

In all, there is nothing that is changing from the municipal bond market recommendation we have consistently preached in recent years. We are still not expecting a sector-wide downward shift of mu-nicipal credit conditions. Extremely distressed municipals will remain “outliers” or exceptions going into 2014. And we still recommend municipal bond investors stick to high-quality general obligation and revenue bond issuers. What do we mean by high quality? High quality issuers are those who have been dealing with the new economic environment with their fi nancial eyes open and those who plan and budget on a conservative basis. We do not like and do not recommend investors consider municipal credits with highly speculative characteristics or where the level of political uncertainty is high. High quality issuers exist in almost every municipal sector and are most easily identifi ed by those who have had consistent or improving underlying ratings or credit factors over the last few years. If investors stick to these types of situations, most of the negative fallout from the above mentioned pressures/issues can be avoided. Tom Kozlik

THE STRENGTH OF NEW YORK CITY

The Mayor-elect of New York City Promises Change

In just over 10 years, New York City (Aa2/AA/AA) has withstood: terrorist attacks, a major blackout (2003), the worst fi nancial crisis since the Great Depression, and Superstorm Sandy and the most populous city in the U.S. (about 8.3 million) is still enjoying among the strongest underlying credit ratings in its recent history. Now, a change in a key political leader has the potential to cause ripples in the city’s credit quality, especially because Mayor-elect Bill de Blasio ran and was elected in a landslide by running on a very populist agenda. He will be replacing Mayor Michael Bloomberg (a Republican turned Independent) who by most accounts was a very successful fi nancial and political leader for the city. Bloomberg served as the City’s 108th mayor, assuming offi ce on January 1, 2002. Bloomberg most often acted methodically and was generally not infl uenced by outside interests due to the fact that he self-funded his political campaigns. The city and fi nancial markets have yet to see how Mayor-elect de Blasio will execute. A recent article in the Economist magazine expressed a pessimistic tone in a Nov 9th sub-headline which read, “The Big Apple has been well run for 20 years. The mayor-elect promises change.”

We think that New York City has come a long way and shown its resilience not only over the last 10’ish years, but especially since its 1970s deep rooted fi nancial crisis. Readers should recall the immortal New York Daily News headline which on Oct. 29, 1975 read, “FORD TO CITY: DROP DEAD.” Mayor Bloomberg’s leadership has made a difference, mostly positive. Now, he is handing over a city which, as we noted earlier, has very strong underlying credit ratings and fundamental strengths. The city survived the World Financial Crisis of 2008. Recovery has been long and slow but the region has clawed its way back. The city’s economy is vast and somewhat diverse. And over recent years city government fi nancial planning has been cautious. There are some chinks in the city’s armor; however, New York City possesses an economic base that is particularly sensitive to cyclical economic cycles particularly due to the city’s fi nancial services presence. Superstorm Sandy reminded New Yorkers that the island is very vulnerable to changes occurring on planet earth, especially weather systems. Most alarming is the city’s currently high level of debt service and its pension and retiree health care costs that are expected to grow signifi cantly. Tom Kozlik

PHILADELPHIA SCHOOL DISTRICT FIGHTS BACK AGAINST CHARTER SCHOOLS

The School District of Philadelphia (SDP) has been in fi nancial distress for over 10 years. As a result, the SDP suspended enrollment increases above the charter cap (originally granted to the charter school by the SDP) for Philadelphia area charter schools. There is a work around charter schools can use by applying directly to the state for funding over the cap, but Standard and Poor’s (S&P) views this situation as uncertain and has taken some negative rating actions as a result. In a November 8th report titled, “Credit Risks for Philadelphia Charter Schools Are Growing” the rating agency also indicated that Philadelphia area charter schools could come under further pressure as a result.

“The Big Apple has been well run for 20 years. The mayor-elect promises change,” The Economist magazine.

The School District of Phila-delphia (SDP) has been in fi nancial distress for over 10 years.



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The S&P report summarizes the situation:

• “The School District of Philadelphia has been in fi nancial distress since 2001;

• The District has decided not to grant increases in charter schools enrollment caps as a way to retain revenue;

• Some charter schools are choosing not to sign their charters as a result;

• The confl ict is negatively affecting the credit quality of some Philadelphia charter schools.”

