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Friday, Dec 01, 2017

Seema Balwada, CFA December 1, 2017

U.S. Tax Reform Amendment Would Bring Positive Impact…Judge Prompts Insight Into Commonwealth Finances… AMBAC Seeks Court Discovery Into Sales and Use Tax Revenue… Resolution of Commonwealth-COFINA Dispute On Track For March Trial… Oversight Board’s Efforts To Narrow COFINA Agents’ “Scope” Viewed As Delaying Tactics… Depressed Puerto Rico Bond Prices Do Not Factor Court Mediation… PREPA Brings Chief Financial Advisor To Regain Investor Confidence…

Fast moving Federal Tax Reform has gripped the attention of Puerto Rico lawmakers and investors. An amendment that could allow Puerto Rico to be treated the same as 50 U.S. states is crucial for Puerto Rico’s revised Fiscal Plan expected by late December. Policy experts and lawmakers urge the Oversight Board to work harder to get favorable federal tax treatment. PREPA brought in a new Chief Financial Advisor to make changes. Puerto Rico’s depressed bond prices do not factor in the progress of the confidential mediations taking place. Federal judges are curbing speculation and do not want the confidential mediation process to be used as a sword or a shield. Judges on the Mediation Team are guiding the revised Fiscal Plan as they target substantial consensus on debt restructuring. Separately, Judge Taylor Swain in charge of Puerto Rico’s Title III restructuring is prompting all parties (bondholders) to take stock of Puerto Rico’s current finances. The Court recognized “it will be nothing less than a major sin if this gets to the end and then we start doing discovery.” Bondholders assert their unquestionable right to see the revised Fiscal Plan when it is submitted to the Oversight Board in late December and want to verify all the facts and figures that went into building it.

U.S. Tax Reform Amendment Should Bring Positive Impact… Senator Bill Nelson (D-FL) filed an amendment that allows Puerto Rico be treated as one of the 50 states for purposes of Tax Reform. Federal Tax Reform is likely by year-end and the amendment is expected to be approved. For tax purposes, the Island is currently considered a foreign jurisdiction, which provides it with certain tax advantages that make it attractive for manufacturing companies. In addition Puerto Rico residents do not have to pay federal income taxes. The proposed Reform would impose higher taxes on products U.S. companies manufacture abroad including Puerto Rico, and sold stateside. Governor Rosselló, and other political figures, visited Washington to speak against this measure. The Oversight Board is being pushed to insert itself in the Tax Reform debate and demand changes favoring the Island. The Island must present a new version of the Fiscal Plan to the Oversight Board on December 22, Board certification is expected by February 2018.

Judge Prompts Insight Into Commonwealth Finances… Bondholders agree now is the time to get Puerto Rico creditors on the same page in terms of financial information so that the parties can knowledgeably negotiate or contest any plan of adjustment.  The Court encouraged financial information discovery “it will be nothing less than a major sin if this gets to the end and then we start doing discovery:” Bondholders united asking for immediate transparency of financial information. Puerto Rico Counsel at a recent hearing alleged, “Bottom line, we know now that the money available for debt service for the next five years is almost nonexistent. And the resolutions that we all have to discuss and are discussing are contingent-type resolutions where, based on the actual availability of income, people will be paid. It’s not that people cannot settle now, people are working on settlements.” Bondholders must confirm his allegations concerning available funds. However, priority liens shall be honored based upon court rulings. The Ad Hoc Group of GO bondholders, bond insurers and the Mutual Fund Group jointly listed 20 targeted information requests for Commonwealth revenues, expenses, liquidity, federal funds receipts and other direct evidence of Puerto Rico’s financial condition. They asked for copies of the forthcoming Fiscal Plan and said the Commonwealth “must evaluate what constitutes an essential service”. A plan of adjustment can be confirmed by the Judge only if it does all that is reasonably possible to maximize creditor recoveries. That is only possible through first gaining a thorough understanding of the Commonwealth’s financial condition. PROMESA requires a plan of adjustment must be consistent with the certified Fiscal Plan. Creditors have an unquestionable right to the financial information and methodology underlying the revised Fiscal Plan. Judge Dein has set a December 14 hearing to address bondholders’ request for transparent financial information.

