Monday, September 24, 2018

Promesa Watch: Prepa, GDB Deals Move Coops Away from Risks

By on August 6, 2018

Editor’s note: This story first appeared in the Aug. 2-8 issue of Caribbean Business.

Puerto Rico’s 116 chartered credit unions are the leading beneficiaries of the preliminary restructuring agreements reached with the Puerto Rico Electric Power Authority (Prepa) and another in the works for the Government Development Bank (GDB).

More than a year ago, credit unions were bracing themselves for the system to fall because of the collapsed value of an estimated $976 million they invested in general-obligation securities, which was the lion’s share of their investment portfolio. The Cooperatives Supervision & Insurance Corp. (Cossec by its Spanish acronym) immediately ordered credit unions to create reserve funds and establish plans to manage the possibility they may lose all their investment.

Credit unions are now seeing the light at the end of the tunnel, the heads of two credit unions said. “Credit unions have significantly invested in [Prepa] bonds. While we are going to get a cut of 32 percent on the bonds’ principal, we now have more certainty and more security,” said Luis Soto, president of Cooperativa de Ahorro y Crédito San Miguel, about Prepa’s preliminary agreement last week.

The GDB’s debt restructuring, on the other hand, is slated to be submitted this month for approval by U.S. District Judge Laura Taylor Swain, so it may not go into effect until possibly September. Local cooperatives have about $500 million in GDB bonds and will get back about 55 percent of their principal with 7.5 percent interest.

“This is positive news because these two negotiations [with Prepa and with the GDB], along with our reserve, means we have the cushion to absorb losses…. This now puts us and Puerto Rico in a position to help promote economic development,” noted Aurelio Arroyo, president of Cooperativa Jesús Obrero.

While Prepa’s agreement is just preliminary, Arroyo said that using the GDB experience, he believes the agreement could end up being improved because the Prepa bondholders’ group is the largest creditor of that public utility.

“In the GDB deal, which was reached last year, the terms were improved as well as collateral payments. I think the same will happen here,” Arroyo said, adding that other groups of Prepa debtors may join the agreement.

Soto noted that all that remains is for an agreement between the commonwealth and Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders over ownership of the sales & use tax to become a reality for the island’s coop system to become much more solid.

There are still areas that the coop system must work out. There are still discrepancies with the P.R. Fiscal Agency & Financial Advisory Authority (Fafaa) and the Financial Oversight & Management Board (FOMB) over the issue of the coop system’s governance and the completion of a fiscal plan. The FOMB wants to overhaul Cossec’s board to reduce the participation of the cooperatives and has established an oversight committee to supervise it. The Cooperative Bank has also stepped in to lend money to credit unions that need it. The cooperative system also plans to get involved in coop structures to operate electric system microgrids.

“There was a time when we thought we may lose it all, but with the creation of the reserves and the negotiations, I don’t foresee any collapse. We have remained strong,” Soto said.

Neither Soto nor Arroyo knew how the negotiations were going to impact litigation in the courts. Several cooperatives have sued the government and others have sued credit-rating agencies, alleging they were forced to invest in government securities. Soto said that at the time of the investments, Puerto Rico securities were safe and “I don’t really foresee those lawsuits succeeding.”

Despite all the financial risks cooperatives have faced, they have remained strong. The San Miguel Cooperative has kept its 3,800 members and more than 2,000 non-members. After the hurricanes, cooperatives imposed a three-month moratorium on payment of mortgages, with those payments delayed to the end of the life of the mortgage loan. “Despite the migration [of people off-island], we have not had a loss. People have remained loyal,” he said.

The San Miguel coop plans to change its core financial system in October to be more active in social media and incorporate a mobile ATM. “We want our 2,900 non-members to become members because they can qualify for mortgages and other benefits, and not just be depositors,” he said.

Arroyo said his cooperative, which has $80 million in assets and a combined 10,400 members and non-members, is a member of the “Coop network,” a system comprising more than 75 local cooperatives that allows a client living in Rincón to do business in another cooperative because they are all interconnected. That system also has more than 5,000 centers in the United States, which means members moving from the island do not have to close their Puerto Rico accounts. “The coop system is getting stronger with each passing day,” he said.

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