San Juan mayor: The fiscal board must disappear

San Juan Mayor Carmen Yulín Cruz (Jaime Rivera/CB)

SAN JUAN — The mayor of San Juan, Carmen Yulín Cruz Soto, sent a letter to Senate President Thomas Rivera Schatz that included a draft of a concurrent resolution seeking that the legislature issue a statement defining the payment of pensions, education, safety and healthcare as essential services, in accordance with the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

“Matters related to the payment of pensions, health, safety and education should be considered as essential services. However, this concept has served as an excuse to favor private interests over the needs of our people. An expression by the Legislative Assembly would strengthen the people’s call to protect these services and also help the Human Resources Committee of the federal chamber [House of Representatives] and its chairman, Raúl Grijalva, to amend PROMESA and force the Board to assume the responsibility and guarantee financial resources for these services,” Cruz wrote to the Senate’s leader.

In the letter, the mayor also referred to subsection (b) of Section 201 of Promesa, which requires the Financial Oversight and Management Board (FOMB) that it established to guarantee sufficient funds to cover essential public services.

“The Board, in clear defiance of the legislative mandate, has not only evaded defining this concept clearly, but has also implemented austerity measures that have had the effect of harming the delicate fiscal situation of organizations that provide essential services to citizens,” the letter reads.

The mayor also said Promesa establishes parameters for designing the respective fiscal plans of each “covered entity,” which must “provide adequate funds for public pension systems.”

“The text of the law in this sense is not ambiguous. Precisely because of its clear and precise language, we can conclude that there is no room for discretion. I repeat, the Board must disappear, but as long as it stays we have a responsibility to fight for the interests of Puerto Ricans,” the San Juan mayor concluded.

Puerto Rico minority senators: Judge should beware of legislative entrenchment in Cofina deal

SAN JUAN – The Popular Democratic Party’s (PDP) delegation in Puerto Rico’s Senate filed Wednesday a friend of the court brief against debt adjustment confirmation of the Puerto Rico Sales Tax Financing Corp. on the grounds that it sanctions legislative entrenchment.

If the requested order is granted, the PDP says, no successor Puerto Rico Legislative Assembly could amend or repeal the new-bond legislation.

“The inability to amend or repeal the New Bond Legislation not only constitutes a textbook example of impermissible legislature entrenchment per se, but given the subject matters legislated thereby, also implies entrenchment with respect to the exercise of some of the most fundamental powers specifically granted to the Legislative Assembly by the Puerto Rico Constitution. This Honorable Court must therefore be mindful of the language used in any order confirming the Proposed Plan of Adjustment such that it does not sanction the unconstitutional restrictions pursued by the New Bond Legislation,” the PDP said.

Federal Judge Laura Taylor Swain gave the Financial Oversight and Management Board until Jan. 24 to answer the PDP lawmakers’ brief.

The restructuring of Cofina’s $17 billion debt has two parts. In the first part, commonwealth and Cofina bondholders settled their dispute over ownership of the sales and use tax by agreeing to divide the 5.5% portion of the 11.5% sales and use tax. Of the 5.5% portion, Cofina will keep 53.6% and the commonwealth receives the rest. According to court documents, the split will result in the commonwealth receiving about $400 million a year from the sales and use tax over the next 40 years.

Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new bonds whose value is being cut. Cofina senior bondholders will recover 93% of the value of their original bonds and junior bondholders 53%. Because the sales and use tax will be used to guarantee the bonds, future legislatures will be prevented from changing it.

Also Judge Swain asked that the board provide the legal basis supporting the validity of the Cofina deal. During a recent hearing on the debt-adjustment plan, she had expressed concern that the Cofina deal may result in an unprecedented rewriting of the Constitution because, besides binding future legislative assemblies to the deal, it would also rewrite the Constitution’s definition of “available resources” because, through the deal, Cofina will own its portion of the sales and use tax.

Judge Swain worries about rewriting Puerto Rico’s Constitution

Sobrino Stares Down Debt

Editor’s note: The following originally appeared in the Jan. 17-23, 2019, issue of Caribbean Business.


This is a revolution—we’re back in 1776,” so begins the allocution of Christian Sobrino, who holds the thankless job of heading the Fiscal Agency & Financial Advisory Authority (Fafaa, or Aafaf by its Spanish acronym) and is the Puerto Rico government’s ex-officio representative on the Financial Oversight & Management Board (FOMB). That entity is a creature of the U.S. Congress, created under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) to oversee the island’s financial and fiscal affairs as a condition to enable the law, which includes a provision, Title III, for bankruptcy-like proceedings. Puerto Rico was stripped of its ability to file for bankruptcy in 1984.

