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Muni Week Review / Preview 8/21/2017

Monday, Aug 21, 2017

U.S. ATTORNEY GENERAL TO ADDRESS BONDHOLDER LAWSUIT FILED AGAINST THE UNITED STATES OF AMERICA ON CONSTITUTIONALITY OF PUERTO RICO FEDERAL BONDHOLDERS DEMAND INTEREST PAYMENTS…BONDHOLDERS LEGAL HEAVYWEIGHTS BRING PUERTO RICO FEDERAL BOARD’S ILLEGAL ACTIONS TO CENTER STAGE…CHICAGO PLANS DEDICATED REVENUE BONDS FOR IMPROVED CAPITAL ACCESS… ILLINOIS LAWMAKERS PREP FOR EDUCATION BILL VOTE…

U.S. Attorney General To Address Lawsuit Filed Against The USA On Constitutionality Of Puerto Rico Federal Control Board… The Attorney General of the United States will address Puerto Rico bondholders’ challenge to the constitutionality of PROMESA. On August 7, in separate com-plaints, General Obligation (GO) bondholder Aure-lius Investments LLC and a Puerto Rico Electric Workers’ Union UTIER asked the U.S. District Court of Puerto Rico to dismiss all Puerto Rico’s Title III petitions on the grounds that the Federal Board in charge of Puerto Rico’s finances is unconstitutional. Former U.S. Solicitor General and con-stitutional scholar Ted Olson on behalf of Aurelius Capital Management will argue that the creation of the Fiscal Control Board violates the Appointment Clause and separation of powers of the United States Constitution. To ensure public accountability federal officers must be appointed by the President with the advice and consent of the U.S. Senate. Puerto Rico Federal Board members have not been confirmed by the Senate. They were hand-picked by individual members of Congress from an intri-cate system of secret lists. None of the Board members ever faced Senate confirmation, which is a constitutional defect of PROMESA that bond-holders pointed out. The Solicitor General of the United States is responsible for determining whether the United States should defend the consti-tutionality of an Act of Congress. On August 15, the Office of the Attorney General of the United States Department of Justice acknowledged receipt of constitutional challenges to PROMESA. The United States will express its opinion on the consti-tutionality of PROMESA by October 6. The Federal Board’s constitutionality will be addressed at a November 15 District Court hearing.

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Puerto Rico GO Bondholders Demand Interest Payments… Puerto Rico’s cash reserve of $1.8 billion greatly exceeds annual interest owed on constitutional debt ($1.1 billion/fiscal 2018), the Ad Hoc Group of GO bondholders has asked the Federal Board and Puerto Rico government to resume interest payments on GO debt. The Com-monwealth has amassed $1.5 billion more than expected in the Federal Board Certified Fiscal Plan. Puerto Rico’s refusal to pay constitutional bond-holders under the cover of an illegal moratorium while continuing to collect record tax revenues led to the large cash reserve. Bondholders demand the excess cash as Puerto Rico to date has missed $2.4 billion GO bond debt service. The Commonwealth has surpassed revenue and liquidity estimates for over a year, fiscal 2017 and year to date fiscal 2018 revenue collections outperformed both budget and prior year. “We beat the expectations once already, and I can commit that we will beat those expecta-tions again,” Puerto Rico Rep to Federal Board stated this month drawing attention to the overly conservative projections of Federal Board Certified Fiscal Plan that contradicts Puerto Rico’s robust revenues. In all, the Commonwealth’s cash position has improved by $2.7 billion. In addition to cash reserves of $1.8 billion, the Commonwealth paid down accounts payable of $1.2 billion. PROMESA was not enacted so the Commonwealth could pay down lower-priority creditors on the backs of bondholders. Rather than paying Constitutional debt, the Federal Board has willfully allowed Puerto Rico to pay non-debt expenses. Puerto Rico has made no attempt to separate essential services from non-essential. Availability of excess cash of $1.5 billion belies the Commonwealth’s illegal moratorium on payment of constitutional debt extended to

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From Puerto Rico Courtrooms… The Federal Board aspires for a consensual resolution of the dispute over pledged sales and use tax through independent agents chosen by the Federal Board from creditor nominations. Mutual Funds hold-ing $4 billion COFINA sales tax bonds want the PR Supreme Court to rule on whether pledged sales tax are available resources of the Com-monwealth, the Oversight Board is opposed to going to the PR Supreme Court. Judge Swain has established a mediation team of sitting Federal judges to oversee voluntary mediation. Absent consen-sus, the Court is expected to adjudicate the disputed COFINA funds issue by November 1. According to a Caribbean business article a source seemed to infer a settlement involving COFINA, similar to pre-viously discussed scenarios could see bondholder interest payments protected for a number of years while principal payments are de-ferred. Statutory lien protections, ‘special revenue’ exemptions from bankruptcy stay and validity of “clawbacks” are pivotal issues in Highways and Transportation Authority (HTA) bondholders claims. At HTA’s first bankruptcy hearing, Paeje Investments LLC, an owner of $65 million uninsured PR HTA bonds claimed unlawful diversion of toll revenues has led to ‘destruc-tion of its lien rights, the taking of its collateral and the impairment of its bonds’. The same has been echoed by bond insurers Assured Guaranty, AMBAC and National. Briefing and discovery has been scheduled through August 8 on the HTA litigation. PR bondholders are closely following every move of the Court; the next District Court Omnibus Hearing is June 28.December 31, 2017 by Governor Rosselló. The cash reserves underscores that the Federal Board Certified Fiscal Plan is far from reality. Creditors say they will not accept projections based on opaque and unreliable data. Bondholders have asked the Federal Board to disclose data and projections behind the Common-wealth’s Fiscal Plan which are irreconcilable with the Commonwealth’s recent disclosures. Puerto Rico has built a massive cash reserve by refusing to pay bondholders and continuing to hide data.

