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Puerto Rico Debt Plan To Hinge on U.S. Aid

Wednesday, Nov 08, 2017

Seema Balwada, CFA November 8, 2017

PUERTO RICO UPDATE

Puerto Rico Debt Plan To Hinge on U.S. Aid… Creditor Input Requested For Revised Puerto Rico Fiscal Plan Expected January 2018… Lawmakers Seek “Narrow” Jones Act Exemption For Island… Fed Board Seeks Court Approval For PREPA Transformation Officer… Perpetual Lien, Constitutional Rights Add Substance To Bondholders PREPA Fight… U.S. To Defend Constitutionality of PROMESA... Pension Bondholders File For Summary Judgement… Court Wants Earliest Resolution of Commonwealth-COFINA Dispute Either by Consensual Agreement, Summary Judgement or a Court Hearing Resulting in a Ruling…

Not only has Puerto Rico’s Title III Court supervised debt restructuring gained more momentum, there are signs of greater accountability from several quarters. Accepting the Puerto Rico Oversight Board’s accountability to Congress, Natalie Jaresko, an Oversight Board Executive Director testified to Congress, “As Congress considers its support for Puerto Rico, it will be vital that any loans or grants provided to meet these needs be measured against the Fiscal Plans and integrated with them.” The Oversight Board made an overture to bondholders by setting two Court mediated creditor input sessions for Puerto Rico’s revised Fiscal Plan. The Oversight Board is replacing their ten-year Fiscal Recovery Plan with a five-year Fiscal Plan. A five-year Fiscal Plan through Fiscal 2022, anticipated by January 2018, signals a shorter time frame than the original ten-year Fiscal Plan for Puerto Rico to gain structural balance. Learning from past mistakes appears to be in the cards, as Board officials affirmed, “It is essential to use the process of revising Fiscal Plans to return to the PROMESA goals of fiscal responsibility, access to private capital markets and sustainable economic independence.”

Clearly, the bully pulpit of the U.S. District Court of Puerto Rico is wielding its influence in resolving Puerto Rico’s debt disputes. The accountability of the Oversight Board is emerging as a central question in bondholders’ fight for their constitutional rights. Meanwhile, the Court expedited the calendar for the resolving the Commonwealth-COFINA Dispute, widely regarded as the “marquee” litigation with implications well beyond the Puerto Rico bond market.

Puerto Rico Debt Plan To Hinge on U.S. Aid…
The federal government’s response will determine Puerto Rico’s recovery, the executive director of the Federal Oversight Board stated at a November 6 hearing held by the U.S. House Natural Resource committee “It is very difficult for anyone in Puerto Rico to see the future at this stage. So much depends on U.S. Congress, the U.S. Administration and how much funding they will appropriate for Puerto Rico. As Congress considers its support for Puerto Rico, it will be vital that any loans or grants provided to meet these needs be measured against the Fiscal Plans and integrated with them. The mechanisms of PROMESA and the full participation of the Board will be required. We have proposed legislative language to this end with regard to liquidity”. Making federal moneys contingent upon Fiscal Plan goals is viewed positively by bondholders.

"In the short term, there’s no question that this will be a very difficult period for creditors, in terms of the future; much depends on your response" told by the Oversight Board spokesperson to the House Natural Resource Cmte Chaired by PROMESA co-author Rob Bishop on Nov 6.

Shorter Time Frame Revised Puerto Rico Fiscal Plan Is Expected January 2018…Unlike the prior Fiscal Plan which was disputed by bondholders, the revised Fiscal Plan will cover a shorter time period of five years (FY2018 to FY2022) not ten years and its building process is more open to stakeholders. Bond insurers and bondholders challenged the constitutionality of Puerto Rico’s prior Fiscal Plan. Showing an effort to not repeat past follies, this time around Puerto Rico has invited all stakeholders to three listening sessions to be conducted through December 4 in San Juan and New York. The listening sessions will feature macroeconomic effects, fiscal measures and economic development. In addition, Court appointed mediators will hold two additional sessions with bondholders and Island government. The Oversight Board has set nine principles for Puerto Rico’s governments to guide the revision of the Fiscal Plan which includes a capital expenditure plan for long term economic recovery, structural balance no later than Fiscal 2022 and long-term debt sustainability. Investors are hopeful that the influence of the Court is bringing about change in the Oversight Board’s stance and are optimistic about a shorter time frame to meet PROMESA’s goal: achieving balanced budget and restoring market access to the Island.

Lawmakers Seek ‘Narrow’ Jones Act Exemption For Island…
Congressman Doug Lamborn, Republican-Colorado, wants Congress to look at a "narrow exemption" for Puerto Rico from the Jones Act. "It's a problem for Puerto Rico," Lamborn said during a House Natural Resources Committee oversight hearing Tuesday on Puerto Rico's recovery from Hurricane Maria. Lamborn, chairman of the subcommittee on Water, Power and Oceans, questioned whether the Jones Act was increasing the cost of delivering Liquid Natural Gas (LNG) to the Island. “We believe any measures that Congress takes to ensure the cost of shipping fuels to Puerto Rico is reduced is a positive step towards rebuilding the economy.” The Jones Act, a nearly 100-year-old law, requires vessels transporting goods between U.S. ports to be U.S.-flagged, U.S.-built and majority U.S.-owned. On September 28, Senators John McCain, Republican-Arizona, and Mike Lee, Republican-Utah, introduced a bill to permanently exempt Puerto Rico from the Jones Act. The Department of Energy is examining a potential Jones Act exemption for Puerto Rico.

