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PUERTO RICO UPDATE Oversight Board Rejects Plan

Tuesday, Feb 06, 2018

Seema Balwada, CFA

Oversight Board Rejects Revised Fiscal Plans for the Commonwealth, PREPA, PRASA… U.S. Lawmakers Question PREPA Privatization… HUD Awards $1.5 Billion for Island’s Recovery… December Sales and Use Tax Exceed Prior Year… Puerto Rico Bonds Have Best Month Since 2016…

The Oversight Board’s requested changes only address half of the problem, and fall short of both Congress and bondholder expectations. The Board hardly addresses debt repayment currently being litigated and mediated. Bondholders realize Puerto Rico has no intention of realistically dealing with their debt; the Court will ultimately deal with debt restructuring. “Our goals of achieving balance and renewing access to the debt markets is only possible if we fundamentally change the underlying economic trends,” Board Chair Carrión stated. Although the interactive process of certifying Fiscal Plans has begun, unless and until Puerto Rico and its Federal Oversight Board commit to honoring bondholder contracts and liens, capital markets will remain distant. Since Congress drafted PROMESA the law’s co-creator Rob Bishop urged that the “Oversight Board and the Governor fully integrate those who hold the debt into the development of these plans”. Bond insurers are fighting for the Court to uphold the constitutional rights and contractual liens of bondholders and want to collaborate with Puerto Rico and its Oversight Board. Rejecting Puerto Rico’s revised Fiscal Plan, the Congress-appointed Oversight Board has asked Puerto Rico Governor to cut pensions, reform labor markets and commit to business-friendly structural reform. Positive on the proposed privatization of Puerto Rico’s electric utility, the Board asked the revised Fiscal Plan “should outline the path, timeline, and parameters of the transaction.” The Board rejected Governor Rosselló’s bid to consolidate Puerto Rico’s energy regulator and wants a separate independent stand-alone energy regulator to oversee PREPA. The short-sighted Oversight Board requested changes that only address a portion of the problems and do not go far enough to reestablish investor confidence and fall well short of restoring capital market access.

Oversight Board Wants Pension Cuts, Labor Reform…Silent On Debt… Specific actions to cut pensions, along with labor market reform such as cutting excessive severance, vacation, sick days are sought by the Board which rejected Puerto Rico’s revised Fiscal Plans for its central government, electric and water utilities. On debt, the Board asks for a 30-year debt sustainability and capacity projections and continues to be silent on debt repayment currently being mediated and litigated by federal judges. “Our goals of achieving balance and renewing access to the debt markets is only possible if we fundamentally change the underlying economic trends that characterized Puerto Rico’s economy prior to the hurricane,” the Board cut combined pension and social security benefits greater than $1,000 by 25%. The Board said pension reductions are part of the “shared sacrifice” that Puerto Ricans must make to tackle a “key driver” of the fiscal crisis. On PREPA, the Board said the government should create a “strong and independent regulator” rejecting commonwealth legislation that would consolidate the Energy Commission with other entities. As for PRASA, the board said its plan “forecasts significantly reduced revenues post-Hurricane Maria but does not provide for a commensurate reduction in operating expenses.” The Board wants latest info on federal disaster relief to be part of the revised Fiscal Plan, sufficient funds for the Commonwealth’s common assets and an emergency funding reserve of $1.3 billion. Puerto Rico’s response to the changes is due February 12, 2018. Both the Puerto Rico Government and Oversight Board ignore how the debt will be addressed.