At this time, the fi nancial future of a select number a Philadelphia area charter schools is somewhat out of the hands of the charter schools themselves and in the hands of state and SDP policymakers. Tom Kozlik

REGULATORY PROPOSAL EXCLUDES MUNICIPAL BONDS

Proposal Applies to Holdings of “Large” Banks

The Offi ce of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System proposed rules on Wednesday Oc-tober 23rd and Thursday October 24th that are meant to strengthen the liquidity positions of large banks. The proposal offi cially applies to large banks or “banking organizations with $250 billion or more in total consolidated assets; banking organizations with $10 billion or more in on-balance sheet foreign exposure; systemically important, nonbank fi nancial institutions that do not have sub-stantial insurance subsidiaries or substantial insurance operations; and bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion or more (covered institu-tions). The proposed rule does not apply to community banks,” according to a FDIC/OCC release.

Comptroller of the Currency Thomas J. Curry explained the importance of the proposal, “We learned during the fi nancial crisis just how important liquidity is to the stability of the system as a whole, as well as for individual banks. A number of large institutions, including some with suffi cient levels of capital, encountered diffi culties because they did not have adequate liquidity, and the resulting stress on the international banking system resulted in extraordinary government actions both glob-

S&P indicated that Philadel-phia area charter schools could come under further pressure.

Regulators proposed rules are meant to strengthen the liquidity positions of large banks.

The proposed rules apply to “large” banks not to commu-nity banks.

Philadelphia Charter Schools With a Signed Charter and Operating Within Cap

Source: S&P & Janney FIS. *The Independence charter is expected to be signed at its December 2013 board meeting.

Philadelphia Charter Schools Without a Signed Charter

Source: S&P & Janney FIS.

Name of School Rating (S&P) OutlookGlobal Leadership Academy BBB- Stable

Philadelphia Performing Arts BB- Stable

Mariana Bracetti Academy BB Stable

New Foundations BB+ Stable

First Philadelphia Preparatory BB Stable

Green Woods BB Stable

Tacony Academy BB+ Stable

Charter HS for Arch. & Design BBB- Stable

Independence Charter* BBB- Positive

Name of School Rating (S&P) OutlookRichard Allen Prep BB+ Negative

West Philadelphia Achievement BB+ Negative

Discovery Charter School BB+ Negative

MaST Community Charter School BBB+ Negative

Russell Byers Charter School BBB- Negative



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ally and at home. The proposed liquidity rule will help ensure that a bank’s cash, and not taxpayer money, is the fi rst line of defense if it faces a short-term funding stress.”

The most important factor included in the proposal for the municipal market is the elimination of municipal bonds as a High Quality Liquid Asset (HQLA); in other words, the proposal no longer allows banks to use municipal bonds to satisfy its liquidity coverage requirement. The proposed rule states, “The proposed rule likely would not permit covered bonds and securities issued by public sector enti-ties, such as a state, local authority, or other government subdivision below the level of a sovereign (including U.S. states and municipalities) to qualify as HQLA at this time”.

There could be some signifi cant ramifi cations for municipal market participants if the proposal is ap-proved in its current form. Broadly, this proposal has the potential to hinder demand for municipals. Specifi cally, bank portfolios, which have become an ever increasingly important buyer of municipal bonds will require a greater enticement to invest in municipal bonds. This will undoubtedly increase costs for issuers. The provision also has consequences for variable rate demand obligation and tender option bond programs. A public comment period expires on January 31, 2014. Tom Kozlik

THE THREAT TO THE TAX-EXEMPTION IS DELAYED

No Threat in 2013

The good news is that there is nothing on the near term horizon that poses a signifi cant threat to the municipal bond tax-exemption. The bad news is that the threat will exist as long as federal lawmak-ers are looking for ways to trim the federal budget and ideas about potential tax reform legislation continue to be discussed.

Threat Could Resurface at End of 2014 or in 2015

It is very unlikely that signifi cant legislative attention will be paid to tax reform, and a potential change to the municipal bond tax-exemption, before the 2014 mid-term elections. Attention could surface in the near term but we expect that there will be much more talk and politicking rather than action from lawmakers in the near term. House Ways and Means Committee Chairman Dave Camp (R-MI) has been planning a committee vote on tax reform. But, this is not likely to occur now before the end of 2013. Senate Finance Committee Chairman Max Baucus (D-MT) is expected to release discussion drafts related to tax reform in 2013, but this will not be a substantial step in any direction in our opinion.

The most important factor in-cluded in the proposal for the municipal market is the elimi-nation of municipal bonds as a High Quality Liquid Asset.

This regulators’ proposal has the potential to hinder de-mand for municipals.

There is nothing on the near term horizon that poses a sig-nifi cant threat to the munici-pal bond tax-exemption.

Holdings of Municipal Bonds at U.S. Banks

Source: Thomson Reuters via the Bond Buyer & Janney FIS.

