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Muni Week Review / Preview 8/10/2017

Thursday, Aug 10, 2017

PUERTO RICO UPDATE

Commonwealth vs COFINA Dispute Over Sales Tax Revenue To Be Resolved By Dec. 15… Judge Reserves Ruling on Receiver For Puerto Rico Electric Utility… Hedge Fund Files Lawsuit Claims Puerto Rico Federal Oversight Board Is Unconstitutional Therefore Its Actions Are Not Valid... Defiant Governor Of Puerto Rico Misrepresents Puerto Rico Liquidity… Balks at Reform… Keeps Public Information Secret…

Commonwealth vs COFINA Dispute Over Sales Tax Revenue To Be Resolved By Dec. 15…
U.S. District Judge Laura Taylor Swain, presiding over Puerto Rico’s massive bankruptcy, approved an agreement on Wednesday aimed at resolving the Commonwealth vs COFINA bondholders competing claims on the U.S. territory’s sales tax revenue by year’s end. Judge Swain approved the recently struck settlement between the Government and sales tax bondholders that seeks to resolve the dispute over COFINA’s pledged funds. The dispute about who is entitled to the more than $700 million a year in sales tax money that guarantees payment of COFINA bonds is one of the main stumbling blocks facing the Puerto Rico Government’s and Federal Oversight Board’s lawless debt restructuring efforts. The agreed stipulation establishes a procedure whereby the parties will mediate the controversies related to the Commonwealth/COFINA dispute in a bid to reach a consensual court ordered resolution by Dec. 15. As part of the procedure, agents will be appointed to represent the particular interests of COFINA and the Central Government. The Stipulation presented by the fiscal Board’s lawyers states that if the pledged sales tax money is not available to the Commonwealth by year’s end, the Government would face serious cash flow problems after Dec. 15, absent additional fiscal adjustments or financing. If the parties cannot resolve the dispute the judge will reorder a ruling on Dec 15. The Government’s Claim centers on the fact that the Commonwealth’s fiscal year is July 1 to June 30 and bondholder debt service must be funded before the Commonwealth’s General Fund receives any sales tax revenue. The Commonwealth historically begins to receive the sales tax revenue from the first week in January to June 30. The Government claims they could run out of money by December 15 and therefore may have to borrow money from COFINA. The Bondholders’ Claim states they have a priority Statutory Lien on a dedicated portion of sales tax revenue pledged to pay bondholders prior to the General Fund receiving any sales tax revenue. The law also states these priority funds are not available resources to the Commonwealth.

Judge Reserves Ruling on Receiver For Puerto Rico Electric Utility… Federal Judge Laura Taylor Swain reserved her decision Wednesday on whether the Puerto Rico Electric Power Authority (PREPA) should be placed under receivership and increase rates to cover debt service and other obligations. The Ad Hoc Group of PREPA bondholders, National Public Finance, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc., which hold about 65% of the public utility’s $8.3 billion debt, had asked Judge Swain last month to lift PROMESA’s stay on litigation so they could sue in court to have PREPA put into receivership. The bondholders argue that PREPA’s trust agreement requires the utility to set its rates high enough to pay its debt. The creditors said that since the only asset the public corporation has is its revenue, adequate protection is not possible. The bondholder attorney Gregory Horowitz noted that PREPA and the Financial Oversight & Management Board were conflicted because while the utility should impose rates that can cover its debt, the Fiscal Board wants electric bills kept lower. The Board has studies suggesting that raising rates will negatively impact the economy and increase outmigration. Martin Bienenstock, a lawyer who advises the Fiscal Board, said granting the bondholders relief from the stay would be tantamount to giving up exclusive jurisdiction over PREPA and its revenues. “Are you going to relinquish government jurisdiction over the revenue stream of the only electric utility on the Island?” he asked. Bienenstock also rejected claims by the PREPA creditor group that a receiver is needed because the utility is and historically has been mismanaged. Although he recognized that under Chapter 11 gross mismanagement is ground for the appointment of a receiver, that is not the case with Title III of PROMESA. The PREPA bondholder attorney stated, “If PREPA’s strong revenue pledge isn’t enforceable, then no revenue pledge in the U.S. is enforceable.”

Hedge Fund Files Lawsuit Claims Puerto Rico Federal Oversight Board Is Unconstitutional Therefore Its Actions Are Not Valid... Instead of encouraging fair, transparent and open negotiations with creditors in an effort to reach consensual debt restructuring agreements, the Federal Oversight Board and Puerto Rico have followed a policy of placing almost every government entity into Title III bankruptcy. Instead of creating a strong fiscal policy that includes real fiscal consolidation and a subsequent return to sound finances, Puerto Rico has chosen to violate creditors’ rights. Bondholder hedge fund Aurelius Capital Management and a Puerto Rico labor union have filed separate lawsuits that question the public accountability and validity of the Federal Oversight Board. None of the seven Federal Board members were required to pass the public scrutiny of a Senate confirmation process. The suits allege the Board was installed in violation of the U.S. Constitution’s Appointments Clause that governs federal principal officers. The Federal Oversight Board has worked in concert with the Island’s politicians, who have been maligned for hiding the Island’s finances from the public. Bondholders allege Fiscal Plans and the Puerto Rico budget certified by the Federal Oversight Board are a gross violation not only of PROMESA, but also the Constitutions of both the U.S. and Puerto Rico. Federal Oversight Board actions take Puerto Rico further away from PROMESA’s goal of capital access and seriously encumber the Island’s growth prospects. The outcome desired by bondholders is to dismiss the Federal Oversight Board and its Title III petitions. The lawsuit may eventually find its way to the U.S. Supreme Court. Theodore B. Olson, lead attorney for Aurelius is a well-respected constitutional scholar and former Solicitor General under President George W. Bush. The Washington DC Board in the late 1990’s was selected by the President and ratified by the Senate. In fact since the Constitution was ratified every federally appointed territorial governor, including in Puerto Rico prior to 1948, when elections began, has been nominated by the President and confirmed by the Senate. Mr. Olson is well qualified for the task as he has been involved in over 60 Supreme Court cases.

Defiant Governor Of Puerto Rico Misrepresents Puerto Rico Liquidity… Balks at Reform… Keeps Public Info Secret…The Puerto Rico Government and The Federal Oversight Board originally misrepresented to bondholders and the Court that the Commonwealth would have $291 million of liquidity by June 30 and could possibly be out of cash by September. Now given its refusal to pay debt, Puerto Rico has $1.8 billion in cash, which wasn’t previously accounted for in evidence presented in any court filings. The $1.8 billion dramatically exceeds the $291 million estimated in the Fiscal Plan certified by the Board. Instead of paying bondholders with the $1.8 billion in liquidity Governor Rosselló wrote to President Trump and House Speaker Paul Ryan requesting that the Federal Oversight Board program requiring two-day a month government employee furlough be put on hold for six months. Governor Rosselló has said, “Whatever the consequences, we are going to oppose government employee furloughs”. When asked, would that include going to jail?, the Governor responded, “Yes, it includes that.” The Governor is also opposed to paying bondholders and a Central Treasury Manager that the Federal Oversight Board is considering. The Governor refuses to make public the budget presented on April 30 to the Oversight Board. “Once again, the Governor insists on efforts to keep the truth secret. In all his efforts during these seven months as Governor we have seen only one thing, secrets,” stated Puerto Rico Senator Eduardo Bhatia.

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