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Federal Judges Guiding New Fiscal Plan

Friday, Nov 17, 2017

Seema Balwada, CFA November 17, 2017

PUERTO RICO UPDATE

Federal Judges Guiding New Fiscal Plan… Judge Houser Confident Of Consensus/Substantial Consensus on Debt Restructuring… Judge Swain Motivates Collaboration, Wants Legal Determinations And New Fiscal Plan… U.S. Lawmakers Probe Governor Rosselló… PREPA Chief Resigns… Governor Seeks $94 Billion Federal Aid… Lawmakers Seek More Oversight and Financial Controls Over Puerto Rico… U.S. Tax Incentives For Puerto Rico On The Table…

On November 13, two congressional committees probed the Island’s leaders seeking $94 billion in federal grants not loans for recovery. U.S. lawmakers took to task the Island’s leadership. “It is significant, if you’re going to receive that kind of money and aid, and I do believe it is needed, it is significant that there is one plan and one voice and everyone is coming together,” House Natural Resources Committee Chair Rob Bishop asked for more Federal Oversight and Controls over the Island. In return for possible tax incentives from the United States, another prominent PROMESA advocate, Senate Finance Cmte Chair Orrin Hatch stated, “I want to help them. There are many things that they have to solve before we do that. There are many things that are happening in Puerto Rico that are highly criticizable.” It is becoming clear to Puerto Rico that federal help could come along with more controls on accountable uses of taxpayer dollars.

At November15-16 hearings Federal Judges took the stage to motivate the parties to “work together, quickly, for positive change”. Judge Taylor Swain set dual priorities: legal determinations of parties’ relative rights and the new Fiscal Plan. Judge Barbara Houser, Judicial Mediation Team Leader is working confidentially with the parties to develop a new Fiscal Plan. The Judges’ goal is to bring about consensus amongst all parties that could be embodied in the new Fiscal Plan and Island budget: to earn the confidence of outside funding sources.

Court Mediation Team Working on New Fiscal Plan, Judge Reveals… “Because the development of these Fiscal Plans is so important to all stakeholders in these cases, we are working with the parties to facilitate the development of these Fiscal Plans in as collaborative a fashion as possible prior to their anticipated certification by the Oversight Board in early 2018,” Mediation Team Leader, Judge Barbara Houser, U.S. Bankruptcy Court for the Northern District of Texas, revealed on November 15. On October 31, 2017, the Oversight Board formally approved a time-line for the development of new Fiscal Plans for Puerto Rico and certain agencies. Three public listening sessions and two creditor input sessions have been announced by the Oversight Board. The new Fiscal Plan aims for structural balance in a shorter time frame of five years relative to the prior ten year plan; Bloomberg cites the Federal Board’s lawyer stating the new Fiscal Plan is in initial stages and subject to priority liens the Board may consider suspending debt service for five years. Separate and concurrent from the adjudication of Title III court proceedings, Judge Laura Swain designated a team of five Federal Judges led by Judge Barbara Houser to act as judicial mediators in a confidential voluntary mediation process initiated in June 2017. Bondholders were encouraged to learn that the Mediation Team is guiding the Island’s new Fiscal Plan.

Consensus or Substantial Consensus on Debt Restructuring, Judicial Mediation Team Confident… “I will push the mediation process as expeditiously as I feel appropriate in order to facilitate a consensual, or substantially consensual, resolution of the cases,” Mediation Team Leader Judge Barbara Houser stated that the Mediation Team has identified the issues in dispute among the parties that it believes could be resolved through mediation. Formal confidential mediation sessions on critical disputed issues with parties who have elected to participate are ongoing. In early 2018, parties will be asked to submit confidential merits mediation statements to the Mediators to allow the Mediation Team to better understand parties’ positions on legal/factual issues. Judge Barbara Houser will then assign Mediation Team members to be responsible for particular issues based upon expertise and availability. The current judicial mediation combines expertise of several judges committed to their goal, Judge Houser said, “I remain highly confident that if the parties and the mediators work together, we will be able to restructure the debt on a consensual or substantially consensual basis.”


