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Events in Puerto Rico

Monday, Mar 26, 2018

Seema Balwada, CFA                                                      

Events in Puerto Rico Fuel Puerto Rico Bond Rally…

Puerto Rico Credit Unions Allege Government Fraud…

Treasury Loan to PR Has Caveats Bondholders Appreciate…

$2 Billion More of Federal Funds Headed for Puerto Rico…

U.S. Energy Executive Walter Higgins to Head PREPA…

The Rosselló administration’s third Fiscal Plan arrived with another significantly higher surplus estimate. Over the next six years the Commonwealth now estimates a surplus of $6 billion not the $2.8 billion estimate in its previous Plan. However, the Oversight Board cancelled a certification meeting set for Monday March 26. It appears the overall plan does not sufficiently cut expenses. Cuts to pensions required by Puerto Rico’s Oversight Board are still missing in the draft Fiscal Plan. The Oversight Board likely requires additional austerity measures prior to certification of a Fiscal Plan. Islanders themselves are not blind to the administration’s wrongdoings. A lawsuit by six credit unions on the Island, whose members are the elderly and the poor, alleges the Commonwealth is guilty of misrepresentation and fraud. The credit unions also say they were forced to buy Puerto Rico bonds under threat of losing their license to operate. They want their debt to be paid in full because debt amassed by fraud is non-dischargeable. Puerto Rico officials, the Oversight Board, advisors, etc. are all defendants in the suit. Amid blanket complaints from bond insurers and bondholders, the Court ordered financial discovery and a forensic investigation of government cash, Puerto Rico is being forced to tighten its belt. The U.S. Treasury’s caveats on loans to Puerto Rico are a meaningful check on the Island’s finances and are valued by bondholders. U.S. Treasury, U.S. Congress, bondholders, bond insurers and Islanders all have acted forcefully to lay bare the lies and deceitful tactics of self-serving politicians now under the microscope of Judge Swain. Broad recognition that the latest Fiscal Plan has exposed the Commonwealth’s feeble and fragile defenses has led Puerto Rico bond prices to rally to the highest in six months.

Events In Puerto Rico Fuel Puerto Rico Bond Rally…The Governors’ first Fiscal Plan presented a deficit, the second Plan had a surplus of $2.8 billion, the current 6-year Plan has a surplus of $6 billion. A good sign for COFINA bondholders is that COFINA pledged sales and use tax revenue is not included in Puerto Rico’s Fiscal Plan General Fund revenue. Although showing a higher surplus, the Fiscal Plan continues to be opaque and short on detail particularly with regard to debt repayment. The plan relies on $35 billion of federal transfers approved by Congress in October 2017 and in the December Omnibus bill. The Puerto Rico government plans to significantly cut its 100,000 public employees’ payroll over the next six years via attrition. Governor Ricardo Rosselló told reporters the biggest disagreement between his administration and the Board is over a proposed average 10% cut to pensions of more than $1,000 a month paid by a system facing nearly $50 billion in liabilities. The Board had been expected to vote on the revised Fiscal Plan Monday, but it unexpectedly announced Friday that it was postponing the vote, without providing a new date. The Board has the power to implement its own measures if it disagrees with those proposed by the government. Puerto Rico officials have reported that the Oversight Board is considering additional austerity measures. News of the higher surplus, the government being accused of fraud, the Board being under scrutiny and what some believe to be a feeble Commonwealth case against COFINA, have all contributed to the rally in Puerto Rico bonds. On Monday March 26, General Obligation bonds traded at 45 cents on the dollar up from 21cents  in December; COFINA Senior Bonds at 63.5 up from 35 and Subordinate Bonds at 27 up from 9.75.Obviously all are significantly higher based on optimism that bondholders will be treated more fairly. 

