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Muni Week Review / Preview 6/30/2017

Friday, Jun 30, 2017

PUERTO RICO UPDATE

Oversight Board Refuses Bondholders Offer to Prevent Default… Governor Seeks to Push PREPA Into Title III Bankruptcy… Bondholders Will Vigorously Seek to Enforce Bondholder Rights… PR Bankruptcy Judge Rules on Procedures, Insists on Mediation…

Puerto Rico’s Federal Oversight Board voted to push the government’s electric utility into Title III bankruptcy after a longstanding debt restructuring agreement with creditors was rejected. The Board chairman has not yet formalized the Board’s Title III authorization. The announcement follows the decision by the Board to reject a pact that the power company, PREPA, first struck with creditors in late 2015, saying it failed to protect residents from the risk of burdensome electricity bills that could delay the Island’s economic turnaround.

The key terms of the deal, especially bondholder recovery of 85 cents on the dollar, were agreed to before U.S. rescue legislation PROMESA was enacted. PROMESA gave the territory the authority to file for a tailor-made type of bankruptcy, known as Title III, giving it leverage with creditors.

PREPA Bondholder Release: The Puerto Rico Electric Power Authority (PREPA) Bondholder Group announced that prior to the expiration of the PREPA Restructuring Support Agreement (RSA), PREPA refused its offer of approximately $170 million of additional liquidity. This incremental financing, along with the $280 million that the RSA parties had already agreed to lend, would have fully funded PREPA's July 1, 2017 coupon payment and allowed PREPA to honor its obligations and avoid lawsuits. In order to give PREPA time to evaluate this proposal, the bondholders also offered to extend the RSA to June 30, 2017. Following dismissal of these offers, the PREPA Bondholder Group recognizes that it is likely to file for Title III relief. The release states, “While we expect negotiations with the Oversight Board and Puerto Rico to continue, the Group stands ready to defend and enforce its rights as necessary.” Stephen Spencer, financial advisor to the PREPA Bondholder Group, states, “We are disappointed that PREPA has rejected our offer of additional liquidity, which reflected our group's ongoing commitment to finding a collective solution to spur the revitalization of PREPA. We continue to believe the RSA represents the best path forward for PREPA, and remain open to working with PREPA and the Oversight Board to implement our deal.”

MBIA and Assured Guaranty have sued Puerto Rico’s Federal Oversight Board, seeking to prevent it from blocking the long stalled deal to restructure the government power company’s $9 billion debt. Nat’l Pub. Fin. Guarantee and Assured, which hold or insure more than $2.3 billion of PREPA bonds, are asking the court to designate the PREPA restructuring pact a pre-existing voluntary agreement and to declare that the Board has acted unlawfully by rejecting the deal. 

Assured Guaranty Statement: “In spite of Congress’ clear intent to preserve the PREPA agreement, the Oversight Board has exceeded the scope of its authority by second-guessing a consensual restructuring ratified by the U.S. Congress, PREPA, two Commonwealth administrations and the creditors by arbitrarily failing to issue the ministerial certification approving the PREPA agreement required under Title VI of PROMESA”.

President of Assured Guaranty: “This is yet another example of a rogue Oversight Board that continues to violate sections of the law “PROMESA”, which in this case clearly deemed the PREPA agreement outside the scope of Oversight Board renegotiation. The clear intent of PROMESA was to restore fiscal responsibility, credibility and access to capital markets, while arriving at consensual resolutions with bondholders where possible and providing a safe-harbor for this lone existing deal (PREPA).  The Oversight Board is aggressively attempting instead to renege on as many obligations in Puerto Rico as it can. Assured Guaranty will vigorously exercise its rights and remedies as guarantor of PREPA Special Revenue bonds, which benefit from special protections under bankruptcy law.”

The U.S. House Committee on Natural Resources
oversees Puerto Rico affairs. Its chairman Rob Bishop, an author of PROMESA law, issued the following statement. “Congress provided a path to stability in Puerto Rico. Yesterday, the Board deviated from that plan. The Board’s rejection of this agreement, with no clear path forward, poses more questions as to the Island’s economic future and Congress will want answers to those questions.” Chairman Bishop previously stated the Board rejecting this plan is beyond the Oversight Board’s scope of authority. The plan was agreed to by all included parties prior to the law PROMESA and prior to the Board’s appointment.

Puerto Rico Administration Stated Today Friday June 30…“We reiterate our desire to continue good faith negotiations with the PREPA creditors with the hope of achieving consensual negotiations in an orderly process in the Title III.”

