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Monday, Jan 22, 2018

Seema Balwada, CFA

FEMA Puts Community Disaster Loans on Hold… Discovery of $6.9 Billion in Numerous Bank Accounts Puts Puerto Rico Finances Under Scrutiny… The Integrity of the Federal Oversight Board is Now in Question… 

FEMA Puts Community Disaster Loans on Hold… Puerto Rico may have too much cash to get a loan. That’s the view of the federal government. Billions of dollars of emergency loans approved by the U.S. Congress to aid Puerto Rico deal with the effects of Hurricane Maria have been put on hold. FEMA officials and the U.S. Treasury believe the territory is not facing as serious a cash shortage as Island officials and the Federal Oversight Board repeatedly warned about in recent months. It has become obvious Puerto Rico is intentionally delaying audited financials in order to play accounting games. Puerto Rico’s Federal Oversight Board had knowledge of a huge bank balance of $6.9 billion since at least July 2017. Misleading Congress prior to the hurricanes, the Oversight Board Director testified that cash would run dry by the end of 2017. For at least two years bondholders have asked for financial transparency. Now that the U.S. Treasury has taken it upon itself to probe Puerto Rico’s excess cash before it sends out taxpayer money, Puerto Rico will be forced into transparency. It has become apparent that Puerto Rico has been overstating its financial troubles. Only after Judge Swain approved the bondholders request for financial discovery did Puerto Rico reveal a $6.9 bank balance. Looking at the excess cash, the U.S. Treasury will be setting a Cash Balance Policy in addition to other terms before it sends out approved federal aid. A January 19 “investigative” public hearing scheduled by the Oversight Board, should have taken place in July when the Board recently admitted it first learned about the $6.9 billion. Why the Oversight Board did not bring forward the bank balances puts the integrity of the Federal Board in question. These inconsistencies call into question to whom the Oversight Board appointed by Congress is accountable. A forensic analysis of finances is a likely prerequisite for Puerto Rico to get federal funds. The U.S. Treasury is now demanding transparency, something bondholders have been requesting ever since Puerto Rico said they couldn’t pay their debt.

Puerto Rico Oversight Board Kept Silent on $6.9 Billion Bank Balance its Integrity is Now in Question… It has been confirmed as early as July 2017, Puerto Rico’s Federal Oversight Board was aware of concealed government accounts holding $6.9 billion in 800 bank accounts. The Wall Street Journal reported on January 18, 2018 it reviewed a log of 60 internal emails from Puerto Rico officials and their advisers. Since July, Puerto Rico was exchanging information on the bank accounts including spreadsheets, account inventories and cash balances. However, it was only on December 18, 2017, days after the Federal Court ordered financial discovery, that Puerto Rico revealed the hidden $6.9 billion. On December 14, 2017, Federal Judge Swain ordered Puerto Rico to turn over all financial data requested by bondholders. Even though the Board was aware of the $6.9 billion in various accounts, an Oversight Board spokesperson said that it had been urging Puerto Rico for months to provide “transparent liquidity numbers for all accounts,” but the information provided “had been insufficient to come to any conclusions.” Deceiving Congress on November 7, 2017 the Oversight Board Executive Director Natalie Jaresko testified to a congressional committee that cash could run out by year end without support from the Federal Government. These inconsistencies call into question the creditability of the Federal Oversight Board appointed by Congress.

Forensic audit is key for Federal Funds… The U.S. Treasury’s stance with Puerto Rico aligns with bondholders’ concerns. A U.S. Treasury spokesperson indicated since the Commonwealth’s central cash balance has consistently exceeded $1.5 billion in the months following the hurricanes, and considering the implications of the reported $6.9 billion of total cash across the Commonwealth, the Federal Government will institute a Cash Balance Policy that will determine the timing of Community Disaster Loans to the Commonwealth and its agencies. On January 9, 2018, FEMA wrote to Puerto Rico government, “It is our understanding that the higher-than-expected central cash balance three months after the hurricanes resulted from greater-than-expected receipts, strategic management of payables, and the structure of relief funds from FEMA and other federal agencies, among other factors, although a review of the underlying detail is still underway.” The Cash Balance Policy will be determined by the Federal Government in consultation with the Commonwealth and the Oversight Board. In October 2017, Congress approved up to $4.7 billion in federal loans to rebuild Puerto Rico’s disaster areas. Disbursement of federal funding to Puerto Rico must be compatible with PROMESA and FEMA, which requires Oversight Board approval of any new debt. Puerto Rico may be required to provide unencumbered taxes as collateral for the loans, both COFINA Sales Tax and the Act 154 tax on corporations have been mentioned as collateral. If excess COFINA Sales Tax is used it should validate bondholder claims. It is likely that the U.S. Treasury would need a forensic analysis of Puerto Rico’s liquidity prior to sending federal aid. Oversight Board member José González said “we have to convince Treasury, and the key answer is that we have to be as diligent, as detailed, as rigorous and as quick as possible in providing that information if we want to move Treasury forward.” Convincing the U.S. Treasury of the Island’s financial condition will now require audited financial statements approved by the Court, not only the suspect Board.

FEMA’s Tough Stance Prompts “Investigative” Hearing… To question current and former officials about the Island’s accounting practices, Puerto Rico’s Oversight Board held an “investigative” hearing January 19 on the liquidity of Puerto Rico and its agencies. Nine current and former Puerto Rico government officials testified to the Oversight Board. Oversight Board member Jose Gonzalez questioned whether during a financial crisis, is it fair to deem certain accounts off-limits to creditors, particularly those whose revenues are generated through government actions like tax streams. In light of the $6.8 billion bank balance in over 800 government bank accounts, Gerardo Portela, director of the Island’s Fiscal Agency and Financial Advisory Authority, noted that $4.3 billion of that is not available for use because of restrictions. He said his office will provide more details in upcoming months about where the funds came from and whether there are ways to modify restrictions to free up more money, as requested by the Board. The Oversight Board confirmed that it expects to appoint an independent forensic analysis team shortly. The Board’s actions appear to be disingenuous since they come 6 months after they finally admitted being aware of the $6.9 billion in accounts.

Former Puerto Rico Treasury Secretary Admits “Playing Games”… In a startling admission Juan Zaragoza, Puerto Rico’s highly regarded former Treasury Secretary criticized Puerto Rico financial practices; “We have been playing games with revenue statements for decades. It allowed us to create a mirage that we had the borrowing capacity.” Zaragoza also mentioned the Island’s lack of a tax expenditure budget and its long-standing tradition of overestimating revenue collections. Referring to the bank accounts Zaragoza said, “No one ever had the responsibility or the need to make an inventory of the bank accounts because there was enough money.” Court rulings concerning priority of liens should not be affected by the disturbing actions of the Puerto Rico Government or the Federal Oversight Board. It appears the only revenues that can be trusted are COFINA Sales Tax revenues. The Court will no longer give the Puerto Rico Government or Federal Oversight Board the benefit of any doubt.

Bond Insurer Demands Answers on Highway Fund Account… MBIA Inc.’s National Public Finance Guarantee Corp is seeking to question officials for Puerto Rico about why money that was supposed to be set aside for bondholders in a protected trust was instead deposited in a bank account that could not be used to make debt payments. We are trying to find money that should have gone to the trust for the benefit of bondholders, the insurer said in court papers.

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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