Puerto Rico Credit Unions Allege Government Fraud… As alleged victims of fraud, vulnerable members of Puerto Rico credit unions seek exemption from bankruptcy proceedings and claim debt repayment as a separate victimized class. Over 1.2 million elderly and low-income savers, customers of six Puerto Rico credit unions claim they have been defrauded by their own government. These credit unions, regulated depositary institutions holding $1.4 billion assets, have invested 65% of their investment portfolio, close to $1 billion, in Puerto Rico bonds on alleged false representations made by Puerto Rico’s self-serving politicians. The Commonwealth said in writing the bonds were safe or secured when the credit unions purchased them. Now the Commonwealth is in court claiming the bonds were never safe or secure. Credit unions claim that their misrepresented Puerto Rico debt investments cannot be impaired or discharged through bankruptcy proceedings. In bankruptcy court, debts based on intentional wrongdoing of the party in bankruptcy survive bankruptcy and cannot be discharged. PROMESA prohibits the discharge or impairment of misrepresented obligations under federal or regulatory laws. The Puerto Rico government and its public agencies, Oversight Board, Fiscal Agents, GDB, Puerto Rico Fiscal Agency/Financial Advisory Authority and credit union regulators failed their fiduciary and legal duties to protect the Island’s credit unions. Through reckless actions, omissions and the alleged threat of not renewing licenses Puerto Rico politicians tried to appropriate or take the liquid funds of financially sound credit unions by maliciously selling increasing amounts of Puerto Rico bonds at or near par values. Political appointees dominate the credit unions’ regulator body, COSSEC. “These bonds have excellent guarantees, which allow investors to apply for loans against their investment,” said COSSEC’s Executive President as he touted GDB bonds in 2009 despite knowledge of the GDB’s impending insolvency. The same individual is now engaged in the GDB’s proposed debt restructuring. Fraud allegations now reaching the courtroom make the Commonwealth’s case for debt restructuring more and more fragile.

Treasury Loan To Puerto Rico Has Caveats…“The good news is that there will be a lot of money to invest in the infrastructure and the local economy,” U.S. Treasury Secretary Steve Mnuchin said upon allowing Puerto Rico to draw on a $4.9 billion loan appropriated by the U.S. Congress for disaster hit Puerto Rico and Virgin Islands in October 2017. The U.S. Treasury had barred the Island’s access to the federal loan after discovering ample cash and liquidity amid the Island’s suspect finances. With security of pledged collateral, a ‘Super-lien’ or a high priority lien that protects U.S taxpayers, the U.S. Treasury opened up the Island’s access to the federal loan. Now Puerto Rico could access the full federal loan for operating expenses if its cash balance falls below $1.1 billion. Puerto Rico reported $1.45 billion in its coffers on March 9; additional moneys estimated at $6.7 billion in 800 government bank accounts are under forensic investigation. Puerto Rico’s legislature, the Oversight Board and Puerto Rico’ Title III bankruptcy Judge Swain will need to approve the federal loan. More capital for the Island through a secured federal loan is a dual win for Puerto Rico’s secured bondholders. Not only does the Island’s economy benefit from access to substantial federal loan, the collateral secured structure of the loan reinforces the obligation to secured bondholders in Puerto Rico’s Title III debt restructuring. After a six month struggle for the promised federal funds, untrustworthy Puerto Rico politicians yielded to granting a super-lien or a high repayment priority to federal loans. U.S. Treasury Secretary Steve Mnuchin stated this loan is only part of a federal aid package to Puerto Rico as FEMA is planning to make more than $30 billion available for rebuilding and the U.S. Department of Housing and Urban Development is considering grants of more than $10 billion. “There’s a lot of money to be allocated here and I think it is going to have an enormous impact on the economy here. I think we are well on the path to a recovery of the economy here.”

More Federal Funds Headed For Puerto Rico… $2 billion additional federal funds for the Island could be allocated to Puerto Rico in the U.S. $1.3 trillion budget bill. U.S. Congress is expected to approve additional funds for the several programs including nutrition assistance, highways, schools and national forests through a dozen appropriations. The U.S. Army Corps of Engineers’ work in Puerto Rico would also receive more federal funding.

U.S. Energy Executive To Head PREPA… PREPA will have a new executive director, Walter M. Higgins III. Mr. Higgins is a former director of several leading U.S. energy companies including South Jersey Gas. PREPA, which the Governor and Board want to privatize, has submitted its draft Fiscal Plan to the Oversight Board which is likely moot. PREPA’s Fiscal Plan has become the topic of a court fight between the utility’s regulator Puerto Rico Electric Commission (PREC) and Governor Rosselló. PREC, supported by bond insurers and PREPA bond trustee is fighting for a role in drafting the Fiscal Plan and PREPA’s future. It is notable that PREPA’s governing board made the appointment without consulting Governor Rosselló. Many in the U.S. Congress and U.S. Homeland Security are not convinced privatizing PREPA is the right thing to do at this time. PREPA reported another week of revenues that are 250% higher than the untrustworthy Puerto Rico government and Board projected for the week of March 16. Many believe U.S. Congress should federalize the Puerto Rico Electric Utility to assure economic growth.

If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information

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