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Puerto Rico fiscal board expects pacts with 70% of creditors by next summer

By on June 3, 2019

Fiscal board Executive Director Natalie Jaresko (Screen capture of

At annual convention of Puerto Rico Manufacturers Association, island’s Economic Freedom Index revealed

SAN JUAN — The executive director of Puerto Rico’s Financial Oversight and Management Board, Natalie Jaresko, said she expects to have reached adjustment pacts by next June on 70% of the island’s debt.

May 31 was the deadline for uninsured creditors of the Puerto Rico Electric Power Authority (Prepa) to inform whether they will be joining the utility’s restructuring support agreement (RSA). For insured creditors, the deadline was earlier. The RSA has only one secured bondholder, monoline insurer Assured Guaranty. Jaresko said she expects the RSA to be evaluated by the court at the omnibus hearing in July.

“How we get through bankruptcy and be done with it once and for all, I think there are many, many pieces. Next big piece is Prepa,” Jaresko said at the Puerto Rico Manufacturers Association (PRMA) convention, where she was one of the featured speakers.

The utility does not have a plan of adjustment yet because there are other legacy obligations remaining to be discussed, such as the public power corporation’s pensions. She also said the board would like to have an operator for the utility’s transmission and distribution system chosen, selected and negotiated in conjunction with the debt agreement. She expects to have a plan of adjustment for the utility within the first half of next year.

Regarding the status of the commonwealth’s restructuring, Jaresko said the board’s goal is to have a plan of adjustment file by year’s end, whose confirmation will depend on a number of factors such as what non-consenting creditors and retirees have to say. The Official Committee of Retirees recently announced it was very close to reaching a tentative deal to ease the impact of the fiscal plan on pensions.

There is much more debt left to be negotiated including the Employees Retirement System and the Public Buildings Authority as well as other standalone entities. Jaresko said there are other instrumentalities whose debt will be negotiated under the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) Title VI for consensual restructuring agreements such as the Puerto Rico Aqueduct and Sewer Authority (Prasa), which owes about $4 billion.

“Prasa is trying to get a consensual agreement,” she said, pointing out it was the only entity under Title VI.

The board’s Special Claims Committee, along with the Unsecured Creditors Committee (UCC) earlier this year challenged the validity of about $6 billion combined in 2012 and 2014 bond issuances, arguing these were carried out in violation of Puerto Rican constitutional debt limits. The UCC recently challenged the validity of bonds issued in 2011 but the board, Jaresko said, is not joining that claim.

Asked how the potential annulments could affect the island’s future market access, and how it could hinder bondholder trust if all three were issuances were invalidated?

“I believe it actually could have a long-term positive effect, if what it does is shine light on the processes by which way Puerto Rico issues debt,” she said.

The board director also pointed to the Sales Tax Financing Corp. (Cofina by its Spanish acronym), which issued restructured bonds in February and were trading well.

“Traditional mutual funds are buying Puerto Rico bonds again. I don’t think we get market or lose market access because of a single issue,” Jaresko said. “If it does not seem that we have the capacity to pay, nothing else is going to matter,” she said.

Jaresko, who served as Ukraine’s finance minister and oversaw the country’s debt restructuring, said it was able to return to the markets.

During her speech at the PRMA convention, Jaresko also spoke about the board’s $9 billion budget for Puerto Rico, which is expected to yield a surplus, and of the new dispute-resolution process to help deal with the claims filed against some 250 government vendors to recover payments made by the commonwealth, the Highways and Transportation Authority and the Employees Retirement System.

The process begins with vendors’ disclosure of information to the Special Claims Committee’s adviser, DiCicco, Gulman & Co., no later than July 17. Local firms Estrella LLC and Casillas, Santiago & Torres will be assisting in the information gathering. Vendors who are unable to settle the dispute in the first phase can still do so if the claims fall below a certain amount. Unsettled or dismissed claims can still go to mediation or alternative dispute-resolution process. Claims that are not settled by mediation would then have to be litigated.

Islandwide President Esther Cintrón said suppliers should not pay the consequences for what the governor did because that creates mistrust. She supports a bill under consideration that would centralize government purchases at the General Services Administration to create more transparency and order in the procurement process.

Economic Freedom Index

During the event, Inteligencia Económica, headed by economist Gustavo Vélez, and the Centro para Renovacion Económica, Crecimiento y Excelencia (CRECE), whose founder is former Gov. Luis Fortuño, presented their Economic Freedom Index, which assigned a score of 61/100 to Puerto Rico, which is lower than the regional average but close to the global average.

The index measures the capability of a country to create economic activity, and Puerto Rico’s particular score signals that the economy is in a state of transition. The study noted that the limited size of the private sector, the government and pension deficits, a low labor-force-participation rate, population decline, the high cost of energy, and the collapse of the mortgage market all restrict Puerto Rico’s economy.

Some of the attending executives noted the need for more transparency to improve the business climate. The island’s government was graded 40 in transparency.

Jossen Rossi, the chairman of developer Aireko Companies said laws regulating public-private partnerships prevent citizen participation in the processes until it is too late. Certain organizations have sued to obtain information about the companies vying to lease Prepa’s transmission and distribution systems.

“Until a project is not negotiated and adjudicated, consumers cannot participate or comment on it. The devil’s in the details,” Rossi said.

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