-10

-5

0

5

10

15

20

25

$0

$50

$100

$150

$200

$250

$300

1993 1996 1999 2002 2005 2008 2011

Holdings in $ bill (left) Percent Change % (right)



www.janney.com




In 2014, Expect the 28% Cap to be Included Again in the President’s Budget

IInvestors should keep in mind that again we expect the potential for headline risk to be high during the time surrounding when the President is scheduled to release his budget proposal to Congress. Scheduled for Monday Feb 3rd, the budget proposal release is likely to be late again. Therefore, we expect there is likely a window of at least a month where the President’s budget could be deliv-ered. This is important for the municipal market because within the proposal, we again expect the President to recommend a 28% cap on municipal bonds’ tax-exempt income, effectively taxing a portion of the interest received by top bracket taxpayers. We should reiterate that the most impor-tant element of the President’s past proposal, which we also again expect to see, was its retroactive nature since it would apply to outstanding as well as future issues. Although we expect this to be reintroduced, we do not think that it signifi es a renewed effort to squash the municipal bond tax-exemption. It is more of a product of the fact that President’s budget proposals do not generally signifi cantly change year over year. Tom Kozlik

UPDATE TO THE INDEX OF ECONOMIC POLICY UNCERTAINTY

Originally Published Prior to the Debt Ceiling Debate Part 2

When we published the October Municipal Bond Market Monthly (on September 27, 2013), we noted that the consequences from the (at the time) potential federal government shutdown and more important Debt Ceiling Debate Part 2 would be limited. This was because the majority of the municipal market fallout from the 2011 Debt Ceiling Debate occurred as a result of the S&P down-grade to the U.S. sovereign rating. Turns out there were very limited consequences to the municipal market as a result of the federal shutdown, Debt Ceiling Debate Part 2, and resultant Continuing Appropriations Act of 2014, so far at least; however, the Index of Policy Uncertainty jumped to its highest level since the December 2012 Fiscal Cliff debates.

On the cover of the October MBMM (published Sept 27, 2013), we published the Index of Policy Uncertainty, and we received many requests to update the data after the events unfolded. So, we complied and include below the updated results so our readers can see that the policy uncertainty did in fact jump, as we would have expected. We expect this Index to fall in the near term, or at least until the beginning of the year when the continuing resolution currently funding the federal govern-ment runs out again on January 15, 2014. Then later in the year the Debt Ceiling will need extended again and policy uncertainty could very well rise. Tom Kozlik

Although we expect this to be reintroduced, we do not think that it signifi es a renewed ef-fort to squash the municipal bond tax-exemption.

It’s expected inclusion is more of a product of the fact that President’s budget proposals do not generally signifi cantly change year over year.

.

Later in 2014 the Debt Ceil-ing will need extended again and policy uncertainty could very well rise.

The Index Jumped During the Debt Ceiling Debate Part 2 as Expected

Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com & Janney FIS.

50

100

150

200

250

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Index of Economic Policy Uncertainty

Balanced Budget

Act

Black Monday

Gulf War I

Clinton Defeats Bush I

Russian Flu and Long

Term Capital Management

Bailout

Bush IIdefeats Gore

Sept. 11th

terrorist attacks

Gulf War II Interest

rate cuts and

stimulus

Lehman and

TARP

Banking Crisis

Obama defeats McCain

2010 midterm elections

2011 U.S. Debt Ceiling Debate Part 1

Fiscal Cliff

U.S. Debt Ceiling Debate Part 2



Aaa Municipal Benchmark Yields Aaa Municipal Benchmark Yield Curve

0%

1%

2%

3%

4%

5%

1 6 11 16 21 26

19-Nov-13 12-Nov-13 19-Oct-13 16-Nov-12

10 Year and 30 Year M/T Ratios

85

90

95

100

105

110

115

120

125

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13

10 YR % 30 YR % 10 YR % (Avg) 30 YR % (Avg)

Source: Thomson Reuters and Janney FIS. Average goes back to 2000.

Flows Out of Municipal Funds in 2013 to Date Have Been the Worst in Four Years

-$60 bln

-$45 bln

-$30 bln

-$15 bln

$0 bln

$15 bln

$30 bln

$45 bln

$60 bln

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2013 2012 2011 2010

Source: Thomson Reuters, ICI Data and Janney FIS.