Federal Board Seeks Court Approval For PREPA Chief Transformation Officer… A month after the hurricane, the Oversight Board that previously rejected bondholders’ request for a Court appointed receiver, moved to appoint retired Air Force Colonel Noel Zamot as an emergency manager for the Puerto Rico Electric Power Authority (PREPA). But Puerto Rico Governor Ricardo Rossello has said the board overstepped its authority and is fighting the appointment in court. PREPA has been criticized by members of Congress from both parties for signing a $300 million suspect deal to repair damage. PREPA was forced to cancel the contract. The District Court of Puerto Rico has set a November 13 hearing to consider the Oversight Board’s motion. The Court’s decision has implications for the Commonwealth and other Puerto Rico agencies currently in Title III.

Perpetual Lien, Constitutional Rights Add Heft To Bond Insurers’ Fight…“Remember we have a perpetual lien on the net revenues of the electric utility,” Assured Guaranty CEO reminded investors that no matter what the path is, at the end of the day, those with statutory legal rights will be repaid. “I believe the Court, whether it be the initial Court, appellate Court or Supreme Court is going to say, yes, the Constitution of the United States and Puerto Rico matters, and your legal rights matter.” Due to the vast scale of its capital resources, Assured Guaranty has a key role in Puerto Rico’s debt restructuring.


U.S. To Defend Constitutionality of PROMESA...The United States will file its memorandum of law in support of PROMESA’s constitutionality on or before December 6, 2017. Bondholders and a Puerto Rican electric workers union challenged the constitutionality of the Federal Board in August 2017. Former U.S. Solicitor General and constitutional scholar on behalf of bondholders argue that the creation of the Fiscal Control Board violates the United States Constitution’s Appointment Clause and separation of powers. To ensure public accountability, federal officers; “principal officers” must be appointed by the President with the advice and consent of the U.S. Senate. Puerto Rico Oversight Board members have not been confirmed by the Senate; instead, they were hand-picked by individual members of Congress, from an intricate system of secret lists. At the recent congressional hearing, Federal Board executive director stated that the Federal Board is accountable to Congress. To whom the Oversight Board is accountable is emerging as a central question in Puerto Rico’s Title III litigation. The Federal Board’s accountability to Congress would make the United States responsible for Federal Board actions. A Court hearing is planned for January 10, 2018. 

Bondholders File For Summary Judgement… Bondholders of Puerto Rico’s Employee Retirement System (ERS) became the first to move the U.S. District of Puerto Rico for a Summary Judgement on perfection of constitutionally protected liens granted to ERS (pension) bondholders. In July 2017, ERS and the Commonwealth challenged the validity, priority, extent and enforceability of prepetition and post-petition liens and security interests claimed by bondholders. To establish bondholders’ perfected security interests, bondholders showed executed active Uniform Commercial Code financing statements amongst strong evidence. As the parties could not resolve issues, bondholders asked the Court to grant a Summary Judgement.

Court Wants Earliest Resolution of Commonwealth-COFINA Dispute… After extensions granted after Hurricane Maria, on Oct 31, 2017 Judge Swain ordered an amended schedule for the Commonwealth-COFINA Dispute. The Judge suggests that the parties may file for summary judgement on or before January 31, 2018 (prior date was Feb12). The Court contemplates expert discovery to be complete by early February. The Court stated, “the Agents shall ask the Court to set a trial date as early in March 2018 as possible”. Expedited resolution of the Commonwealth-COFINA Dispute is advancing per the Court directed schedule.

Puerto Rico Bondholders Watch List…

Upcoming Court Dates
15-Nov-17 OMNIBUS HEARING
13-Nov-17 Court Hearing on Appointment of PREPA Chief Transformation Officer
21-Nov-17 Court Hearing on bond insurers' complaint against Puerto Rico's alleged illegal clawbacks, special revenue protections
13-Dec-17 Court Hearing: Employee Retirement System complaint against Altair - ERS lien perfection
20-Dec-17 OMNIBUS HEARING: Commonwealth-COFINA Dispute Motions to be heard
10-Jan-18 Court Hearing on Bondholder Complaint re: Federal Board Appointment (Aurelius, UTIER, U.S.)

Commonwealth-COFINA Dispute
Parties May Move For Summary Judgement By Jan 31, 2018
On Oct 31, the Court stated, “the Agents shall ask the Court to set a trial date as early in Mar 2018 as possible”.
25-Oct-17 (i) Court Hearing & (ii) Amended Complaint with certain technical corrections to be filed by the Commonwealth Agent
30-Oct-17 COFINA Agents’ amended answer responding to corrections due  
06-Nov-17 Permitted Intervenors to file respective positions; Others who wish to intervene to file motions
20-Nov-17 Agents to file answer and counterclaims to pleadings of Permitted Intervenors
21-Nov-17 Oppositions are due to motions to intervene to parties other than Permitted Intervenors
29-Nov-17 Permitted Intervenors to file answers to any counterclaims asserted against them  
05-Dec-17 Replies are due in support of motions to intervene made by persons other than Permitted Intervenors  
08-Dec-17 Commonwealth including COFINA, GDB, AAFAF, Puerto Rico Dept of Treasury and Puerto Rico Dept
of Justice to complete document production  
20-Dec-17 Omnibus Hearing where motions to intervene will be heard
26-Jan-18 Agents shall complete taking fact discovery and Agents shall submit expert reports 09-Feb-18 Agents shall complete expert discovery

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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