‘Amores Perros en el Capitolio’
The Puerto Rico Legislature enters the final days of this session, which concludes on June 30, with the expectation that a budget measure will pass against the backdrop of intrigue over measures that have serious ramifications on debt restructuring and, more importantly, will mold the perception of Puerto Rico’s ability to govern itself.
We are off to a bad start when the government announces that Puerto Rico’s debt-service-to-revenue ratio is in the range of 20%. The calculation is flawed say some analysts on Wall Street. They point to the inclusion of debt that does not tap into the general fund and has its own revenue streams as a disingenuous exercise in accounting that attempts to overblow debt-payment challenges as a strategy to help the commonwealth achieve much-needed restructuring of $1.5 billion in payments that will hit on July 1, 2016.
The $1.78 billion in total debt payments calculated by the Office of Management & Budget includes $408 million owed by the Puerto Rico Aqueduct & Sewer Authority, $322 million in public debt and $545 million by the Puerto Rico Electric Power Authority (Prepa), which have securitization mechanisms in place to guarantee revenue streams that do not draw from the general fund.
The proper accounting, say financial analysts in the creditor camp, should limit general-obligation debt service to a total $1.126 billion; they agree that general fund revenue is $9.1 billion, although that number includes $117 million of P.R. Infrastructure Financing Authority rum taxes, which creditors say should be subtracted for a total budget of $8.983 billion. That amount divided by $1.126 billion amounts to about 12.5%, which is within the constitutionally accepted limits of a debt-service-to-general-fund-revenue ratio that must be under 15%.
Unfortunately, mathematics in the debt-restructuring realm is devoid of objectivity and the commonwealth prefers a top-heavy formula that will help make the case that we are up the quebrada without a paddle.
Then, for good measure, there is some political gamesmanship going on behind the scenes in the run-up to pass the budget. The infighting taking place would impact debt restructuring on several levels—just what we need to inspire confidence in the markets.
For instance, House Bill 2786, known as the Prasa Revitilization Act, which at presstime was still stuck after it had been approved in both chambers of the Legislature, contributes to a horrendous credibility deficit. The recall by the Senate has inspired uncertainty and is the last thing Prasa needs as the measure would provide the government utility with much-needed access to capital.
Then there’s Senate Bill 1673, which is being amended in the House of Representatives. The Senate bill seeks to amend the Debt Moratorium Law to remove public corporations that are in forbearance agreements or negotiating deals from the reach of the law. Without the amendments, it was a near certainty that forbearing creditors already in a restructuring deal with Prepa would pull out.
As with all legislation, however, there is always a catch. In the case of SB 1673, uncertainty traces directly to the further gutting of the Government Development Bank by removing public corporations from its oversight. Like children taken to foster homes, entities that were under the purview of the government’s former fiscal agent are removed and placed under the watch of various government agencies. It is chock-full of uncertainty that Puerto Rico does not need.
Now, more than ever, lawmakers need to realize that the world is watching—it behooves them to show that Puerto Rico’s democratically elected officials have the capacity to fulfill the mandate of the people.