MaturityNov 19 (as of)

W-O-W Change

M-O-M Change

Y-O-Y Change

1 0.17% -0.01% -0.01% -0.03%2 0.33% -0.01% -0.02% 0.03%3 0.50% -0.01% -0.12% 0.08%4 0.78% -0.01% -0.15% 0.26%5 1.15% -0.02% -0.11% 0.51%6 1.52% -0.01% -0.11% 0.76%7 1.90% -0.01% -0.05% 0.99%8 2.22% -0.01% -0.03% 1.11%9 2.42% -0.01% -0.01% 1.10%10 2.61% -0.01% 0.01% 1.11%11 2.77% -0.01% 0.01% 1.15%12 2.91% -0.02% -0.02% 1.22%13 3.04% -0.04% -0.05% 1.30%14 3.18% -0.05% -0.06% 1.39%15 3.31% -0.06% -0.07% 1.46%16 3.43% -0.06% -0.08% 1.52%17 3.54% -0.06% -0.09% 1.57%18 3.63% -0.06% -0.08% 1.60%19 3.71% -0.07% -0.09% 1.62%20 3.77% -0.07% -0.09% 1.62%21 3.82% -0.08% -0.10% 1.60%22 3.87% -0.08% -0.11% 1.58%23 3.93% -0.07% -0.11% 1.57%24 3.97% -0.07% -0.12% 1.53%25 4.00% -0.07% -0.13% 1.51%26 4.03% -0.07% -0.13% 1.53%27 4.05% -0.07% -0.13% 1.54%28 4.07% -0.07% -0.13% 1.55%29 4.08% -0.07% -0.13% 1.55%30 4.09% -0.07% -0.13% 1.55%



Select Recent Changes to Ratings & Outlooks (as of Nov 20, 2013)

Source: Moody’s; S&P; Fitch and Janney FIS.

Issuer State Recent Rating Action DateUnderlying Rating(s)

Notes

Atlantic City NJ Downgraded to Baa2 from Baa1 by Moody's 20-Nov-2013 Baa2/A- Tax appeals; Outlook "Negative"Wistar Institute PA Downgraded to Baa1 from A3 by Moody's 19-Nov-2013 Baa1 Expects lower funding; outlook "Negative"

York City School District PA Placed on "Negative Credit Watch" by S&P 18-Nov-2013 Baa2/A Failure to provide requested informationRhode Island Airport Corp. RI Outlook raised to "Stable" from Neg by Moody's 14-Nov-2013 A3/BBB+/BBB+ 7 straight months increased enplanementsPuerto Rico (Comm GO) PR "Rating Watch Negative" assigned by Fitch 14-Nov-2013 Baa3/BBB-/BBB- Challenges remain despite progress

Albright College PA Under review for downgrade by Moody's 11-Nov-2013 Ba1 Near term remarketing risk, thin liquidityChicago (City of) IL Downgraded to A- from AA- by Fitch 11-Nov-2013 A3/A+/A- Lack of a solution to pension funding gap

Arcadia University PA Downgraded to BBB from BBB+ by S&P 8-Nov-2013 BBB 2 years of operating defi citsDutchess (County of) NY Downgraded to Aa2 from Aa1 by Moody's 8-Nov-2013 Aa2 Falling GF reserves, depends on sales taxNY St Thruway Auth NY Downgrade to A2 from A1 by Moody's 8-Nov-2013 A2/A New Tappan Zee bridge has taken its toll

Aspinwall (Borough of) PA Upgraded to A+ from BBB by S&P 7-Nov-2013 A+ Upgrade due to new S&P local GO criteriaWaterbury CT Upgraded to AA- from A by S&P 6-Nov-2013 A1/AA- Upgrade due to new S&P local GO criteria

Penn State University PA Outlook up to "Positive" fm "Stable" Moody's 6-Nov-2013 Aa2/AA Settlement of most abuse claimsTennessee (State of) TN Outlook lower to "Stable" frm "Positive" S&P 5-Nov-2013 Aaa/AA+/AAA Areas of economic weaknessNY St Thruway Auth NY Downgrade to A from A+ by S&P 29-Oct-2013 A2/A New Tappan Zee bridge has taken its tollMonroe (County of) NY Outlook lower to "Negative" frm "Stable Fitch 29-Oct-2013 Baa1/A/A- Narrow reserves & recent operating defi cit Chicago Transit Auth IL Downgraded to A1 from Aa3 by Moody's 26-Oct-2013 A1/AA Political pressure from area deterioration

East Providence (Town of) RI Moody's up to Baa3 from Ba1 by Moody's 23-Oct-2013 Baa3/A Increased reserves and improvingDiscovery Charter School PA Downgraded to BB+ from BBB- by S&P 23-Oct-2013 BB+ Phil SD not approve increases above cap