U.S. Lawmakers Ask Questions On PREPA Privatization… Congress has many questions on PREPA’s proposed privatization. U.S. lawmakers want to know how the Island will ensure transparency during the privatization process, its oversight of the private operator, nature of the proposed new energy regulatory body, contracts, pensions and legacy subsidies or contributions-in-lieu of taxes given by the utility to the Island’s municipalities. Under PREPA’s revised Fiscal Plan, a single concessionaire would assume all responsibilities related to transmission and distribution, while other generation assets would be privatized and additional private generation added. PREPA would maintain public ownership of the infrastructure, though it would be externally managed. How much cash if any a private company is willing to invest in the process, without a bondholder settlement, will factor into PREPA’s Plan. “The Island’s Oversight Board has requested the Federal Judge handling PREPA’s Title III bankruptcy for approval of a $1.3 billion loan from the Commonwealth. As for the loan AMBAC attorney’s stated, “To permit the Commonwealth to transfer value from one Title III debtor to another based on conclusory assertions of need and harm, and insulating that transfer from all third party attack is unacceptable and inconsistent with any reasonable interpretation of due process.” U.S. lawmakers brought up concerns on the privatization to Governor Rosselló asking for “an open and transparent process.” PREPA bondholders will fight privatization efforts that do not respect their rights.

HUD Awards $1.5 Billion For Puerto Rico Recovery… The U.S. Department of Housing and Urban Development of the United States (HUD) granted $1.5 billion in disaster recovery grants to Puerto Rico. These grants are provided through the Community Development Block Grant Disaster Recovery Program to support long-term recovery of homes and businesses. These grants were approved as part of Congress-approved disaster aid package signed by President Trump in September 2017. HUD has relied on data from FEMA and Small Business Administration to identify needs and will direct funds to the most impacted.

December Sales & Use Tax Collections Exceed Prior Year… Post Hurricane Maria, December 2017 became the first month where sales and use tax collection exceeded same month prior year. Collections from the sales & use tax in December totaled $233.1 million, some $11.8 million, or 5.3%, more than the previous year. For the first half of fiscal 2018, $1.1 billion of sales and use tax has been collected. The Island’s General Fund collections in December $697.6 million, $101.9 million less than the same time the year prior and $65.8 million lower than projected for the month. Net revenue in the General Fund for the first half of the current fiscal year reached $3.6 billion, which represents $348 million, or 8.8%, less than the previous year and is $157 million or 4.3% lower than projected. The Puerto Rico Government and Oversight Board, in character frivolously predicted as much as a 50% decline in revenues. The COFINA debt service fund held by Bank of NY is now sufficient to pay 8/1/2017, 2/1/2018 and 8/1/2018 debt service.

Puerto Rico Bonds Have Best Month Since 2016… Puerto Rico securities had their best month in a year and a half. Commonwealth debt has gained about 12% in January. COFINA Subordinate Bonds gained 70%, albeit from distressed prices. The gains are a reversal from last year per Bloomberg. Some analysts believe that given 2018 tax reform, the year-end sell off may well reflect tax loss transactions. Creditors remain unfazed by Puerto Rico Fiscal Plans as bondholders look to the Courts to uphold liens.

Assured Guaranty Will Appeal Recent Ruling… Assured Guaranty will appeal to the U.S. Court of Appeals to reverse Judge Swain’s recent ruling on bonds issued by Puerto Rico Highways and Transportation Authority (HTA), Convention Center and Infrastructure Financing Authority. The court did not address whether the HTA bonds are secured by a lien or security interest. On January 30, 2018, Judge Swain issued two decisions in proceedings related to the Title III restructuring of Puerto debt. The court rejected the Commonwealth and Oversight Board’s argument that Section 305 of PROMESA deprives the court of jurisdiction over certain claims; instead, the court held that section 305 only limits the court’s ability to order remediation. The court dismissed the plaintiff monoline insurers’ complaint against the Commonwealth and the Puerto Rico Highways and Transportation Authority and ruled that the special revenues provisions of the Bankruptcy Code do not require a debtor, post-petition, to apply the special revenues to the bonds they secure. The court also held that the plaintiffs were unable to show that bondholders have an ownership interest, to the exclusion of HTA, in the funds held in certain reserve accounts at HTA. Most judges have very little if any experience with Chapter 9 let alone Title III debt restructuring as they are more familiar with corporate bankruptcy. This may explain Swain’s error on bankruptcy-remote special revenue, a bankruptcy expert James Spiotto noted. Judge Swain’s decision is mostly an effort to narrow scope and may need to be reconsidered either by an appellate court or by her.

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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