Tuesday, September 25, 2018

Cossec restructuring would impact co-ops’ cash flow

By on March 26, 2018

SAN JUAN — More than half, or 56 percent, of the $1.5 billion investment portfolio of Puerto Rico’s savings & loan cooperatives is invested in the island’s junk bonds, which means the government’s debt restructuring would have a big impact on the co-ops cash flow.

Despite a 2015 law that allows cooperatives to write off, for a period of 15 years, their bond losses as special investments, “this will only benefit them from an accounting point of view because they will suffer reductions in their cash flow due to the restructuring of the government bonds,” says the fiscal plan of the Cooperatives Supervision & Insurance Corp. (Cossec), regulator of Puerto Rico’s cooperatives, and sent last week to the fiscal control board.

Cossec, government, and fiscal board sued for allegedly misleading cooperatives into buying junk bonds. (CB Photo)

The law says Cossec will not impose sanctions or operational restrictions on any cooperative, its board members, executive members or employees for the creation of special investments or losses, which according to the fiscal plan complicates Cossec’s role as a regulator.

According to the plan, Cossec only has $200 million in reserve as a cushion for losses to cooperatives, which together form an important financial sector for the island.

Co-ops’ recent fiscal problems result from a 2009 decision by the administration of then-Gov. Luis Fortuño, which forced the cooperatives to buy government bonds so the agencies would have money to operate. At that time, the cooperatives were guaranteed the bonds were safe.

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Some cooperatives, however, recently sued the government, Cossec and the fiscal control board alleging they were misled into buying the bonds and the government failed in its fiduciary duty to protect the cooperatives’ financial system. Cooperatives have $852 million invested in government bonds.

Cossec’s fiscal plan does not indicate how many of the island’s 116 cooperatives are at risk of collapse since that number is still under evaluation. That assertion was included in the fiscal plan despite indicating more than a year ago that 11 to 15 cooperatives were in imminent danger of having to close.

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