Allentown (City of) PA Outlook raised to "Stable" from "Negative" 21-Oct-2013 A3/BBB+ As a result of the water and sewer leaseMarywood University PA Downgraded to BBB- from BBB by S&P 18-Oct-2013 BBB- Weakened fi nancial position

Slippery Rock Stud Hsg PA Downgraded to BBB from BBB+ by S&P 18-Oct-2013 BBB Slimming debt service coverageTemple University PA Outlook lower to "Neg" fm "Stable"by Moody's 17-Oct-2013 Aa3/A1 Potential drag from Temple Health System

Guam (Territory of) GU Upgraded to BB- from B+ by S&P 15-Oct-2013 BB- Improving management practicesPhiladelphia School Dist PA Downgraded to BB from BBB- by Fitch 11-Oct-2013 Ba2/NR/BB Poor fi nancial performance, charter schools

New Haven (City of) CT Downgraded to A3 from A2 by Moody's 11-Oct-2013 A3/BBB+/A- Recent budget defi cits and low reservesHawaii (State of) HI Outlook raised to "Positive" frm "Stable"by S&P 10-Oct-2013 Aa2/AA/AA Financial improvements, pension solutions

State Housing Fin Ag NA Outlook raised to "Stable" fm Neg" by Moody's 8-Oct-2013 Various ratings Recent positive trends for the sectorCOFINA Sales Tax Bonds PR Downgraded to A2 from Aa3 by Moody's 3-Oct-2013 A2/AA- Weak economic & population trends

Kankakee (County of) IL Downgraded to Baa1 from A1 by Moody's 1-Oct-2013 Baa1/A/A- Signifi cant operating defi citsMount Sinai Hospital NY Outlook lower to "Neg" frm "Stable by Moody's 1-Oct-2013 A2/A- Risks related to Continuum mergerAston (Township of) PA Upgraded to AA from AA- by S&P 1-Oct-2013 AA Upgrade due to new S&P local GO criteria

COFINA Sales Tax Bonds PR Outlook lower to "Neg" from "Stable" by S&P 30-Sep-2013 A2/AA- Weak economic & population trends



Source: Moody’s; S&P; Fitch and Janney FIS. (*) Denotes a Lease or Issuer Credit Rating.

State and Other Select Issuer Ratings (Nov 20, 2013) Moody's S&P Fitch

State Rating Outlook Last Rating Outlook Last Rating Outlook LastAlabama Aa1 Stable 4/16/2010 AA Stable 8/3/2007 AA+ Stable 5/3/2010Alaska Aaa Stable 11/22/2010 AAA Stable 1/5/2012 AAA Stable 1/7/2013

Arizona (*) Aa3 Stable 2/8/2012 AA- Stable 12/23/2011 NR - -Arkansas Aa1 Stable 4/16/2010 AA Stable 1/10/2003 NR - -California A1 Stable 4/16/2010 A Stable 1/31/2013 A Stable 8/5/2013

Colorado (*) Aa1 Stable 4/16/2010 AA Stable 7/10/2007 NR - -Connecticut Aa3 Stable 1/20/2012 AA Stable 9/26/2003 AA Negative 7/2/2013Delaware Aaa Stable 4/30/2010 AAA Stable 2/22/2000 AAA Stable 4/13/2006

Dist. of Columbia Aa2 Stable 8/2/2013 AA- Stable 3/21/2013 AA- Stable 4/5/2010Florida Aa1 Stable 4/16/2010 AAA Stable 7/12/2011 AAA Stable 8/23/2013Georgia Aaa Stable 4/16/2010 AAA Stable 7/29/1997 AAA Stable 4/13/2006Hawaii Aa2 Stable 5/17/2011 AA Positive 10/10/2013 AA Stable 6/15/2011

Idaho (*) Aa1 Stable 4/16/2010 AA+ Stable 3/30/2011 AA Stable 4/5/2010Illinois A3 Negative 6/6/2013 A- Negative 1/25/2013 A- Negative 6/3/2013

Indiana (*) Aaa Stable 4/16/2010 AAA Stable 7/18/2008 AA+ Stable 4/5/2010Iowa (*) Aaa Stable 4/16/2010 AAA Stable 9/11/2008 AAA Stable 4/5/2010

Kansas (*) Aa1 Negative 4/6/2011 AA+ Stable 5/20/2005 AA Stable 2/13/2007Kentucky (*) Aa2 Negative 3/30/2011 AA- Negative 1/31/2013 AA- Negative 2/15/2011

Louisiana Aa2 Stable 4/16/2010 AA Stable 5/4/2011 AA Stable 4/5/2010Maine Aa2 Negative 5/17/2012 AA Stable 5/24/2012 AA Stable 1/23/2013

