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PUERTO RICO BONDHOLDERS

Monday, Dec 18, 2017

Seema Balwada, CFA

Court Grants Puerto Rico Bondholders Request For Financial Transparency… Four Days Later Five Billion of Cash Discovered in 800 Accounts… Federal Board Seeks PREPA Transformation From a Political Entity to a Private Enterprise...

The Court granted bondholders’ request for discovery relating to Puerto Rico’s current financial position at the December 14 court hearing. On December 18, 800 bank accounts containing billions in cash were unearthed. In the wake of the Court ordered financial discovery every report hashed out by Puerto Rico’s maligned adminis-tration is questionable. Did the central government not know about 800+ government bank accounts until now? It took a consolidated effort from a united group of bondholder lawyers to discover billions of previously unknown funds. The Court ruling which brought billions of dollars to the surface begs more questions from federal judges mediating and litigating Puerto Rico’s Title III debt restructuring and from bondholders.

Court Grants Puerto Rico Bondholders Request For Financial Transparency…Judge Dein honored bondholders’ request for Puerto Rico’s latest finances at the December 14 court hearing. The Court upheld bondholders’ request for copies of the forthcoming Fiscal Plan due December 22 when it is submitted by Puerto Rico to the Oversight Board, along with input on all Fiscal plans. The Court ordered Puerto Rico to provide bondholders with materials reflecting the definition and cost analyses of ‘essential services’, details on revenues under ‘claw back’ from several Puerto Rico agencies for general obligation debt service payments, details on the ‘commonwealth debt redemption fund’ established for general obligation bond debt service. Also required are court deposition records, along with documents for fiscal years 2016, 2017 and year to date fiscal 2018 showing actual revenues and expenses, budget variances, liquidity reports as submitted by Puerto Rico to the Oversight Board, monthly reports on federal funds receipts/disbursements, debt, payroll, quarterly reports on Puerto Rico economic, financial, social and labor statistics. On November 28, 2017, a broad group of bondholders including Ad Hoc Group of general obligation bondholders, bond insurers and mutual funds sought the Court’s help listing seventeen specific information areas subject to discovery. Before December 22, 2017, a joint proposal on the usage of the documents should be set. A plan of adjustment can be confirmed only if Puerto Rico does all that is necessary to maximize creditor recoveries. By obtaining court orders for release of this critical info, which is the basis for any Fiscal Plan, and any subsequent plan of adjustment, bondholders will have better information at hand for settlement negotiations. 

Puerto Rico Suddenly Discloses 5 billion of Additional Cash…Four days after the Court granted bondholders requests for financial transparently Puerto Rico announced $5 billion more in cash than they disclosed three weeks ago. The Puerto Rico administration recently reported a cash balance of $1.7 billion, this most recent report has now been exposed as a farce. The newest tally includes the following accounts that previously were not reported: Puerto Rico’s Treasury Account $1.6 billion, other government accounts $1.7 billion (comprising 65+ government instrumentalities including federal funds), Title III restricted accounts $813 million (comprising general obligation redemption fund $154 million, pension related accounts $513 million and $146 million of claw backs), other Puerto Rico Treasury Custodial Accounts $491 million (comprising pension related accounts $285 million, lottery related funds $118 million, Treasury sweep accounts $59 million and other funds $29 million), Highway and Transportation Authority $63 million, University of Puerto Rico $320 million. In addition to these funds, COFINA Bond Trustee funds are $905 million, PREPA funds $598 million and PRASA funds $340 million. For the first time, bank account balances of Puerto Rico’s central government and its agencies have been disclosed. The sweeping cash overhaul was found after Puerto Rico’s fiscal agent (AAFAF) sent requests to banks and agencies asking for an inventory of bank accounts. This list of bank accounts is now programmed into an online Web Cash Platform to make the cash more visible. Puerto Rico’s fiscal agent along with the Oversight Board have uncovered over 800 bank accounts as an initial step in obtaining a comprehensive view of the Island’s true cash position which has always been carefully concealed from bondholders. “The Puerto Rico government will be requesting the assistance and participation of the Oversight Board and creditor groups in these efforts,” Puerto Rico’s fiscal agent said it will now conduct an independent investigation to evaluate the source of cash inflow and out flows into these government accounts that were hidden. Federal Judge Swain prompted bondholders to seek discovery so Puerto Rico’s true financial picture can surface saying “it will be nothing less than a major sin if this gets to the end and then we start doing discovery”. Puerto Rico’s weekly cash flow reporting up until now was a farce. The government will now include these hidden accounts into weekly cash flows and will determine a legal mechanism and process to access excess cash. Now that Court ordered financial discovery has begun, Puerto Rico’s administration has nowhere to hide its guile. Under the Court’s spotlight, the truth is coming out and the bondholders’ lawyers’ hard work is gaining rewards. The president of Maglan Capital said, “This is cash. Cash is not usually a number you can flub. It’s either there or it isn’t. If this is the case for something like cash, I can only think about the numbers for liabilities or other estimates of costs. If this was a corporation and they reported this number, heads would roll. It leaves me speechless. It just leaves me wondering what else we don’t know.”

PREPA Transformation Sought… A sounding board for PREPA’s Fiscal Plan to be submitted December 22, Transformation Advisory Council (TAC), composed of 11 independent energy experts has been set up by PREPA’s Governing Board. The TAC is a knowledge-sharing platform. “We have an opportunity here, not just to restore power and emerge from bankruptcy, but also to establish a model for power generation and delivery in Puerto Rio that sets global example.” To develop that model, PREPA will need to access best-in-class advice from leaders who have dealt with complexities of utility transformations,” said PREPA Governing Board Chair. Asking for PREPA’s privatization, Federal Board Chair Carrion said that it was important to ‘get it out of the hands of politicians’ and private capital will be needed for its transformation. The Department of Energy along with New York’s state-run power utility New York Power Authority are pitching a nearly $17 billion plan to revitalize the Island’s hurricane ravaged utility. ‘Build Back Better’ a 63-page plan endorsed by New York Governor Andrew Cuomo and Governor Ricardo Rosselló calls for a decade-long series of projects and operational improvements aimed for greater resiliency to natural disasters. At a price tag of $17.6 billion, it envisages a system of microgrids independent of the larger grid, alternate energy generation from wind, solar along with underground transmission lines. The plan is modelled on work underway in New York post Hurricane Sandy. PREPA stands to receive $550 million property insurance proceeds. So far FEMA has disbursed $1 billion for hurricane repairs. Before privatization can take place PREPA bondholders, who have a priority lien on electric revenue, must be satisfied in order for PREPA to exit Title III debt restructuring.

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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