Upon enabling the federal law, Congress set in motion an experiment that has seen Puerto Rico’s government and the oversight board clashing over directives issued by the panel that are often ignored or fought on grounds, says the Rosselló administration, that the board is overstepping its bounds. Those dustups—refusal by the Rosselló administration to implement a two-day monthly furlough for government employees and reneging on the FOMB order to suspend the granting of Christmas bonuses to public employees—have bolstered claims by critics who allege Promesa is a flimsy law with many gray areas. Sobrino disagrees.

“I don’t think the law is flimsy; we just have to administer it correctly,” Sobrino said during an interview that took place in the boardroom on the fourth floor of Aafaf’s headquarters, which once was home to the Government Development Bank (GDB), the former fiscal agent for Puerto Rico that was liquidated as part of a debt-restructuring strategy set in motion in the final two years of the Alejandro García Padilla administration.

The writing on the wall

Sobrino, who was a young attorney in the days when the “good bank, bad bank” ploy was being concocted by Puerto Rico’s financial advisers at Cleary Gottlieb and Millco, saw the writing on the wall well before the death knell.

“I started to think the end was near for the GDB in 2013,” said Sobrino, who was a young attorney in private practice at the time. “We were working on the Comprehensive Cancer Center financing—a $200 million loan. And I was thinking why are you taking such a forward hit; you have liquidity issues and you are hiring people to deal with this—right? People forget that people like Millstein and Proskauer, Cooper—all of those guys came at the end of 2013, the beginning of 2014 to help the GDB.

“To be honest, I had concerns even when Carlos [García] was here—me being a young attorney and seeing what was happening—how the economic situation started to deteriorate even with stimulus programs like ARRA [American Recovery & Reinvestment Act] going on. And I questioned if this model worked—where you took your general fund and your operating accounts for each of the government entities and essentially turned it into an investment vehicle for development purposes. I think that worked great for a long time. It still works great in North Dakota and it works in some other states.”

Sadly, the government’s fiscal agent jumped off the rails more than 10 years ago—when short-term debt was ratcheted up to fund public corporations and the central government’s unbalanced budgets, a practice known as deficit financing. The bank veered from its role as the lender for infrastructure works and as the fiscal agent responsible for economic policy to become a bankrupt lender of last resort. The numbers are ominous indicators of the GDB’s inevitable insolvency.

“Liquidity dropped from $5 billion in 1989 to less than $500 million in 2016, while at the same time the portfolio of loans jumped from $1 billion to $8.3 billion,” former GDB President Melba Acosta told Caribbean Business during an exit interview in 2016.

“I thought the GDB was a great concept, but it wasn’t there. We didn’t have the culture that was implemented in the beginning,” Sobrino says with a hint of nostalgia coloring the sound of his voice. “When it was created in the 1940s, the original purpose was to turn your general fund into an investment vehicle for infrastructure and economic development, much the same way that North Dakota did with its Agriculture Bank. And that worked great, if you think about it, we are surrounded by the GDB’s legacy—the Museum, Hotel La Concha, the Vanderbilt, the Highways. I don’t think people appreciate what we lost last year when it closed; we lost something great. We lost an institution that formed generations of lawyers, of bankers, of accountants, of economists. And we don’t have anything nearly ready to take its place yet. We should work on getting that; developing an institution that trains people to be leaders and professionals in society.”

Can Aafaf be something like that? “I think Aafaf is an intermediate institution; it reflects what we need now for certain transactions and work,” Sobrino replied. “I think Aafaf and other agencies will eventually merge and evolve into something that could be that. I am not sure yet; I am not clairvoyant. But we need something like that.”


For now, Sobrino’s time is occupied trying to secure consensus in public policy that is being dictated by an oversight board that was imposed on Puerto Rico as a condition for the passage of Promesa. Think of him as a goalie attempting to defend Puerto Rico’s goal with one arm tied behind his back. As the ex-officio representative on the FOMB, his role is pro forma—he delivers reports, answers questions and the seven members of the control board tell him what fiscal measures they expect of the Rosselló administration.

Meanwhile, professional and financial advisers in this legal jamboree under Promesa’s Title III bankruptcy proceedings have racked up more than $300 million in legal and advisory fees in the two years since the inception of Promesa in June 2016. Those overblown costs led to the appointment of Brady Williamson as fee examiner in October 2017 to rein in those rampant fees. Sobrino said that when it has come to the consultants working for Aafaf, who are subject to the fee examiner, the entity has been fair in its observations. “I do have some issues with the amounts that some consultants on the other side charge and my perception of their value. I like flat-fee arrangements. They are productive but my consultants on flat fees have to keep time sheets. That is a standard in the accounting world. Keeping time sheets is good for managing the contract,” Sobrino said, adding that companies that charge a lot of money to the island should “at least set up shop here.”