Maryland Aaa Stable 7/19/2013 AAA Stable 5/7/1992 AAA Stable 4/13/2006Massachusetts Aa1 Stable 4/16/2010 AA+ Stable 9/16/2011 AA+ Stable 4/5/2010

Michigan Aa2 Positive 3/28/2013 AA- Positive 4/2/2013 AA Stable 4/2/2013Minnesota Aa1 Negative 8/1/2011 AA+ Stable 9/29/2011 AA+ Stable 7/7/2011Mississippi Aa2 Stable 4/16/2010 AA Stable 11/30/2005 AA+ Stable 4/5/2010Missouri Aaa Stable 7/19/2013 AAA Stable 2/16/1994 AAA Stable 4/13/2006Montana Aa1 Stable 4/16/2010 AA Stable 5/5/2008 AA+ Stable 4/5/2010

Nebraska (*) Aa2 Stable 4/16/2010 AAA Stable 5/5/2011 NR - -Nevada Aa2 Stable 3/24/2011 AA Stable 3/10/2011 AA+ Stable 4/5/2010

New Hampshire Aa1 Stable 4/16/2010 AA Stable 12/4/2003 AA+ Stable 4/5/2010New Jersey Aa3 Stable 4/27/2011 AA- Negative 9/18/2012 AA- Stable 8/17/2011New Mexico Aaa Stable 7/19/2013 AA+ Stable 2/5/1999 NR - -

New York Aa2 Positive 8/22/2013 AA Positive 8/27/2012 AA Positive 5/31/2011North Carolina Aaa Stable 1/12/2007 AAA Stable 6/25/1992 AAA Stable 4/13/2006

North Dakota (*) Aa1 Stable 4/16/2010 AA+ Positive 5/12/2011 NR - -Ohio Aa1 Stable 3/16/2012 AA+ Stable 7/19/2011 AA+ Stable 4/11/2011

Oklahoma Aa2 Stable 4/16/2010 AA+ Stable 9/5/2008 AA+ Stable 4/5/2010Oregon Aa1 Stable 4/16/2010 AA+ Stable 3/10/2011 AA+ Stable 4/5/2010

Pennsylvania Aa2 Stable 7/16/2012 AA Negative 7/19/2012 AA Negative 7/16/2013Puerto Rico Baa3 Negative 12/13/2012 BBB- Negative 3/13/2013 BBB- Negative 3/20/2013

Rhode Island Aa2 Negative 7/1/2013 AA Stable 4/22/2011 AA Stable 7/18/2011South Carolina Aaa Stable 12/7/2011 AA+ Stable 7/11/2005 AAA Stable 4/13/2006

South Dakota (*) Aa2 Stable 5/27/2010 AA+ Stable 3/25/2011 AA Stable 4/5/2010Tennessee Aaa Stable 12/7/2011 AA+ Stable 11/5/2013 AAA Stable 4/5/2010

Texas Aaa Stable 4/16/2010 AAA Stable 9/27/2013 AAA Stable 4/5/2010Utah Aaa Stable 4/16/2010 AAA Stable 6/7/1991 AAA Stable 4/13/2006

Vermont Aaa Stable 4/16/2010 AA+ Positive 9/17/2012 AAA Stable 4/5/2010Virginia Aaa Stable 7/19/2013 AAA Stable 11/11/1992 AAA Stable 4/13/2006

Washington Aa1 Stable 7/19/2013 AA+ Stable 11/12/2007 AA+ Stable 7/19/2013West Virginia Aa1 Stable 7/9/2010 AA Stable 8/21/2009 AA+ Stable 7/8/2011

Wisconsin Aa2 Stable 4/16/2010 AA Stable 8/15/2008 AA Stable 4/5/2010Wyoming (*) NR - - AAA Stable 5/3/2011 NR - -



Municipal Credit Rating Scale and Definitions

Source: Moody’s; S&P; Fitch and Janney FIS.

Rating Agency

Moody's S&P Fitch Defi nition

Investment Grade

Aaa AAA AAA Exceptionally strong credit quality and minimal default risk.Aa1 AA+ AA+ Upper medium grade and subject to low credit risk.Aa2 AA AA Upper medium grade and subject to low credit risk.Aa3 AA- AA- Upper medium grade and subject to low credit risk.A1 A+ A+ Strong credit quality and subject to low default risk.A2 A A Strong credit quality and subject to low default risk.A3 A- A- Strong credit quality and subject to low default risk.

