Monday, May 23, 2022

Remember the Clawbacks?

By on May 26, 2016

With just over a month before Puerto Rico’s next large debt payment hits, silence reigns supreme at La Fortaleza over the whereabouts of the “clawbacks”—pledged monies that were redirected late last year for the payment of constitutionally guaranteed debt.

Last November, Gov. Alejandro García Padilla ordered the clawback of revenue streams that cover debt obligations of the Highways & Transportation (HTA), Infrastructure Financing (Prifa, or AFI by its Spanish acronym) and Convention Center District authorities. As a result, officials said at the time that roughly $330 million would enter government coffers through this summer.

While the administration used about half of these funds in January to pay constitutionally guaranteed debt, namely general-obligation (GO) bonds, it remains to be seen if the government would follow suit when roughly $780 million is due July 1 on constitutionally guaranteed GOs.

Treasury Secretary Juan Zaragoza recently told Caribbean Business that there should be about $140 million in clawback funds by June 30, which is consistent with the estimates given when the administration first announced the measure.toro top story

However, Caribbean Business asked La Fortaleza about the use of these funds, how much has been clawed back to date and whether the money will be used for the July 1 GO payment, but the governor’s press office declined to comment.

For her part, Government Development Bank (GDB) President & Chairwoman Melba Acosta said she no longer has any clear information on these funds, since they were taken out of the GDB as part of the government’s plan to move its accounts to private banks, in an effort to isolate government funds amid the GDB’s deteriorating condition.

A changing situation

For months after implementing the clawback measure, the García Padilla administration repeatedly stated that these funds could only be used to pay for debt carrying the commonwealth’s guarantee.
Puerto Rico, under its Constitution, could claw back certain revenues to service its guaranteed debt, but only if there are no other revenue streams available to pay for this debt.

Yet, during a roundtable last month with the press to discuss the recently enacted moratorium law—which allows the governor to not pay debt obligations, including GOs, to guarantee payment of essential services to residents—Justice Secretary César Miranda let on that the situation has “evolutions.”

“Let’s see the classification that we give to essential services. This is a debate that we have had internally, where even the U.S. Treasury has given its opinion on what is first priority,” he said.

Miranda went on to argue that a court could interpret that the commonwealth, under the Constitution’s police power, is allowed to prioritize first and foremost essential services to residents, even if the Constitution places these in the third rung of priority payment.

“At this moment, if you ask me and I’m pressed to give you an answer, I would have to say those monies [clawbacks] would need to go to pay constitutional debt,” the Justice secretary conceded during the roundtable.
“Also, a federal law could be enacted [for Puerto Rico], changing…the game rules. We are on shaky ground, to put it somehow,” Acosta added.

Pending litigation

In January, three municipal bond insurers sued the government in federal court, challenging the use of the clawback measure, which they believe to be invalid.

While recognizing Puerto Rico’s right to claw back certain revenues to service its GO debt, Ambac—one of the plaintiffs—stated at the time that it is subject to important preconditions. For instance, they argue that the commonwealth had enough revenues to service its constitutionally guaranteed debt.

The legal actions are still pending in federal district court and have remained dormant for more than two months, after Judge Francisco Besosa received the cases from Judge José Fusté, who abstained from the matter and is retiring next month.

Most recently, Ambac sued the HTA, calling for a receiver at the public entity, and as part of its lawsuit, it argues that the administration has repeatedly refused for months “to provide trust balances and an accounting of how much revenue has been ‘clawed back,’” the monoline’s lawsuit reads. A hearing on this case is scheduled to be held today (May 26).

The HTA’s clawed back revenue streams are tied to the petroleum-products tax, known as la crudita, and vehicle license fees. As for Prifa, or AFI, the administration took over certain federal excise taxes related to the rum cover-over program, while the Convention Center District’s hotel occupancy tax collected by the Puerto Rico Tourism Co. was also targeted.

The three bond insurers are significantly exposed to the debt of three public entities affected by the clawback order, as they would have to foot the bill if the commonwealth defaults on insured-debt payments.

The HTA and the Convention Center District are expected to meet in full their $240 million and $20 million in debt service payments, respectively, due July 1. Nevertheless, they would most likely do so by siphoning their reserve accounts, while their ability to make subsequent payments remains in question. Moreover, after defaulting early this year on about $36 million of Prifa (AFI) debt, the commonwealth is not expected to pay the $77 million owed by this entity on July 1.

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