Summary

It appears the market does not foresee uninsured bondholders taking a materially larger haircut than 15%. The bid on blocks ($1 million plus) of PREPA bonds was around 61 after the Board voted to push PREPA into Title III, which the chairman has yet to approve. It is important to note the Board’s latest proposal was not seeking greater haircuts from uninsured bondholders. The Board wants to extract a 15% haircut from all creditors including bond insurers. They also want to cap electric rates which would weaken bondholder security and lengthen maturity 10 years to 2057 with no fixed amortization schedule.

Puerto Rico Bankruptcy Judge Rules on Key Procedures

U.S. District Judge Laura Swain retained control over deciding on the validity of the Island's Sales Tax bonds and diminished the Federal Oversight Board’s role in the COFINA case at a hearing Wednesday. Mutual fund groups had called on the judge to allow the Puerto Rico Supreme Court to issue a ruling on the validity of the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. They said she should lift the stay on a case that was deciding that matter and allow the Puerto Rico Supreme Court to rule on whether the legislation that established COFINA violated Puerto Rico’s constitution. Oversight Board lawyers stated, “Absent a ruling that the COFINA statute is unconstitutional, the Commonwealth will have to revise its fiscal plan and current budget within the next few months to come up with funding that it currently assumes will come from COFINA’s revenues.” The Title III case focuses on possible restructuring of $17.9 billion of COFINA debt and restructuring $13 billion of Puerto Rico general obligations. A key issue in the case is whether COFINA revenue can be diverted from bondholder payments. Speaking for the COFINA bondholders, attorneys told Swain that “Time is of the essence.” Puerto Rico’s government claims the government will run out of money in November unless it gets access to the sales tax revenues.  Swain denied the motion saying that the lawyer’s arguments relied on speculative assumptions. The Puerto Rico Supreme Court is unlikely to accept a question on certification on the constitutional question, the case is also Federal in scope, she said. Bondholder’s holding Sales Tax bonds haven’t shown that they are likely to be harmed significantly by allowing the stay to continue, Swain said. Her point is valid since the funds are in escrow and revenue continues to flow to the trustee. She said she could handle the topic when she wanted to do so. The Oversight Board denied it wanted to take COFINA’s assets.

Swain Insists on Mediation: Judge Swain maintained control of nerve-wracking controversies related to the Island’s debt negotiations. Swain expressed satisfaction with the strong support that the parties involved in the case gave to her mediation proposal. Mediation will help the successful solution of the complex issues in Puerto Rico cases under Title III of PROMESA. In a period of approximately six hours, Swain handled almost a dozen issues before her consideration, urging lawyers to be brief in their approaches and warning the parties to agree or else she would make a decision. It also provided the opportunity for lawyers from the different parties to discuss with their peers and rearticulate premises or claims they may want to be considered.

Historical Initiative:  Prior to addressing the contentious issues set out in the agenda for the day, Swain introduced Judge Dein, Massachusetts District Judge, who will assist Swain in the decision making of Title III cases. She also asked the lead judge of the Puerto Rico Mediation Committee, Barbara Houser, to explain the purpose of mediation. Houser underscored the interest and commitment of the U.S. Judicial Conference to provide a successful and as expeditiously as possible solution to the financial and economic crisis in Puerto Rico. Houser then urged about one hundred lawyers in attendance in the Puerto Rico Federal Court and others in New York to seriously consider mediation as an alternative, while indicating that the Judges of the mediation committee were selected for having competencies and specific expertise, making them “exceptionally qualified” for the oncoming mediation process. Although the mediation mechanism is used in cases of bankruptcy, the committee created by Swain, with the support of the Judicial Conference, is a novel proposal. This is because the committee that would take care of the situation on the Island is composed of judges, whose history has marked in several aspects the jurisprudences of U.S. bankruptcy and have intervened in hundreds of cases of high complexity. The committee is comprised of Third Trial Circuit Judge Thomas Ambro, South District Senior Judge in Texas, Nancy Atlas, California East Bankruptcy Judge Christopher Klein, and Senior Judge of the Southern District of New York and Puerto Rico, Victor Marrero.

Beneficial Alternative: According to Houser, mediation is the “ideal” mechanism to address the various issues that will arise in Title III cases of Puerto Rico. It will help resolve “complex” and “novel” issues never before raised in court. It will also streamline the debt readjustment process, while saving time and money for the parties and especially the debtor. According to the judge, who chairs the bankruptcy court in the Northern District of Texas, cases dealing with large insolvency cases “are always costly and Title III cases will be no exception.” Houser argued that when parties come to mediation acting in good faith, “common ground is often identified,” which would be in favor of all the parties. “A negotiated resolution eliminates the uncertainty associated with litigation,” Houser added, reminding litigation becomes a risk to both parties. Houser summoned all parties to an organizational meeting on July 12 in New York. Houser’s exhortation to lawyers to employ mediation was welcomed by all parties.

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