Baa1 BBB+ BBB+ Subject to moderate risk and possess some speculative characteristics.Baa2 BBB BBB Subject to moderate risk and possess some speculative characteristics.Baa3 BBB- BBB- Subject to moderate risk and possess some speculative characteristics.

Sub-Investment Grade

Ba1 BB+ BB+ Weak credit quality with speculative elements and substantial credit risk.Ba2 BB BB Weak credit quality with speculative elements and substantial credit risk.Ba3 BB- BB- Weak credit quality with speculative elements and substantial credit risk.B1 B+ B+ Very weak credit quality, very speculative with high credit risk.B2 B B Very weak credit quality, very speculative with high credit risk.B3 B- B- Very weak credit quality, very speculative with high credit risk.

Caa1 CCC+ CCC+ Extremely weak credit quality and subject to very high credit risk.Caa2 CCC CCC Extremely weak credit quality and subject to very high credit risk.Caa3 CCC- CCC- Extremely weak credit quality and subject to very high credit risk.Ca CC CC+ Highly speculative and are in or near default with some prospect for recovery.

C CC Lowest class of rated bonds and may be in default with little prospect for recovery.CC- Lowest class of rated bonds and may be in default with little prospect for recovery.

D D DDD Issuer is in default and/or has failed to make a payment.



Source: Janney Fixed Income Strategy.

Janney Municipal Bond Market Publications

Title Date Pub NotesMunicipals: Rating Action Divergence November 18, 2013 Weekly Diffi cult to rationalize upgrades by S&PConnecticut: A Review of State Issuers November 8, 2013 Note CT faced signifi cant economic challenges

Municipals: Puerto Rico Update November 4, 2013 Weekly Disclosure has improved and yields narrowedMunicipals: Old Normal Returns October 28, 2013 Weekly Market stabilizing, S&P's optimistic view

Municipals: Back to Normal? October 21, 2013 Weekly Growing primary market calendar post-shutdownMunicipals: Regional Economic Shutdown October 7, 2013 Weekly State & regions just around DC to be most affected

Puerto Rico: Island Visit and COFINA October 4, 2013 Note Sales & use tax revs growing despite weak economyU.S. State Fiscal Health Update October 3, 2013 Note Status of U.S. States largely secure, laggards remainMunicipals: Washington Crunch September 30, 2013 Weekly Commentary on outfl ows and DC interference

Debt Ceiling Debate Part II: Treat Uncertainty September 27, 2013 Monthly More uncertainty, but will be less impactful than in 2011M/T Ratios Continue to Retreat September 23, 2013 Weekly Sparse supply helps municipals stabilize

New Issuance & Outstanding Debt Declining September 16, 2013 Weekly Municipal issuers have reduced new money borrowingPuerto Rico Accomplishments and Challenges September 13, 2013 Note Fiscally better but headwinds remain

Taper, a New Fed Chief and War- Oh My! September 11, 2013 Monthly Advice: municipal investors stay composedReceiver Unveils "Harrisburg Strong" Plan August 27, 2013 Note A guide for handling municipal distress

A Bond Insurance Revival August 26, 2013 Weekly Bond insurance remains an important part of marketMuni Tax Considerations-Market Discount August 22, 2013 Note Investors should consider market discount ramifi cationsTrials and Tribulations- Lehman Like Move August 21, 2013 Monthly A new period of volatility for investors has begun

Tobacco Bonds August 19, 2013 Weekly Smoking declines may pressure pricesMotown's Bankruptcy Blues August 9, 2013 Note Bankruptcy process will be contentious and protracted

Creative Financings- Allentown, PA August 5, 2013 Weekly Structure can serve to reduce local stressDetroit fi les for Chapter 9 Protection July 19, 2013 Note Action not representative of credit conditions

Municipal: Technical Notes July 15, 2013 Weekly A focus on fund fl owsU.S. State Fiscal Health Update July 1, 2013 Note Tremendous amount of budget pressure for some states

Opportunities in Munis June 25, 2013 Note Good entry point for investorsMunicipal: Looking Back and Ahead June 24, 2013 Weekly A focus on fund fl ows, compares 2011, 2012 & 2013

A Look at Several Municipal Credit Topics June 20, 2013 Monthly Local governments on the periphery are examinedPuerto Rico Hgwy Trans- Bumpy Road June 13, 2013 Note Solvency requires additional revenues

Puerto Rico- The Clock is Ticking June 3, 2013 Note Need political action to avert downgrade21st Century Manufact. Renaissance June 3, 2013 Note Onshoring and reshoring jobs in the US

Why Municipal Bonds? May 16, 2013 Monthly Several reasons to consider municipal bondsBond Insurance Comeback? May 6, 2013 Weekly Increasing market share for insurance providers

