Thursday, October 19, 2017

Cossec: Co-ops solvent, but face cash-flow problems

By on August 12, 2017

Editor’s note: The following article originally appeared in the August 10 print edition of Caribbean Business.

SAN JUAN — While the Cooperatives Supervision & Insurance Corp. (Cossec) has enough reserves to ensure the co-op system’s solvency, the Financial Oversight & Management Board (FOMB) named a committee to assume control of the insurer while its fiscal plan is in effect because of alleged conflicts of interest.

The entity’s fiscal plan was recently approved by the FOMB, subject to six revisions that must be submitted in 30 days.

The document presented last week by the government says the island’s savings & loan co-ops can withstand the fiscal crisis even though they have heavily invested in Puerto Rico securities. Still, they are expected to experience reductions in cash flow due to the likely restructuring of the government’s estimated $73 billion debt.

From left, fiscal oversight board Executive Director Natalie Jaresko, member Ana Matosantos, and Chairman José Carrión III. (Juan J. Rodríguez/CB)

During the board’s most recent meeting, it was revealed that five of the 116 co-ops face serious liquidity problems and could be consolidated.

As part of the amendments required by the board, legislation needs to be amended to facilitate the COOP-Self Program—a capital injection program that would deploy resources to reinforce cooperatives and provide sustainability. The proposal would provide $533 million in combined commitments from different entities and will be administered by a new Cooperative Financial Task Force.

The board also requires that Cossec’s enabling act and the Savings & Loans Coops Act of 2002 be amended to authorize Cossec to sell assets of a credit union to non-coop entities in the event of liquidation.

The FOMB also requires exploring options to have cooperatives join federal charters in the future or be overseen by other entities with expertise such as the National Credit Union Administration. The board also called for changes in Cossec’s governance.

The entity regulates Puerto Rico’s cooperatives and insures deposits but it is also governed by the entities it regulates. There are five co-op representatives and four representatives from government agencies on Cossec’s board. Its chairman is the Puerto Rico cooperative development commissioner.

“Co-op representatives have significant and, at times, determining participation; this situation has the potential to cause conflicts of interest whereby these representatives may vote for actions that are in the best interest of the co-ops but not necessarily in the best interest of Cossec,” the fiscal plan states.

“There is a need for Cossec to have stronger and independent governance to exercise its role as a regulator and insurer of the co-op system,” the plan states.

The new committee, which will comprise the board president of Cossec, the executive director of the Fiscal Agency & Financial Advisory Authority and the commissioner of financial institutions, will not only exercise all powers granted to Cossec, but will also spearhead reforms to strengthen the co-op system.

The risks involved

Though designated as a covered entity by the board, Cossec has not issued public debt and is not a debtor. However, as an insurer of deposits and shares of the island’s 116 cooperatives, it faces risks related to claims from insured clients that invested in Puerto Rico securities and a run on client deposits and shares due to a perceived lack of confidence, according to the plan.

While the island’s savings & loan co-ops can withstand the fiscal crisis since their funding sources have remained stable over the past 10 years and their assets have grown, they will still experience reductions in cash flow due to the likely restructuring of Puerto Rico’s debt.

Puerto Rico securities—about $976 million—account for 65% of the co-ops’ total investment portfolio of $1.5 billion. The majority of the co-ops purchased the bonds at issuance and, due to regulatory accounting treatment, they carry the investments on their books at par value even though the bonds trade below par value.

Government Development Bank bonds, which comprise about 44% of the co-ops’ exposure to government securities, trade at roughly 84% discount par value. On the other hand, general-obligation bonds, the co-ops’ second-largest government exposure, are trading at 41% discount.

Taken as a whole, the aggregate co-op investment in government bonds has a market value at roughly 49% below par value.

Regulatory accounting treatment allows the co-ops to amortize losses on special investments over a 15-year period; however, this will only benefit co-ops from an accounting standpoint since they will still undergo reductions in cash flow when the government’s debt is restructured.

The plan states that Cossec has enough reserves to ensure the co-op system’s solvency with $160 million in total provision for losses, of which $108 million is the expected loss reserve.

The 116 savings & loan co-ops hold $7.9 billion in deposits for more than one million customers compared to $4.5 billion in deposits held by local banks. Cossec insures up to $250,000 per person.

Cossec’s investment in Puerto Rico securities is less than 5% of its portfolio or $262.5 million.

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