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Muni Week Review / Preview 12/28/2015

Monday, Dec 28, 2015

Puerto Rico Pays $900 Million Due Bondholders Jan. 1. Defaults on $37 Million. Cofina Bondholder  Interest and Principal Due Feb. 1 Will Be Paid In Full.

Puerto Rico To Make Vast Majority Of Payments Due Jan. 1… Puerto Rico will default on about $37 million in bond payments due Jan. 1 and divert revenue to make other payments, escalating the conflict with investors.The $37 million is a fraction of the almost$1 billion in interest due at the start of the year. The island will miss payments on$35.9 million of non-commonwealth guaranteed Puerto Rico Infrastructure Financing Authority debt and $1.4 million of Public Finance Corp. bonds. The Governor says money is being used to help pay investors who are owned $328.7 million of interest on general-obligation municipal debt. The default follows Garcia Padilla’s failed attempt to persuade Congress in December to include a provision in a $1.1 trillion spending bill to allow commonwealth agencies to file for bankruptcy protection. House Speaker Paul Ryan directed committee heads to come up with a plan for Puerto Rico by the end of March. Garcia Padilla this month started redirecting revenue used to repay certain agency debt to the central government’s coffers. About half of funds to make the general-obligation municipal bond payment, $164 million, is coming from the clawback. By keeping The Commonwealth’s pledge to those investors, he hopes to continue negotiating with bondholders as Congress works on a plan for the island.Agencies such as the Highways & Transportation Authority and the Convention Center District Authority had said they’ll use reserves to help pay their investors on Jan.1 Holders of bonds issued by the Government Development Bank, the Public Building Authority, the Employees Retirement System, the Industrial Development Authority and the University of Puerto Rico will also receive payments due in January.The Infrastructure Financing Authority, while defaulting on most of their debt, will make payments that are guaranteed by the commonwealth. Holders of sales-tax revnue debt will also receive their payments. Puerto Rico doesn’t have plans to clawback sales-tax collections because the government doesn’t have control over that revenue, Melba Acosta, president of the GDB, said during a call with reporters.

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AMBAC, FGIC Demand Puerto Rico Transfer Taxes To Infrastructure Bondholders… Two insurance companies that guarantee almost $900 million of debt issued by The Puerto Rico Infrastructure authority and backed by federal taxes on rum demanded the commonwealth return as much $94 million of revenue it diverted from bondholders to pay other creditors. Ambac Assurance Corp., a unit of Ambac Financial Group Inc., and Financial Guar-anty Insurance Co. made  their case in a letter to Puerto Rico Governor Alejandro Garcia Padilla. They said that the plan to divert rum-tax revenue pledged to $1.9 billion of municipal bonds issued by the Puerto Rico Infrastructure Financing Authority violated the commonwealth’s constitution as well as the takings, contracts and due process clauses of the U.S. Constitution. Pursuant to the PRIFA Enabling Act the Department of the Treasury of the Commonwealth is required to transfer the first proceeds of the Rum taxes to the Puerto Rico Infrastructure Fund when received from the United States, up to a maximum amount of $117 million per year. Under the operative trust agreement, the monies must then be transferred as soon as practicable to a separate fund (the “Sinking Fund”) maintained in trust on behalf of  PRIFA bondholders. No monies were transferred into the Sinking Fund in September, October, or November of 2015. The taking of Rum taxes before an Executive Order was issued on December 1, 2015, violates the PRIFA Enabling Act and Trust Agreement, as well as state and federal constitutional provisions. The foregoing pattern of activity is unacceptable said Nader Tavakoli, AMBAC Chairman, and Derek Donnelly, Managing Director at FGIC, in a letter to Governor Padilla.  Accordingly, Ambac and FGIC further demand that the Commonwealth cease all efforts to “claw back” or otherwise take any action in violation of applicable Commonwealth and federal law concerning any bonds issued by the Commonwealth and/or its agencies and instrumentalities. Many market participants expect the insurers to file legal papers.

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Puerto Rico Municipal Debt That Will Be Paid On January 1, 2016… Puerto Rico Governor Alejandro Garcia Padilla said the commonwealth will default on about$37 million in bond payments due Jan. 1. Here is the list of Bonds getting paid. General Obligation Bonds: $328.7 million, Highways & Transportation Authority Bonds:$101.7 million, Public Authority Bonds: $92 million, Cofina Bonds:$15.4 million, Employment Retirement System Bonds: $13.9 million, Infrastructure Financing Authority Commonwealth GTD Bonds:$11.4 million, Industrial Development Authority Bonds: $10.1 million, Government Development Bank Bonds: $9.9 million, Convention Center District Authority Bonds: $9.5 million, and University of Puerto Rico Bonds: $1.7 million. All Electric Authority and Aqueduct and Sewer Authority payments will be made.

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Puerto Rico Electric Authority Reaches Agreement with Majority of Bondholders… A consensual agreement with 70 % of PREPA’s bondholders after more than a year of negotiations sets an important precedent for Puerto Rico’s public sector debt. “While the entry into these agreements is another important milestone in PREPA’s trans-formation, the transaction is subject to a number of conditions and contingencies. Chief among them are the enactment of the necessary legislation, the approval by Puerto Rico Energy Commission of PREPA’s rate structure and the securitization charges, execution of a successful exchange offer, and the achievement of an investment grade rating for the overall situation at the commonwealth,” said Lisa Donahue, PREPA chief restructuring officer. Assured Guaranty’s CEO said, “We believe that the restructuring transaction outlined in the Restructuring Support Agreement can be the foundation for a consensual settlement that fosters modernization, long-term sustainable rates for rate-payers and continued access to efficient capital markets financing for PREPA. We are committed to continue working cooperatively with PREPA and other stakeholders to implement the terms of PREPA’s recovery plan.” The agreement puts to rest unfounded speculation and full recovery on PREPA exposure bodes well for bond insurers and uncommitted municipal bondholders.

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Puerto Rico Credibility Again In Question… (Commentary,by Daniel Hanson, Height) In reality, this is a remarkably mild  default, given the Commonwealth’s repeated claims about its inability to pay debt. When a debtor repeatedly claims they have no cash but then pays more than $900 million in debt service, the credibility of the debtor must be called into question. The governor repeatedly blamed the US Congress for PR’s plight during his remarks, but when Congress returns from its recess, the lack of credibility and commitment to reform within the PR government is likely to push Congress closer to imposing a federal control board over the territory. The governor blamed delays in the release of the FY2014 financials on the auditors at KPMG when asked about the delay during the press conference. The financials are now 243 days past due, and the Commonwealth has disclosed that the delay is due to major components, including the GDB and the pension system, not having complete audits. Investors may wonder why the Commonwealth is able to pay 95 percent of debt service due on January 1 despite paying Conway MacKenzie more than $5 million to produce cash flow projections indicating negative liquidity by January.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.

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