State HFA MBS Pass-Through Bond May 2, 2013 Note An innovation in housing fi nance, strong relative valueU.S. State Fiscal Health Update April 29, 2013 Note State revenues are up for a 12th consecutive quarter

Eye on Economic Data- Rising Home Values April 9, 2013 Monthly Home values are rising, credit updates on outliersPuerto Rico On the High Yield Precipice April 2, 2013 Credit Much needed to prevent further downgrades

Mary Washington Healthcare, VA March 22, 2013 Credit Current fi nancial metrics resemble lower rated mediansSharon Regional Health System, PA March 18, 2013 Credit Outlines recent stresses and metrics

Build America Mutual Assurance March 12, 2013 Note A new insurer on the block, catching up to AssuredTennessee Valley Authority March 7, 2013 Note A self-funded government corporation

Good Samaritan Hosp of Lebanon, PA March 4, 2013 Credit Update on recent negative rating actionsSequester 2013- Limited for Municipals February 27, 2013 Monthly Meaningful GDP drag but limited municipal credit fallout

U.S. State Fiscal Health Update February 11, 2013 Note There are a limited number of states exposed to SequesterSequester and BABs February 11, 2013 FI Weekly Subsidy cuts and ERP trigger as a result of Sequester

Philadelphia Charter Schools February 6, 2013 Note Update on recent trends and renewal infoImproved Muni Tax Revenue but Challenges February 4, 2013 FI Weekly Higher revenues negative rating trend continues

Credit to Reign Supreme, In 2013 January 30, 2013 Note Several factors to infl uence muni credit in 2013Assured Downgrade January 18, 2013 Note Despite decline of business, insurance has worked well

Cliff Bump and Medicare Tax Increase January 11, 2013 Note Cliff resolution moves top bracket higherOur List of Factors to Watch for 2013/Beyond January 8, 2013 Note 10 U.S. Strengths are reasons for Investor Optimism

Municipal Supply and Demand January 7, 2013 FI Weekly Volume to include lots of refundingsPuerto Rico Downgrade December 18, 2012 Note Moody's downgraded $46 billion PR related debt

New Issue Will Grow Modestly in 2013 December 10, 2012 FI Weekly Technical market commentarySingle Family Housing Sector Update December 10, 2012 Note Structure related factors are once again the priorityState Fiscal Health Scorecard Update November 27, 2012 Note There are potential spoilers for 2013

Impact of Elections on Municipal Bonds November 8, 2012 Note Highlight several noteworthy outcomesThe Elections are Next for Municipals November 1, 2012 Monthly Previewed elections, public power review

The Power of Premiums October 22, 2012 Note Steep premium prices are frequent in market



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Analyst Certifi cation

We, Tom Kozlik and Alan Schankel, the Primarily Responsible Analysts for this report, hereby certify that all of the views expressed in this report accurately refl ect our personal views about any and all of the subject sectors, industries, securities, and issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specifi c recommendations or views expressed in this research report.

Defi nition of Outlooks

Positive: Janney FIS believes there are apparent factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades

Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades.

Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades.

Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrades.

Defi nition of Ratings

Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in terms of total return

Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset class in terms of total return

Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return

Benchmarks

Asset Classes: Janney FIS ratings for domestic fi xed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the “Barclay’s U.S. Aggregate Bond Market Index” as a benchmark.

Treasuries: Janney FIS ratings employ the “Barclay’s U.S. Treasury Index” as a benchmark.

Agencies: Janney FIS ratings employ the “Barclay’s U.S. Agency Index” as a benchmark.

Mortgages: Janney FIS ratings employ the “Barclay’s U.S. MBS Index” as a benchmark.

Investment Grade Credit: Janney FIS ratings employ the “Barclay’s U.S. Credit Index” as a benchmark.

High Yield Credit: Janney FIS ratings for employ “Barclay’s U.S. Corporate High Yield Index” as a benchmark.

Municipals: Janney FIS ratings employ the “Barclay’s Municipal Bond Index” as a benchmark.

Disclaimer

Janney or its affi liates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication.

Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income Strategy & Research (Janney FIS).

This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent.

This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specifi c features or securities available at a given time. Preliminary Offi cial Statements, Final Offi cial Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or fi nancial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney FIS publications change.

Janney Fixed Income Strategy does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. For investment advice specifi c to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Consultant and/or your tax or legal advisor.

Documents

The Municipal Market in 2014 - CDFA€¦ · Puerto Rico bonds are not for the faint of heart. Risk is signifi cant, & unless fi nances and liquidity improves, we recommend caution