Sunday, November 18, 2018

Puerto Rico’s new chief investment officer takes on economic development plan

By on September 7, 2018

Editor’s note: The following originally appeared in the Sept. 6, 2018, issue of Caribbean Business.

BY PHILIPE SCHOENE ROURA and EVA LLORÉNS VÉLEZ

Few phrases are more apt to describe Gerardo Portela’s move from the helm of the Fiscal Agency & Financial Advisory Authority (Fafaa) to become Puerto Rico’s chief investment officer (CIO) than “out of the frying pan into the fire.”

As Fafaa’s executive director, he spent the past year and a half growing the agency to nearly 80 employees and spent countless sleepless nights during renegotiations of the Sales Tax Financing Corp. (Cofina by its Spanish acronym), Puerto Rico Electric Power Authority (Prepa) and Government Development Bank (GDB) restructuring support agreements, which were often tied to the words “in principle” and “preliminary”—euphemisms for “not yet consensual.” Throw into the “frying pan” that he dealt with 15 certified fiscal plans, two certified budgets, and improved the financial information coming from Puerto Rico’s government with a website that is publishing information: “Everything from weekly cash flows for the central government—the Treasury Single Account [TSA]—to cash flows for the public corporations.”

When Caribbean Business caught up with Portela, he was barely finished unpacking his belongings in new digs on the second floor of the Palacio Rojo, a cobblestone’s throw away from La Fortaleza where he now has the unenviable task of bringing investment to Puerto Rico.

“As executive director of [Fafaa], I was taking over the right side of the balance sheet—the liability side—and helped pave the way towards fiscal responsibility. So, the governor talked to me and said that given my background and the previous work that I had done, the track record that I had, he wanted me to now work on the left side of the balance sheet—Puerto Rico’s assets,” Portela explains looking across a table that has scribbled notes, the product of brainstorming about his new role.

“My job is to optimize and maximize Puerto Rico assets…we are going to be putting together, complex financial transactions with the collaboration of other key government stakeholders including Chief of Staff & [Office of the Chief Financial Officer] OCFO Raúl Maldonado or Secretary of State Luis G. Rivera Marín, which will move the needle to continue bringing the right capital to Puerto Rico and fostering economic activity.”

Back to his roots

Truth be told, the move makes great sense for Puerto Rico because Portela cut his teeth on the investment side of the equation. The new CIO is armed with a master’s degree in strategy and finance from the University of Virginia and spent a large part of his career—15 years—as an investment banker.

Although it would seem that 18 months spent on the opposite side of the table in rather difficult negotiations and renegotiations with creditors under the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) Title III and Title VI proceedings might not be a sterling calling card, he intends to use that experience to his benefit. “I am using my experience from the past year and half in leading all the efforts in the restructuring business of Puerto Rico and coupling that with my experience as an investment banker to take over the left side of the balance sheet. And continue, in collaboration with key government officials previously mentioned, maximizing Puerto Rico’s assets to create jobs and bring investment to Puerto Rico,” he explains.

“What is very important is that we are going to take this office of the CIO as sort of a centralized hub for senior investments and capital markets, players and other local and foreign investors to come and contact us if they have any ideas on these assets or any other assets. They have an office that has the financial experience to engage these investors, closing transactions,” Portela adds.

Now, the newly created CIO will work hand in hand with CFO & Chief of Staff Maldonado; Economic Development Secretary Manuel Laboy; Secretary of State Rivera Marín; Puerto Rico Housing Secretary Fernando Gil, because of Community Development Block Grant (CDBG) Disaster Relief Funds coming down the pike; and with the Puerto Rico Financial Oversight Management Board’s revitalization coordinator, Noel Zamot, for possible inclusion under Title V of Promesa for the development of critical infrastructure projects. The group, he said, meets weekly.

“Remember this is a team effort—my role is focused on the specifics of the transaction; we are not here to operate agencies—we are a transaction-oriented team,” Portela says. “We are sort of creating an investment banking shop right here in La Fortaleza so we can take a look at these specific transactions and identify viable solutions to them—some of which, for decades, have not found a comprehensive, holistic solution to them. We are following a simple three-pronged approach, first, to understand the assets and different optimization alternatives; second, to bring senior and serious investors to Puerto Rico; and third, evaluate and execute those ideas that bring the maximum return to the people of Puerto Rico.

