Seema Balwada, CFA November 29, 2017
Governor Agrees To Hand Over To FEMA The Power To Approve The Use Of All Disaster Relief Spending… Puerto Rico Begins The Transition From Response To Recovery… Con Ed Restoration Expert To Bring Back Electricity… Trustee Holding $822.6 Million In COFINA Sales Tax Revenue… Board Scolds Governor For Christmas Bonus Payment… PR Trading Volume At Six Week Low As Selloff Tapers While Prices At Or Near All Time Lows…
Puerto Rico Agrees to Hand Over To FEMA the Power to Approve the Use of All Disaster Relief Spending… Puerto Rico Governor Rosselló said the Island has agreed to the Federal Emergency Management Agency appointing Michael Byrne as the Federal Disaster Recovery Coordinator (FDRC). This gives Mr. Byrne unprecedented power to oversee disaster relief spending, a step that may appease the anxiety Congress has over monitoring of the disbursement of federal funds as the territory seeks billions to recover from Hurricane Maria. Rosselló, who has requested $94 billion in aid from Washington, said at a press conference Monday in San Juan that he agreed to let the agency pre-approve the use of any federal funds. He said that FEMA has never taken that step before. Puerto Rico came under fire from some in Congress this year after it was revealed that the Island’s electric utility hired a little-known Montana firm for a $300 million contract to repair its grid. The revelation led the Island’s Federal Control Board to try to install its own chief to oversee the utility’s reconstruction, though that move was blocked by a Federal Judge.
Puerto Rico Begins the Transition From Response to Recovery… As Puerto Rico begins to transition from the response phase to recovery, spending of federal aid must be approved by Michael Byrne, the Federal Disaster Recovery Coordinator. Byrne has more than 30 years of experience in disaster management and recovery program execution, including serving as the FDRC for Hurricane Harvey in Texas, and the FCO for Hurricane Sandy in New York and the 2011 Alabama tornadoes. As the FDRC and FCO, Byrne will work closely with the government of Puerto Rico and federal response leadership to facilitate disaster recovery coordination and collaboration between Puerto Rico, federal and municipal governments, private sector entities, and voluntary, faith-based and community organizations. Due to the complex recovery challenges of Hurricane Maria, the federal government will leverage all available resources in support of Puerto Rico’s recovery efforts. Areas of focus will include:
Housing, coordinated by the U.S. Department of Housing and Urban Development (HUD), to develop adequate, affordable, and accessible housing solutions for Hurricane Maria survivors.
Infrastructure Systems, coordinated by the U.S. Army Corps of Engineers, to efficiently facilitate the restoration of infrastructure systems and services to support viable, sustainable communities and improve resilience to, and protection from, future hazards.
Economic Recovery, coordinated by the U.S. Department of Commerce, to assist with sustaining or restoring businesses and employment in the affected area, and developing economic opportunities in these communities.
Health and Social Services, led by the U.S. Department of Health and Human Services, to support locally led recovery efforts to address public health, health care facilities and coalitions, and essential human services.
Natural and Cultural Resources, led by the Department of Interior, will work with communities wishing to preserve, protect and restore natural and cultural resources such as historic structures during recovery.
Community Planning and Capacity Building, coordinated by FEMA, to facilitate support among a variety of partners for the planning, capacity, and resilience building capabilities needed by local or tribal governments following this disaster.
Con Ed Restoration Expert to Bring Back Electricity… A former Consolidated Edison, Inc. engineer who helped repair New York’s electricity after the September 11 terrorist attacks will lead in the rehabilitation of Puerto Rico’s electrical grid. Governor Rosselló appointed Carlos Torres to coordinate the restoration of the government owned Puerto Rico Electric Power Authority (PREPA), according to a statement from the Governor. Two months after Hurricane Maria devastated the Island, PREPA is operating at 58% of its capacity. Torres is an energy restoration coordinator at the Edison Electric Institute. He worked for more than 30 years at Con Ed of New York, including 10 years as vice president of emergency preparedness and business resilience. Torres led emergency response plans following the September 11 attacks, New York’s 2003 blackout and after Hurricane Irene and Superstorm Sandy. Justo Gonzalez, a 28-year employee at PREPA and the utility’s director of generation is serving as interim executive director after Ricardo Ramos Rodriguez left the position last week amid criticism of a $300 million restoration contract with a small Montana company.