Judge Taylor Swain Motivates Collaboration… Wants Legal Determinations & New Fiscal Plan… Working towards a timely and confirmable plan of debt adjustment, Judge Laura Swain in charge of Puerto Rico’s Title III debt restructuring believes that “necessary legal determinations as to the parties’ relative rights and obligations, to continue in tandem with the formulation of Fiscal Plans and recovery efforts.” Judge Swain urges all the parties to “focus principally on consensual, collaborative work in aid of recovery and restructuring, the Court will not preclude litigation of any matters that are brought before it.” With regard to Puerto Rico’s ailing electric utility, the Judge has rejected bids to appoint a Chief Transformation Officer at PREPA sought by the Federal Board, a bond trustee appointed Receiver sought by bondholders or other forms of emergency managers or co-managers.

U.S. Lawmakers Probe Governor Rosselló, PREPA Chief… For several hours, U.S. lawmakers questioned Governor Rosselló and PREPA Chief Ricardo Ramos, who deposed before two congressional committees early this week. How can a better electric grid be built? Why was “mutual aid” (a cost-recovery contract arrangement amongst neighboring power producers governed by American Public Power Association) not requested? A defensive Gover-nor Rosselló called for “building stronger and better” with more resilient micro grids and private sector collaboration. Deeply cognizant that questionable governance and management have created problems at the Island, U.S. lawmakers’ probe is insightful and hopefully augurs more institutional controls at Puerto Rico’s debt issuers. Ricardo Ramos Rodriquez the head of PREPA resigned on Friday, November 17.

Puerto Rico Seeks $94 Billion Federal Aid… Puerto Rico’s governor on Monday asked the federal government for $94.4 billion. The Governor will make a formal request to the White House and Congress seeking $46 billion to restore housing through the Community Development Block Grant program, $30 billion within FEMA to cover critical infrastructure and $18 billion in other federal grant programs for long term recovery. So far Congress has approved nearly $5 billion in aid for Puerto Rico and disbursed $3.8 billion.

Lawmakers Seek More Oversight And Financial Controls Over Puerto Rico… Lawmakers are asking for changes as Puerto Rico needs more controls over its spending. “Improved coordination and the need for transparent and accountable expenditures of taxpayer dollars are goals all parties working in Puerto Rico can aspire to achieve,” Chairman Rob Bishop stressed that Congress has serious concerns about Puerto Rico government’s ability to competently negotiate, manage and implement infrastructure projects without greater independent oversight. Stressing the need for greater collaboration between the Federal Board and Puerto Rico’s governments, Bishop stated, “It is significant, if you’re going to receive that kind of money and aid and I do believe it is needed it is significant that there is one plan and one voice and everyone is coming together.”

U.S. Tax Incentives On The Table… “It is our intention to make improvements to our tax reform legislation as it relates to Puerto Rico when we go to conference,” House Speaker Paul Ryan and Resident Commissioner, Jenniffer González Colón, issued a joint statement on November 16. The U. S. could help Puerto Rico through tax incentives. Six U.S. Congress members, Nydia Velazquez, Jose Serrano, Luis Gutierrez, Raul Grijalva, Darren Soto and Adriano Espaillat wrote to House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell on November 15, “Specifically we ask that you include permanency for the rum cover and Section 199 domestic manufacturing production credit for Puerto Rico, expand the child tax credit, extend the use of the earned income tax credit and address problems for companies operating in Puerto Rico.” PROMESA’s bipartisan Congressional Task Force on Economic Growth in Puerto Rico has called for modifications to the U.S. tax code to benefit the Island.

Judge Swain Hand-Picks Second COFINA Investor Letter… For the second time, Judge Swain showcased an investor letter stating the importance of the COFINA bond structure, a concern that the Court is deeply mindful of. Policymakers and the public must recognize that bonds are not all structured the same. Each bond has very separate and unique security features which need to be considered and respected, not just in the case of COFINA, but for the overall health of the municipal bond market. If all bonds are treated the same, and politics trumps property rights and security analysis, then the unintended consequences will be costly and far-reaching. Puerto Rico’s unwillingness to honor liens sets a dangerous precedent for the $3.8 trillion municipal market, the backbone of the nations’ roads, bridges, schools and hospitals.

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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