AMBAC Seeks Court Discovery Into Sales and Use Tax Information… To aid bondholders’ ability to evaluate any restructuring proposals, AMBAC has asked the Court to obtain information relating to current and future Sales and Use Tax (SUT). Governor Rosselló signed an executive order exempting 60,000 businesses from collecting and remitting SUT from November 20 through December 31 and established a 10% reimbursement to businesses on their monthly SUT filings from August through November. Little is known about what percentage of SUT is collected electronically as these systems were damaged by Hurricane Maria. AMBAC has sought greater visibility into how much SUT has been collected and deposited into the lawfully designated accounts. On November 17, the Commonwealth reported Fiscal 2018 YTD SUT collections of $350 million. The trustee for sales tax bonds now holds $822.6 million in debt reserve funds. Annual debt service for COFINA bonds is approximately $700 million.

Resolution of Commonwealth-COFINA Dispute On Track For March Trial… Oversight Board’s Efforts To Narrow Agents’ “Scope” Viewed As Delaying Tactics…Expedited resolution of the Commonwealth-COFINA Dispute is progressing per the Court’s schedule. The Parties have submitted answers and questions to the Court. Viewed as a covert delaying tactic, the Oversight Board has sought the Court to clarify the “scope” of complaints. Tellingly, the Oversight Board found far too many issues that the COFINA Agent raised as “outside scope” while only found a single fault with the Commonwealth Agents’ complaint. The Board’s guise to “narrow” the Commonwealth-COFINA dispute triggers more questions about its role. Despite the Board’s objection, which was an attempt to delay the process, the Court has set the Commonwealth-COFINA Dispute on an expedited track which plans motions for summary judgement to be served by January 31, 2018 or a March 2018 trial.

Puerto Rico Bond Prices Do Not Factor In Court Mediation… Court led mediation has made a lot of progress although the process could be difficult, Judge Dein stated. The mediation process should not be permitted to be used as a shield or a sword in formal court proceedings. Mediation Team Leader Judge Houser indicated that since we are not permitted to tell anyone outside the mediation process our views or how well specific issues are proceeding in mediation, no one should speculate as to our progress. To protect the integrity of the separation of the concurrent litigation and mediation processes Judges Swain and Dein issued standing orders that confidentiality violations could trigger sanctions. The Mediation Team is guiding Puerto Rico’s new Fiscal Plan. Because very little information is available, depressed Puerto Rico bond prices do not reflect or factor in the mediation progress.

PREPA Brings Chief Financial Advisor To Regain Investor Confidence…To lead PREPA’s restructuring, the utility has appointed energy and restructuring expert Todd W. Filsinger as its Chief Financial Adviser, who Financial Advisor will communicate directly with creditors and the Island administration. Filsinger shall be responsible for the development of a restructuring, fiscal and transformation plan as well as federal funding issues.

Stronger Anticorruption Laws… “Anticorruption Code for the New Puerto Rico”, a bill presented by Governor Rosselló, will strengthen anticorruption laws. The measure calls for a “Registry of Convicted Persons for Corruption”, boosts protection to whistleblowers and creates tools to reign in offenders. Puerto Rico’s corrupt/illegal underground economy is a major cause of the Island’s misfortune. Roughly 23% of the Island’s Gross National Product is unaccounted for. The Puerto Rico Department of Justice indicated it will validate a policy of zero tolerance for corruption.

Upcoming Court Hearings… December 14: Judge Dein will address bondholders’ request for financial information discovery; December 20: OMNIBUS HEARING will feature Commonwealth-COFINA Dispute and Pension Bondholders’ call for continuing bondholder protections including monthly interest payments until further resolution; January 10, 2018: Court Hearing on Bondholder Complaint Against Federal Board Appointments.

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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