“Basically, if investors have an idea, they can contact this office to present innovative proposals for large-scale and transformational projects for governmental assets. If such proposals are considered feasible and beneficial to Puerto Rico and, at the same time, aligned with the governor’s public policy, we will execute such an idea and close that deal—we will inject money into the economy and create jobs for Puerto Rico.”

Low-hanging fruit

Do you have any overlap with Fafaa in your work right now?

“No, right now we are working on these three main emblematic, transformative assets—Roosevelt Roads, the Port of Ponce and the [Convention Center] District Authority, but there are other assets we are looking at,” Portela assures.

While he did not explain exactly what the plans were with the three assets, at least two of them have encountered issues in efforts to make them profitable.

Since the Naval Station at Roosevelt Roads closed in 2004, the government has been trying to redevelop the area to bring an economic boost to eastern towns. The closing of Roosevelt Roads caused a loss of $300 million a year to the local economy and thousands of direct and indirect jobs, including 3,000 at the base alone. When Amazon was looking for a site to build its headquarters, the current government proposed Roosevelt Roads. Recently, the Local Redevelopment Authority (LRA) for Naval Station Roosevelt Roads, which is overseeing the property closed by the Navy, issued a request for proposals (RFPs) to manage the electrical distribution system at the former military base and operate an independent microgrid to supply the power needed by the premises’ 15 current and future tenants.

The selected energy distribution or generation providers would be required to finance, develop, construct, operate and manage the projects on the 3,409-acre property. The former military installation includes an airfield with an 11,000-foot runway, and areas controlled by the U.S. Army Reserve, Coast Guard and Department of Homeland Security, as well as a marina, a school, law enforcement agencies and several offices.

When asked about the proposed microgrid, Portela said there have been some proposals submitted to the LRA, which his office will analyze, and “if they add value to Roosevelt Roads, then we will have positive advice on them.” Asked how many jobs he believes will be created at Roosevelt Roads, Portela said, “We are still analyzing these assets…. We are going to provide a thorough assessment in the near future.”

Asked about the lack of investment in Roosevelt Roads, Portela said he did not want to focus on the past but on the future. “I have had experience with large, complex transactions. This asset has a prime location and we are starting to provide our financial information and that gives us some credibility,” he said.

Just as happened with Roosevelt Roads, different administrations have tried to develop the Port of Ponce to no avail. In January, the central government gave Ponce and Mayor María Meléndez control of the port, so they could engage in activities that could help boost the economy on the southern side of the island. But Portela said that if he can find a private operator to manage the port and bring jobs, then “why not? That is a hypothetical example.”

Of the three, the Convention Center District is the most profitable, as it includes restaurants, hotels and stores and the Convention Center itself has hosted more than 6,000 events and 3,000 groups attending national and international conventions, congresses, exhibits, conferences and sample fairs since opening at the end of 2005.

The construction of digital studios is underway. With a $70 million investment, the project is expected to create 150 direct and 200 indirect jobs during its construction. The development consists of five sound studios, administrative offices and conference rooms, as well as post-production and editing facilities, dressing rooms, storage space, an industrial kitchen, a “university” and laundry services.

Could you tell us how much Puerto Rico has in assets, Caribbean Business asked. “Well, I have only been in the role for three weeks and I am focusing on these three emblematic transactions—Roosevelt Roads, Ponce Ports and the [Convention Center] District Authority, but there are also other assets that we are analyzing. We are only in the due diligence phase and I will have more information on the prioritization as to how we go about optimizing these specific assets and other assets of Puerto Rico.

Obstacle course

One of the problems in attracting investment is the cost of power and its unreliability. Fiscal oversight board Chairman José Carrión noted that a preliminary agreement reached with Prepa bondholders, the second one agreed upon in three years, will help the economic development of Puerto Rico because a resolution to the public utility’s $9 billion debt is a needed step to attract private capital to transform the power company and eliminate the uncertainty created by the Title III bankruptcy process.

Carrión said the transformation of Prepa will occur with the significant post-Hurricane Maria federal aid to build with resilience, greater operational efficiency via the granting of electric transmission & distribution (T&D) concessions; and a more cost-effective combination of power generation that allows for providing electric service at a lower cost.

