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Ambac rails against HTA clawback

By on December 16, 2015

Bond insurer: Puerto Rico’s financial credibility hangs in the balance

BY PHILIPE SCHOENE ROURA & LUIS J. VALENTÍN

Although it made a Dec. 1 payment, Puerto Rico’s government announced last week it had employed a clawback of $22 million tied to a revenue stream backed by the petroleum- products tax known as la crudita, which further tarnished Alejandro García Padilla administration’s credibility, according to bondholders.

In making the $354.7 million payment on Government Development Bank (GDB) notes, the government’s debt negotiation brigades didn’t resort to the clawback mechanism— tapping into a revenue stream destined to cover the payment of other debt—using instead the bank’s funds after a deal that was in the works between the GDB and monoline bond insurers to fund the exchange of short-term notes fell through at the 11th hour. The $22 million clawed back from la crudita are going to be used instead to fund a $331.6 million payment due Jan. 1 on general obligation debt.

“From our perspective, the clawback is a patent attempt to revise the provisions of the constitution and contracts without justification
or the required process,” Ambac Assurance Corp. CEO Nader Tavakoli told Caribbean Business during an exclusive interview late last week.
nader-tavakoli
Ambac is one of the Highways & Transportation Authority’s (HTA) bond insurers, with a total exposure of $493 million of lifetime principal and interest on the authority’s more than $4.5 billion in outstanding debt.

However, it should be noted that the market had already recognized more than a month ago that a clawback was likely in the works, as previously reported by Caribbean Business (Nov. 19, 2015).

“Even if you think that you can resort to the [clawback] mechanism, they haven’t put in place the requisite demonstrations to coincide with the provisions. We believe that isn’t justifi ed,” Tavakoli said.

His objections are in reference to Gov. Alejandro García Padilla signing an executive order last week that mandated the clawback of revenue streams pledged to pay certain public corporations’ debt, including the HTA’s debt backed by la crudita, which wasn’t subject to clawback, according to legal stipulations.

In large part, the financial community saw the move as an unnecessary subterfuge that raises red fl ags about a brutal schedule of debt-service payments that begins Jan. 1. The winter of the administration’s discontent commences with a roughly $115 million payment on HTA notes that mature on New Year’s Day. Ambac is on the hook for some $11 million of the HTA debt that must be paid on Jan. 1. GDB resident
& Chairwoman Melba Acosta is on the record stating that the HTA has enough reserve funds to pay the $115 million in debt that is due an. 1.

“We believe Puerto Rico will make its payments on January 1 as it relates to our HTA obligations,” Tavakoli explained. “Now, that payment may come from debt service reserve funds and we believe that any such use of debt service reserve funds is unjustifi ed.”

While announcing the government’s decision to use revenues that cover the debt services of the HTA, Infrastructure Financing, Metropolitan Bus, Integrated Transportation and Convention Center District authorities to pay debt carrying the commonwealth’s guarantee, Acosta said the Dec. 1 GDB payment was met using the bank’s funds. Yet, the commonwealth advisers’ strategy to announce the clawbacks— a full $329 million in revenue streams that have been targeted for clawbacks by summer, with $201 million corresponding to he HTA—has severely hindered Puerto Rico’s credibility in the fi nancial community.

“What we have been saying all along is that with these tactics Puerto Rico has been doing tremendous harm to its financial integrity, it continues to destroy its credibility,” explained Ambac’s Tavakoli. “The biggest issue here is credibility—continuing to chase hammers to beat up your creditors does not get you credibility.”

Now that the U.S. Supreme Court (see related story on page 6) has decided to examine the constitutional merits of the Puerto Rico Public Corporations Debt Compliance & Recovery Act, many creditor groups are concerned that negotiations with the commonwealth public entities will grind to a halt. “The governor has an obligation to do the best thing for the people who elected him,” Tavakoli added. “And right now, as best we can tell, he has delegated those responsibilities to professional bankruptcy advisers.

“Whatever amount of obligations the commonwealth believes it will defer by deploying these legal and tactical maneuvers will pale in comparison to the expense and suff ering that will result from the destruction of the island’s credit,” he said.

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