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PUERTO RICO UPDATE Bondholders Unfazed

Monday, Jan 29, 2018

Seema Balwada, CFA

Bondholders Unfazed as Puerto Rico Revised Fiscal Plan is DOA… Fiscal Plan Must Account for Debt, Revised Plan Repeats Past Follies… Sales Tax 5-Year Projection Covers COFINA Debt About 3x… Court Amends Schedule for Summary Judgment Deciding COFINA Funds Into April… Why PR Bonds are Rallying Despite PR Government Threats…

Puerto Rico’s revised Fiscal Plan is DOA. The Island’s politicians have wasted another opportunity to make amends with bondholders. The Island risks long delays on receiving federal aid and access to capital markets if it does not change its secretive way. Puerto Rico has a rogue strategy to cheat bondholders indicative of a third world mentality. Bond insurer Assured Guaranty rejected the revised Fiscal Plan “we once again urge the Commonwealth and Oversight Board to meaningfully engage with creditors for the benefit of Puerto Rico.” PROMESA co-author the U.S. House Natural Resource Cmte Chair Rob Bishop urged “It is imperative the Oversight Board and Governor fully integrate those who hold the debt into the development of these plan.” After all, the law is the law.

Dead on Arrival Revised Fiscal Plan Leaves Puerto Rico Bondholders Unfazed…
Puerto Rico’s revised Fiscal Plan unbelievably relies on $3.4 billion of external liquidity while not accounting for debt payments. No one will lend $3.4 billion to an Island that asks investors to accept a complete rejection of their legal rights based on secretive long range projections. This is a government that has been unable to produce audited financial reports for fiscal years 2015, 2016 and 2017 and continues to evade current financial transparency. Puerto Rico’s debt payments will be determined by Judge Swain in Federal Court. Puerto Rico’s Fiscal Plan made no cuts to pensions. The revised Fiscal Plan is likely to see its day in court as it does not address red flags of the prior Fiscal Plan that was hotly contested in Federal Court by bond insurers and bondholders as unconstitutional. A Puerto Rico lawyer revealed to the Court in November 2017 of a five-year debt moratorium. The revised Fiscal Plan not addressing debt did not faze bondholders that are secured by liens. Since Puerto Rico and its Oversight Board were recently found hiding a $6.8 billion cash bank balance, the U.S. Treasury is unwilling to provide federal aid without close scrutiny. It is clear that the revised Fiscal Plan fails PROMESA’s stated goal of restoring market access and respecting bondholder rights.

Fiscal Plan Must Account For Debt, Lawful Priorities and Liens… PROMESA Co-author Congressman Rob Bishop stated, “These plans are a first step in Puerto Rico’s future recovery, of which the privatization of PREPA will be a key component. However, the transformation of PREPA and the recovery of the Island will not occur overnight, and cannot be done behind closed doors. It is imperative the Oversight Board and Governor fully integrate those who hold the debt into the development of these plans, thereby guaranteeing accuracy and transparency in the underlying assumptions. After all, the Board’s stated goal under PROMESA is to return Puerto Rico to fiscal accountability and the capital markets, this can only occur if the Fiscal Plans respect the lawful priorities and liens of debt holders. My committee will be following the development of these plans intently to ensure financial stability and success return to the Island.”

Revised Fiscal Plan Fails Rule of Law and PROMESA and repeats Past Follies… Assured Guaranty president said, “Unfortunately, the Revised Fiscal Plans repeat and exacerbate flaws in the original plans. Certifying such plans now would be a disservice to the American citizens of Puerto Rico, as the plans fail to focus on growing the economy and restructuring the government and its cost basis to improve efficiency and transparency. The Revised Fiscal Plans also fail to identify essential versus nonessential spending and ignore both creditors’ constitutional rights and contractual liens and covenants. The Revised Fiscal Plans as presented once again erode Puerto Rico’s credibility and undermine confidence in the Puerto Rico government to honor its obligations. This disregard for creditors’ rights would shake, on a nationwide basis, investors’ confidence in the enforceability of their contracts, the rule of law and public officials’ willingness to abide by the commitments they have made. Collaboration on developing a fiscally sound strategy that involves all stakeholders, especially those with constitutional rights and contractual liens, and that prioritizes a detailed and substantiated reconstruction plan, would be a far better solution than certifying a non-collaborative five-year plan in which no one can have confidence because its assumptions and development are secretive.”

Projected COFINA Sales and Use Tax 5-Year Projections Adequate For Pledged COFINA Bond Payments… Projected Sales and Use Tax projected revenue exceeds by about three times the pledged COFINA debt service over the next five years. Projected Sales and Use Tax revenue Fy18: $2.18 billion, 2.9x COFINA debt service of $753 million; FY19: $2.38 billion, 3.03x COFINA debt service of $783 million; FY20 $2.47 billion, 3.03x COFINA debt service of $814 million, FY21 $2.55 billion, 3.01x COFINA debt service of $847 million and FY22 $2.63 billion, 2.98x COFINA debt service of $880 million. The Revised Fiscal Plan aggregates all Sales and Use Tax revenue to the General Fund. However, COFINA Bondholders are unfazed as they are secured by a statutory lien and understand the Commonwealth-COFINA Dispute resolution is progressing in Federal Court. 

Judge Amends Commonwealth vs COFINA Court Schedule… The Court determined that requests for additional time should be allowed in-light-of a requested extension of discovery and authorization to file supplemental factual statements required for oral arguments.

February 14, 2018: The parties shall complete taking fact discovery (and all fact depositions shall be taken by this date, except as otherwise provided).

February 16, 2018: The parties shall identify any expert witnesses for use at trial.

February 21, 2018: The parties shall file any supplemental factual statements in support of any motions for summary judgment, including any supplementation of expert reports. The supplemental factual statements shall be based on factual information that  becomes available to the parties after January 22, including, but not limited to, documents produced after the deadline for substantial completion of document discovery on December 8.

February 26, 2018: Depositions of any rebuttal expert witnesses identified in oppositions to summary judgment motions shall be completed by this date.

March 6, 2018: The parties shall submit any additional expert reports to be relied on for trial.

March 20, 2018: Depositions of any expert witnesses to be relied on for trial shall be completed by this date.

March 20, 2018: The parties shall submit rebuttal expert reports.

March 31, 2018: Depositions of any rebuttal expert witnesses shall be completed by this date.

April 10, 2018: at 9:30 am (AST): Argument on motions for summary judgment shall be heard in the NY courtroom.The Commonwealth-COFINA dispute is a key dispute in Puerto Rico’s debt battle. It now appears a summary judgment can be expected in April.

Why Puerto Rico Bonds Have Rallied… Puerto Rico bond prices have rallied as bondholders now realize the Court not Puerto Rico will decide recoveries. Congressman Rob Bishop, Co-author of PROMESA and Chairman of the U.S. House Committee on Natural Resources which oversees Puerto Rico affairs, stated access to capital markets can only occur if Fiscal Plans respect the lawful priorities and liens of bondholders. He said his committee will intently follow the development of the plans. Moody Investment Services stated the Fiscal Plans won’t dictate specific bondholder recoveries. Recoveries are likely to emerge from judicial proceedings or negotiations. Recoveries will be determined by economic predictions and the relative specific strength of bondholder claims for each of the 18 Island bond issuers.

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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