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Muni Week Review / Preview 6/28/2017

Wednesday, Jun 28, 2017

PUERTO RICO UPDATE

Puerto Rico Oversight Board Defies Chairman Of Congressional Committee Vetoes Electric Utility (PREPA) Restructuring Deal… Bond Insurers Sue Puerto Rico Board Asks Judge To Compel Approval of PREPA Deal…
Pataki; Trump Should Consider Replacing Puerto Rico Board…

Puerto Rico Oversight Board Defies Chairman Of Congressional Committee…

Puerto Rico’s Oversight Board defied the Chairman (Rep. Robert Bishop) of the Congressional Committee of Natural Resources, which oversees Puerto Rico affairs and announced Tuesday night it rejected the proposed debt-restructuring agreement with creditors of the Electric Power Authority (PREPA). By closing the door to a deal nearly three years in the making they have defied Chairman Bishop who previously stated a veto was outside their authority. The deal was agreed to in December 2015 and amended in PREPA’S favor in April 2017. The $9 billion PREPA deal was favored by U.S. Congress, approved by two PR Governors, PR Legislature, PR Fiscal and Financial Advisory Authority and bondholders, ignoring the approvals the Oversight Board rejected the deal.

The power utility creditors and Governor Rosello’s administration agreed in April to modify an existing agreement reached in 2015. In the new deal, creditors agreed to a 15% cut to bondholders, but extended maturities until 2047. The new agreement would have saved $2.2 billion in debt service costs over the next five years.

Chairman of the Congressional Committee that oversees PR Affairs Congressman Bishop in a letter dated June 15, 2017 stated: The ongoing actions taken by the Oversight Board towards the PREPA agreement, including the development of Fiscal Plan and subjecting the agreement thereto, are outside the scope of the Oversight Board’s powers and a violation of PROMESA.

The Chairman continued to say, if the Oversight Board is seeking to circumvent the requirements of PROMESA and asserting a right to review the PREPA agreement under Section 207; such assertion is wrong. While Section 207 does authorize review for the issuance of new debt, it does not allow for the review of debt pre-approved by the statute, of which the debt issuance contemplated by the PREPA agreement is. Congress could have provided oversight functions of preexisting agreements, but chose not to in order to promote consensual debt resolutions.

Congressman Bishop concluded with; To maintain an open and transparent line of communication regarding the status of Puerto Rico’s financial affairs, I ask that any decision made in the forthcoming days by the Oversight Board, including those not related to the PREPA agreement, be explained in writing and transmitted to this Committee. I hope the utmost care and deliberation are being taken into consideration by all Oversight Board Members as they pertain to the future of the island’s power generation, and the adherence to the explicit text and statutory intent of PROMESA.

Bond Insurers Sue Puerto Rico Board To Compel Approval of PREPA Deal…

In opposition to the Oversight Board rejection of the PREPA deal, bond insurers sought an order in U.S. District Court to compel the Oversight Board to certify the PREPA agreement under Title VI of the federal PROMESA Law. 

Insurers, National Public Finance Guarantee Corp and Assured Guaranty are seeking a declaration that PREPA restructuring agreement is grandfathered in under PROMESA.

Congress intended to preserve the PREPA Restructuring deal approved prior to the enactment of the PROMESA Law. Under Congress directive the Board only had the authority to make a ministerial or non-discretion approval. The Board was told by Chairman Bishop they do not have the authority to reject the PREPA Restructuring deal approved prior to the Board being appointed.

The bond insurers have said they are willing to discuss extending the negotiations and discuss a loan to pay debt service due July 1, the Oversight Board has not responded.

GMS believes bond insurers MBIA and AGO have a solid case. Congress granted the PREPA deal special status as a “Pre-Existing Voluntary Agreement” under PROMESA, with no need for evaluation by the Oversight Board. The condemnation of the Board’s actions by Chairman Bishop, who oversaw the drafting of PROMESA and therefore can speak with authority about the spirit and intent of the law, should carry significant weight in the court case.

The Oversight Board through its rejection of the PREPA deal may set in motion events that could put their positions in jeopardy. In addition to Bishop, US Sen. Tom Cotton (R-AR) and Tom Tillis (R-NC) have criticized the Board for taking actions not in compliance with PROMESA. While the Board can only be removed by the President and only for cause, their latest action could serve as a tipping point that could cause some members of Congress to begin to push for such a removal.

If the insurers lose their litigation to compel the Board to accept the plan the debt will enter Title III. It appears the Board wants the insurers to also accept a 15% haircut similar to all bondholders. The insurers were not subject to a haircut because they were willing to supply bridge loans and debt service reserves along with assistance with infrastructure loans and liquidity.

It has become quite obvious it will be difficult to move forward with people who agreed to a PREPA deal and then reneged... not once but twice. It now appears the judge, who in concert with the law, will decide bondholder recoveries. Nat’l Pub. Fin. Guarantee and Assured Guaranty have said they are determined to take, as bond insurers, necessary actions to protect bondholder rights. Retail bondholders of Puerto Rico bonds are fortunate to have their rights protected by experienced prominent lawyers representing bond insurers, major institutional investors, bond funds and hedge funds willing to spend hundreds of millions of dollars to protect bondholders rights.

Pataki; Trump Should Consider Replacing Puerto Rico Board…(By Bloomberg) 

Former New York Governor George Pataki, who is advising a group of Puerto Rico bondholders, said President Donald Trump should consider replacing the members of the Federal Oversight Board for failing to reach debt-cutting agreements with investors.

In an interview with Bloomberg Television, Pataki criticized the “Federally, Obama-appointed” Control Board, which he said has only served as an impediment to striking consensual deals with creditors. His comments followed the Boards decision Tuesday to veto the long-standing agreement the electric utility reached with creditors.

“The Control Board now has killed one deal that was done, another deal with GO bondholders that was very close and has thrown Puerto Rico into bankruptcy. The lawyers get rich, the bondholders don’t get paid,” Governor Pataki said. “Trump should look at that Control Board and consider removing its members.”

The Board was created by a bipartisan emergency law enacted last year that allowed Puerto Rico to restructure its $70 billion debt. President Obama picked four Republicans to sit on the panel and three Democrats, after reviewing a list of candidates provided by both parties. 

Jose Luis Cedeno, a spokesman for the Board, declined to comment for this story.

Puerto Rico Court Hearing…

Federal Judge Laura Swain will hold an omnibus hearing related to Puerto Rico bankruptcy cases June 28. The next Puerto Rico update will address what took place at the hearing.

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