How do you attract investment to Puerto Rico when Prepa has become this poster child for dysfunction throughout the world thanks to all the global coverage it received after the devastation wrought by Hurricane Maria. How do you address those concerns, Caribbean Business asked.

The new fiscal plan that was delivered to the oversight board a couple of days ago has an energy reform as part of the reforms the governor has emphasized, Portela said. “One of the objectives is to provide clean, effective and cheap energy. That is why there is a working group that is dedicated to Prepa, that is working through[Fafaa] and [Prepa Executive Director] José Ortiz and the [fiscal oversight] board to convert Prepa into Prepa 2.0 with private generation and concessions for T&D. Thus providing clean, effective energy to Puerto Rico—cheap energy would correlate with productivity in any country. It is an important step,” he said.

Is it a question investors ask—a concern—when you are out selling, Caribbean Business asked.

“They always ask. Remember that we are still in the due diligence phase. And as a prudent professional, and a prudent public official, I need to study those assets correctly. As a very preliminary initial assessment, there are a lot of opportunities for these assets. In the next weeks we will be providing more information on the prioritization of these assets and what things we are looking at,” he said.

According to the CIO, Gov. Ricardo Rosselló is expecting an analysis of the assets that could be optimized by Dec. 3. Portela is holding meetings with potential investors this week in New York. He said one of the elements that attract investors are “opportunity zones. The entire island is an opportunity zone and we will be working with the [CFO] & Chief of Staff Raúl Maldonado to see how these projects can best benefit from the opportunity zones,” he stressed, noting the amount of federal funding assigned to Puerto Rico.

These investors will possibly be able to have their projects fast-tracked because of the “ease of doing business” in the fiscal plan.

While President Trump’s tax reform has hurt the island as an investment destination for stateside-based companies, Portela said the government will work with what it has and seek to make the law more favorable.

“We are going to have a code that deals with those incentives. If it is positive for Puerto Rico, we will provide incentives. If it is not positive for Puerto Rico, we will not provide incentives,” he said. “The whole entire island is an opportunity zone. We are going to get $20 billion in CDBG funding. I believe those are very big incentives…. And there is going to be an office that will be dedicated to investors.”

Asked how he would pitch Puerto Rico to investors? “We are not in the pitch phase right now. I am talking to different parties. We have not done the formal pitching of these assets yet,” he said.

Responding to a question from Caribbean Business, Portela disputed the idea that Puerto Rico has not been transparent with its numbers, noting that the island’s remaining audited financial statements would be published before the end of this year. “We are publishing the TSA cash flow. We are providing information on public corporations, attendance and public employees, on pensions, on budget to actuals. This information takes time. We have over 100 agencies. To be honest, our governor has done a lot of good things toward transparency,” he said.

Given Portela’s tenure at Fafaa, Caribbean Business asked about his perspective on the Cofina deal. One of the deals will split Cofina revenue between the agency and the commonwealth, and a second preliminary deal will divide its revenue between senior and subordinate Cofina creditors.

“It is very important to start negotiating all of the debt of Puerto Rico. I worked on the Cofina deal, I worked on the Prepa deal, the GDB deal. And there are some other credits that will be coming in soon; these could be possible candidates for Title VI. We will also improve the confianza [trust] and the credibility Puerto Rico used to have; the governor and all of us have improved that perception of Puerto Rico,” he said.

What other negotiations do you see going to Title VI, Caribbean Business asked. Portela mentioned that he believed the Puerto Rico Aqueduct & Sewer Authority [Prasa] and the University of Puerto Rico (UPR) will end up going to Title VI, where creditor groups can consensually agree to a deal with the debt issuer, dragging nonconsenting holders along, to seek a plan of adjustment under a Title III proceeding.

“Well, I can’t get into specifics; we know which ones are in Title III—GOs, Cofinas, HTA [Puerto Rico Highways & Transportation Authority] and ERS. GDB was the first Title VI to be included—the RSA [restructuring support agreement] should be closing sometime in October. There are other opportunities that are not in Title VI, but they could be candidates for Title VI—Prasa, UPR, for example,” he said.

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