Puerto Rico Trustees Holding $822.6 Million in COFINA Sales Tax Revenue… The trustee for Puerto Rico’s sales tax bonds had $822.6 million in debt reserve funds as of November 1 as investors continue to wait for a court ruling determining ownership of the cash. The sales tax revenue held by trustee Bank of New York Mellon (BNY) is up slightly from last month, when it held $762.8 million, according to a filing posted Tuesday on the Municipal Securities Rulemaking Board’s website. The funds would be sufficient to pay the missed August 1 bondholder payment and the payment due February 1, 2018. BNY has stopped directing the revenue to owners of Puerto Rico’s sales tax bonds, called COFINA as investors fight in court over who is entitled to receive the cash first after Puerto Rico fell into bankruptcy in May. The Court has been conducting confidential mediation sessions between the parties to reach a restructuring agreement as the bankruptcy process plays out in court.
Puerto Rico Board Scolds Governor for Christmas Bonus Payment… Puerto Rico’s federal overseers said they were concerned about Governor Rosselló’s decision to pay Christmas bonuses to public employees given the “perilous liquidity situation on the Island”. The Board said in a letter release that it was not told of the decision beforehand and expect “to be consulted during the formulation and prior to the announcement of policies”. Governor Rosselló announced earlier this month that he was paying the bonuses to employees, despite the financial strains of the storm. Such bonuses are required by local law. That is a law the fickle Governor chose to respect. The Board had previously sued after Rosselló ignored its request to offset the bonuses with budget cuts elsewhere, though the suit was withdrawn after the Island was devastated by Hurricane Maria.
Puerto Rico Bond Trading Volume at Six Week Low as Selloff Tapers While Prices at or Near All Time Lows… The volume of trading for Puerto Rico debt is the lowest in nearly six weeks. A selloff in Puerto Rico bonds followed Hurricane Maria’s destruction and President Trump’s irresponsible “wipe out the debt” statement. The trailing 30-day average amount of all Puerto Rico debt traded was $319.9 million on November 28, the lowest since October 18, Bloomberg data shows. Trading volume has continued to decline as bondholders expecting favorable court rulings continue to hold their Puerto Rico positions. Buyers have always provided liquidity for Puerto Rico debt albeit at depressed market prices. The lack of media coverage of court cases concerning bondholder rights being disregarded and laws being broken, allows Puerto Rico to make strategic dire statements related to their unwillingness to pay the debt. These statements which are uncontested by the ill-informed media allows Puerto Rico to drive prices down for negotiation leverage. The Puerto Rico bond market has also been somewhat affected by confidentiality agreements signed by major bondholders participating in mediation that prevent them from buying or selling in the market. Numerous tax swaps to establish losses executed the lowest possible price continue to put downward pressure on the market and accounts for a substantial part of the volume. Odd lot trades under 100 bonds sold by individuals not familiar with the court cases are being executed at what appear to be unrealistic low prices. GO’s with an 8% coupon maturing in 2035 recently traded in blocks at an average price of 24.1 cents on the dollar, up from 23.2 cents on November 22, the lowest since the debt was first sold in 2014, according to data compiled by Bloomberg. It’s down from 56.7 cents before Hurricane Maria hit the Island on September 20. The last offer to GO bondholders the Commonwealth made public earlier this year paid bondholders up to 77 cents, which bondholders rejected. Just before putting Puerto Rico into Title III bankruptcy GO bondholders said they had a deal with the Commonwealth, however, the Oversight Board refused to approve it. A $146 billion disaster relief bill recently sponsored by Senator Bernie Sanders calls for debt relief and preventing the Commonwealth public institutions from being privatized along with helping the Island rebuild from Hurricane Maria. As government aid begins to flow into Puerto Rico bond prices should begin to rebound.
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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