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PR Bondholders Legal Heavyweights Bring The Federal Board’s Illegal Actions To Center Stage… Recognition of the Federal Board’s willful violation of PROMESA and Puerto Rico law is being noticed. The Federal Board’s disregard for the rule of the law was obvious when it directed 94% of Puerto Rico revenue to non-debt expenses, elevating these above the rights of bondholders including those that own constitutionally protected and dedicated revenue pledges such as COFINA sales and use tax. Because PROMESA, a law enacted by Congress explicitly calls to ‘respect the lawful priorities or lawful liens’, mutual funds, bond insurers, GO and COFINA bondholders jointly wrote to the Federal Board, “As certified, the Fiscal Plan presumes that all non-debt expenses are paid before any payments are made on debt service, the oversight board and the government of Puerto Rico have never explained the legal basis for such presumptions in the Fiscal Plan. It is not plausible that 100% of the approx. $18 billion in average annual expenses projected under the Fiscal Plan are for essential services. The persistent refusal of the Federal Board and Puerto Rico to address this obvious question is telling.” Without fulfilling the prerequisites for entering Title III bankruptcy proceedings and ignoring bondholders’ appeals for information or discussion, the Federal Board authorized the largest Puerto Rico debt issuers to file for bankruptcy like Title III proceedings. In June Senator Tom Cotton pressed for an answer from the Federal Board, “Is it the Opinion of the Federal Board that the servicing of Puerto Rico lawful debt is a non-essential expense.” Soon after, the Federal Board rejected  PREPA’s restructuring agreement which was grandfathered under PROMESA inviting rebuke from Con-gressman Rob Bishop, “The Oversight Board’s dilatory tactics run counter to the plain language of PROMESA.” The top notch and very  expensive legal teams of bond insurers and major bondholders are fighting for bondholder rights each day in the U.S. District Court concurrent with court-led mediations. In July, bondholders commenced legal action against the USA making the United States account-able for the Federal Board’s violation of the U.S. Constitution Takings Clause and Contract Clause. Amid legal rights claimed by bondholders, the Federal Board has sought an investigation of the causes of Puerto Rico’s fiscal crisis hopefully including debt practices that utilize tactics to delay resolution and obfuscate reality. Contradicting the financial picture portrayed by the Federal Board, Puerto Rico’s dramatic revenue outperformance and rapidly expanding cash position are evidence of hiding financial data. Creditors say “Despite mounting evidence that the Commonwealth’s finances are robust, the Board has refused to correct frivolous financial projections in its Fiscal Plan for the Commonwealth. Neither the Federal Board nor the Puerto Rico government have followed the law. They have fallen short of meeting PROMESA’s goals of restoring fiscal responsibility and returning Puerto Rico to the capital markets. Bondholders allege that the Federal Board is a federal entity for constitutional purposes pursu-ant to the analysis of the United States Supreme Court. Against this backdrop, the U.S. Attorney General’s decision on the constitutionality of the Federal Board is meaningful to bondholders.

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Chicago Plans Dedicated Revenue Bonds For Improved Capital Access… Mayor Emanuel intends to take advantage of a new local government borrowing vehicle established in the Illinois state budget. Bonds issued under the new program should carry higher grade ratings insulated from the issuers’ general credit, because special revenues would be assigned to the bonds. To mitigate credit risk other distressed issuers have created dedicated revenue borrowing vehicles such as Puerto Rico’s COFINA and NYC’s Municipal Assistance Corporation (MAC). A statutory lien on a dedicated revenue creates a secured bond structure that offers bondholder protection against a bankruptcy stay. For example; Puerto Rico law states that the Dedicated Sales Tax revenue is to be transferred to, and shall be the property of, COFINA and provides further that the Pledged Sales Tax will (i) be deposited in the Dedicated Sales Tax Fund upon receipt and will not be deposited into the Commonwealth’s General Fund (ii)) not constitute resources available to the  Common-wealth, and (iii) not be available for use by the Secretary of the Treasury. Chicago plans to refund up to $2 billion GO bonds and $500 million sales tax bonds. The borrowing plan bodes well for Chicago’s liquidity and interest costs. Investors welcomed the plan and pushed the yield penalty on Chicago GO bonds lower by 40-45 basis points.

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Illinois Lawmakers Prep For Educa-tion Bill Vote… Illinois House is expect-ed to vote on August 23 to override the Governor veto of an education funding measure of the enacted Illinois budget. On August 13, Illinois Senate overrode Gov-ernor’s Rauner’s amendatory veto of a school funding measure. Illinois fiscal 2018 budget increases funding to school districts and mandates that $6.7 billion of aid to schools be doled out through an evidence-based funding formula. On August 1, Governor Rauner proposed changes to the budget’s school funding measure. On Aug 10, the State of Illinois failed to distribute the first payment of fiscal 2018 general state aid to schools. Meanwhile, Chicago’s school leaders are betting that higher state funding will come through. Recent months have seen bold action from IL lawmakers who overcame a budget impasse that lasted two years. A lawmaker said, “There is a willingness to bring this to closure.” Ratings agencies and investors are looking to lawmakers to end the education funding impasse.

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