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Muni Week Review / Preview 5/2/2017

Tuesday, May 02, 2017

BONDHOLDERS REJECT PUERTO RICO OFFER…LEGAL STAY LIFTED COFINA CREDITORS SUE…BONDHOLDERS CHALLENGE PR FISCAL PLAN…PREPA RECEIVES BONDHOLDER CONSENSUS…

Bondholders Reject Puerto Rico Offer… Puerto Rico offered to pay 52 to 77 cents on the dollar for general obligation bonds, 39 to 58 cents for COFINA sales tax bonds. Debt from Puerto Rican public agencies, like its highway and infrastructure authorities, would recover less than 30 cents on the dollar under the plan, and only in the form of conditional cash flow bonds. The Island’s highest priority debt classes, holders of general obligation bonds and senior sales-tax secured COFINA bonds, which carry legal first claim on Puerto Rico revenue, rejected the offer. “Puerto Rico’s debt restructuring agency, AAFAF, regrettably has broken the Commonwealth's decade-old promise not to impair COFINA its only rescue financing. The plan also inexplicably affords equal recoveries for Senior and Subordinated COFINA Bondholders, while expressly recognizing the priority of Senior Bonds over Subordinated Bonds.” General obligation bondholders say Puerto Rico’s plan isn’t a credible starting point for negotiations. A creditor said the proposal was “not even close to a good proposal. Not just lowball but also not a well-constructed proposal.” In June 2016, the U.S. Supreme Court affirmed as uncon-stitutional former Puerto Rico administration’s Recovery Act upholding the rulings of two lower courts after bondholders challenged illegal confiscation attempts. Broadly, the legal system serves to set precedents that honor contract and property laws so that governments follow prudent fiscal policy. Prices of Puerto Rico bonds rose after bondholders rejected Puerto Rico’s debt restructuring proposal reflecting investor confidence in a court of law.

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Stay Lifted COFINA Creditors Sue… On May 1 the stay on litigation expired and bondholders sued Puerto Rico, the Federal Board and each of the Federal Board’s seven members. Holders of $16 billion COFINA sales tax secured bonds and bond insurer AMBAC were the first to challenge the constitutionality of Puerto Rico’s plan to cut debt in the San Juan federal court. Bondholders accused Puerto Rico officials of strong-arming it into what it called “unfair, unjust, and illegally punitive terms.” The complaint accuses Puerto Rico's leadership of impairing contractual rights of COFINA bondholders, whose debt is backed by sales tax revenue, and trying to take their property “without just com-pensation or due process in violation of rights protected under the United States and Puerto Rico Constitutions.” In two similar complaints, plaintiffs AMBAC, a local COFINA holder and hedge funds asked the court to block Governor Rossello from implementing a fiscal plan that was approved by the oversight board in March; AMBAC also seeks to prohibit the filing of any Title III bankruptcy that is premised on that fiscal plan. The complaint accuses Governor Rossello and other officials of angling to repurpose the tax revenue earmarked to pay COFINA bondholders, “Sovereignty confers great power on public officials, but it does not authorize lawlessness,” the complaint alleges, adding that the board exacerbated the Island's abuses by “giving its imprimatur to an ongoing scheme that can only be called theft.” The lawsuit is expected to be one of many as bondholders seek to recuperate the money they invested in Puerto Rico municipal bonds. Puerto Rico already faced about a dozen lawsuits before the litigation freeze was implemented as part of a rescue package, PROMESA, approved by U.S. Congress last year. Puerto Rico has defaulted on $1.3 billion of principal owed since the previous governor declared the $70 billion public debt load unpayable in June 2015. AMBAC’s lawsuit accuses the government of illegally retaining $300 million owed to bondholders. The newest suit comes after the administration of Governor Ricardo Rosselló failed to negotiate a deal with bondholders before the May 1 deadline of the litigation freeze. Puerto Rico officials have said that embracing a bankruptcy style process under Title III of PRO-MESA could be an option after failing to win consensual solutions with bondholders.

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Bondholders Challenge Puerto Rico Fiscal Plan… The Federal Oversight Board is squarely at odds with the stated intent of the U.S. Congress. Bondholders are dissatisfied with the Federal Board because, amongst other reasons, it did not address how the board certified fiscal plan ‘respects relative lawful priorities’ and why it does not differentiate between essential and non-essential expenses. When asked by Senate Banking Cmte members Senator Tillis, R-NC, and Tom Cotton, R-AK (Apr 7) on how the board certified fiscal plan complies with PROMESA Section 201(b)(1) which requires a certified fiscal plan to “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act,” the Oversight Board offered a feeble defense, playing on words and dismissing creditors as wanting a larger piece of the pie. The Board directly rebuked PROMESA’s language and Congress’ legislative intent saying (Apr 25), “As you know, Congress deployed the word ‘respect’ while consciously twice declining to use ‘comply with’. ‘Respect’ provides flexibility and is different than the words Congress used for other fiscal plan requirements, such as to ‘ensure’ the funding of essential public services.” In essence the Board takes a position that they can ignore Section 201(b)(1)(N) entirely because they perceive a semantic difference between the words ‘respect the law’ and ‘comply with the law’. The Board’s disingenuous word play reflects its belief that it has the ‘flexibility’ to ignore laws. To ensure the Board is complying with PROMESA and refraining from hurting bondholders, the Ad Hoc Group of Puerto Rico General Obligation Bondholders is urging (Apr 28) the Senate Banking Committee members to use tools at their disposal including hearings.

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PREPA Receives Bondholder Consensus… The Federal Board certified a new Restructuring Support Agree-ment to restructure $8.9 billion in debt through new bonds with longer maturities.  While various terms were altered to provide additional savings for the Island, investors will still be able to exchange their bonds for 85 cents on the dollar, far more than where the bonds have been trading. The new deal which maintains the 15% haircut extends maturities to 2047, and removes the investment grade rating as a condition of closing the deal. In the new deal the parties would operate under Title VI of PROMESA whereby all the non-insured bondholders would be required to accept new securitized bonds at 85 cents on the dollar; whereas the pre-vious deal allowed uninsured PREPA bondholders to hold onto original PREPA bonds. Bondholders could choose between current interest rate bonds with a 4.75% interest rate and capital appreciation (Zero Coupon) bonds with a 5.5% yield to maturity.

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Chicago Schools Seek Court Help... A judge dealt a blow to the schools’ lawsuit against Governor Rauner and the state board of education. The suit challenged funding practices that have made the district the only one in Illinois that pays most of its pension costs. Judge Valderrama rejected the board’s assertion that the funding system is discriminatory to the heavily minority student district, giving Chicago until May 26 to file an amended complaint. Escalating pension bills are the crux of the financial squeeze threatening the solvency of the school system. For years it has been draining reserves shortchanging its pensions and borrowing to pay bills. Its retirement system is short by $9.6 billion; this year’s required payment will eat up 13% of the district’s budget. Chicago covers a greater share of teachers’ pension contribu-tions than the rest of Illinois’s schools, which received more state aid. For the year started July 1, Chicago will spend $1,891 per student on teacher pensions, while other districts spend $86, according to Chicago officials. Illinois kicks in about $32 per Chicago student, while other districts get $2,437. The lawsuit came after Rauner vetoed $215 million of aid for Chicago’s schools in December, though it wouldn’t have received the money unless the state enacted pension reforms, something it’s been unable to do. Illinois has more than $129 billion of unfunded retirement liabilities and lawmakers haven’t even been able to agree on a budget in almost two years.

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