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Muni Week Review / Preview 7/21/2017

Friday, Jul 21, 2017

PUERTO RICO UPDATE

Bondholders Claim The United States Of America Is Accountable For Puerto Rico Oversight Board Actions… Creditors Demand A Receiver As PREPA Title III Filing Violates The PROMESA Law… Federal Oversight Board Perpetuates Puerto Rico Problems… Puerto Rico Fiscal 2017 Revenues Exceed All Estimates And Prior Year Revenues…

Bondholders Claim the United States is Accountable For Puerto Rico Federal Oversight Board Actions…
Bondholders claim Puerto Rico’s Federal Oversight Board approved legislation on June 30, 2017 that violates the Takings Clause of the Fifth Amendment to the United States Constitution. On July 19 Employee Retirement System (ERS) Secured Creditors commenced an action in the Court of Federal Claims against the United States of America to obtain just compensation for the taking of property affected by Puerto Rico legislation which confiscates bondholders’ constitutionally protected property interests in Pledged Property. The new law bypasses the ERS bond resolution and requires employers to make increased employer contributions to the Commonwealth General Fund instead of bondholders. The new law orders the ERS to sell its assets and to transfer the net cash proceeds into the Puerto Rico Treasury Secretary’s account as part of the General Fund for fiscal year 2017-2018 to make payments to pensioners. The ERS bonds are secured by collateral that includes all employer contributions from Puerto Rico government employers. ERS bondholders claim if the new law is allowed, Congress authorized Puerto Rico to seize cash that belonged to bondholders, violating the U.S. Constitution. Bondholders claim “constitutionally-protected property interest in the form of valid and enforceable liens on Pledged Property” entitles them to just compensation. The Oversight Board, working with the Commonwealth, designed the new law and directed the Commonwealth to enact it and adopted it on behalf of the Governor. Bondholders allege, the Board is a federal entity for constitutional purposes pursuant to the analysis of the United States Supreme Court. The foundation of the original ERS bond transaction was an extensive security package necessary to protect holders of ERS bonds. ERS collateral pledged to support the ERS bonds was sufficient to service the interest on the bonds for the life of the bond issue and to repay the principal amount of the bonds in full at maturity. Without this security package it would have been impossible for the ERS to sell the bonds in the first place. Because the Oversight Board is clearly a part of the U.S. Federal Government its actions are the actions of the United States Government. Thus, when the Oversight Board takes actions to confiscate private property such as the multi-billion dollar collateral package securing the ERS bonds it is an unlawful, compensable taking by the United States Government. The bondholder claim is founded on the Fifth Amendment to the United States Constitution, which provides in pertinent part that “private property shall not be taken for public use, without just compensation.” The action seeks to bring the Federal Board’s alleged violations of the U.S. Constitution under the spotlight of the United States Supreme Court. All Puerto Rico secured bonds have moved up as much as 20% since the claim was made.

Bondholders and Bond Insurers Claim PREPA Title III Filing Violates PROMESA… Congress explicitly separated PREPA’s restructuring agreement from the Commonwealth by exempting the PREPA restructuring agreement from PROMESA. The U.S. Congress specifically precluded substantive consolidation of Title III cases, and Congress specifically condemned transfers from one debtor to another, PREPA bondholders say. Bondholders owning 65% of PREPA bonds exercised their statutory right to appoint a receiver for PREPA. A receiver would ensure that a collateral package produces net revenues in amounts sufficient to pay the total debt service the original lien granted to PREPA bondholders not the 85% of face value agreed to in the deal the Board rejected. Puerto Rico law and the original Trust Agreement require PREPA to set its rates and charges at amounts sufficient to enable PREPA to pay 100% of its debts. PREPA had not sought an increase in its base rates from the 1980’s through 2015, and its current rate is inadequate to generate sufficient revenues to pay its debt. PREPA estimates that its rates from fiscal year 2011 to fiscal year 2015 were 13% to 25% lower than they should have been. As a result, PREPA defaulted on its payment of principal and interest that was due on July 3, 2017. Original bond documents provide creditors with the equivalent of a full recourse obligation that is secured by a mortgage on its physical assets. PREPA pledged its revenues, and covenanted that it would maintain rates at levels sufficient to cover certain operating expenses and debt service on the bonds. Bond documents provide for the automatic appointment of a receiver in the event that PREPA fails to meet its obligations. For over three years bondholders worked tirelessly with two different governors to address PREPA’s cash flow issues and establish a pathway for long-term reform. As the negotiations slowly progressed, bondholders and insurers advanced hundreds of millions of dollars of new liquidity to PREPA to avoid payment defaults. Puerto Rico’s electric utility, one of the largest U.S. utilities and the Island’s monopoly power provider, is a flashpoint in Puerto Rico’s financial crisis. Congress had blessed PREPA’s voluntary restructuring as a model for consensual settlements of Puerto Rico’s other debts. PREPA’s bankruptcy filing has roiled some members of Congress. The judge may decide Puerto Rico’s fate at an August 9 court hearing.

Federal Board Perpetuates Problems, Forbes July 20… Puerto Rico’s Federal Board has authority to approve Puerto Rico’s budgets but its actions during June raise some questions about how seriously they take this responsibility or how much they understand budgeting games. Puerto Rico’s budget is not transparent. The Federal Board approved budget presented only four exhibits on its website which collectively represent the fiscal year (FY) 2018 budget. Unfortunately, the exhibits are entirely in Spanish despite Puerto Rico’s past representations to investors in both Spanish and English. Budget numbers lacked supporting detail and how revenue numbers will be achieved. Many observers thought that when the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was passed last year that one of its favorable outcomes would be more accurate Commonwealth budgeting. PROMESA gives the Financial and Oversight Management Board (FOMB), whose members took office two months after the law was passed, the right to approve Puerto Rico’s budgets. Transparent, understandable and realistic budget documents are essential to every sub-sovereign government in the US. This is especially the case with Puerto Rico, which not only is trying to regain access to credit markets but is attempting to satisfy a diverse group of stakeholders, including creditors and its own citizens. The collective actions of Puerto Rico’s leaders and the Oversight Board fail to indicate that they understand this fact.

Puerto Rico Fiscal 2017 Revenues Exceed Estimates & Prior Year… Puerto Rico’s fiscal year 2017 ended June 30 and sales tax collections totaled $2.547 billion, or $170.5 million above the previous year. COFINA sales tax bond debt service for the period was approximately $700 million. The Commonwealth received $9.334 billion in net revenues during fiscal year 2017 exceeding the government’s 2017 projections by $234.9 million and prior year revenues by $160 million or 1.7% more. 

If you have any questions or desire updated information contact your GMS Account Executive.

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