Sobrino took pride in the fact that his consultants have not increased their fees as others have done because “I crack the whip and my consultants know what they have to do.”

Regarding the conflict of interest by McKinsey & Co., which advises the island on its debt, but also owns Puerto Rico bonds, Sobrino said the matter should be investigated aggressively. “It would not have been tolerated had it been a government consultant. I am looking forward to what the independent investigator will publish,” he said. Sobrino declined to say whether he told the board [FOMB] to cancel the contract, merely saying, “They hear my opinions about every consultant.”

In his role as director of Aafaf, Sobrino is keeping his eyes peeled on negotiations between the Rosselló administration and the diverse creditor constituencies in restructuring Puerto Rico’s more than $70 billion debt.

Chinese checkers

Caribbean Business inquired about what Puerto Rico should expect regarding the restructuring of commonwealth agencies, in general. Sobrino said he does not agree with the theory that after the Puerto Rico Sales Tax Financing Corp. (Cofina) restructures its $17 billion debt, other agencies will follow suit in a domino effect because of the complications with each type of debt. Each debt is being worked upon on a credit-by-credit basis.

“I don’t see the dominoes. Everyone expected it to be very orderly. They would first see GO [general-obligation bonds] then Cofina and you would follow the stack down. But there is a much more complicated scenario and you have to take each credit on its own terms,” he said.

Aafaf is trying to find credits in which the parties, legal advisers and economic situation lend themselves to “good restructuring” at a given time. If that does not work, Promesa’s provisions allow for a “cramdown,” or forced restructuring. “I don’t think there is a domino effect and we proved that with the GDB. Everyone thought the GDB could not be closed until we closed GO and Cofina, but we showed that it could be done,” he said.

In that regard, Sobrino did not expect the $9 billion restructuring of the Puerto Rico Electric Power Authority (Prepa) to move forward any time this year because a group of monoline bond insurers are currently in court seeking a receiver for the power utility in an effort to hike up rates and pay debt. “That does not lend itself to a positive negotiation process. I would love to sit down with them and see if we can negotiate something, but if that is the position, then we have to unfortunately fight it out,” he said. Monolines, he added, are refusing to negotiate because they benefit from the delay.

Utility players

Sobrino said there will never be a receiver in Prepa and opined that monolines refuse to negotiate a debt settlement because they get unfair advantage through a delay. “I am going to privatize Prepa first because there is never [going to be] a receiver,” he said.

Right now, there are five companies vying to take over Prepa’s transmission and distribution system, including consortiums. All are from the United States. “They are all serious players and are all involved in the energy sector,” he said.

While Sobrino assured everything is on schedule to announce the name of the company that will lease Prepa’s transmission and distribution system, Prepa’s executive director, José Ortiz, said in a radio interview that the entire privatization process may be delayed because of the partial shutdown of the federal government and the energy agencies that are helping Prepa are not working.

Meanwhile, the government is developing a new energy policy, Senate Bill 1121, which calls for the island to use 100 percent renewables by 2050. Sobrino says the government is trying to clarify the language to establish the exact jurisdiction for the Energy Bureau and provide it discretion to implement the reforms and causes of action that could arise, “[so] there is a clear mandate over who is responsible to impose those policy directives,” he said about the requested amendments, denying that the government wants language to ensure it can control the composition of the Energy Bureau.

Another entity that for the past few years has said it is close to restructuring is the Puerto Rico Aqueduct & Sewer Authority (Prasa), which has a $4 billion debt. Sobrino said he expected the water utility to announce a debt deal “in the coming months.”

However, Prasa recently paid about $1.6 million of debt and announced it will continue to pay debt while negotiate its restructuring. “Prasa has not failed to make a payment on its senior bonds. It is working on its negotiations with the EPA [U.S. Environmental Protection Agency] and with the USDA [U.S. Department of Agriculture] on the federal part of the debt stack. A very critical component included refunding the revolving fund,” he said.

While Prasa is “a very good entity,” Sobrino said the issue with the debt is having the ability to implement a capital improvement plan for its infrastructure.

Agents of change?

On the other hand, Sobrino said he expects Judge Laura Taylor Swain to approve the plan of adjustment to restructure the $17 billion debt of the Puerto Rico Sales Tax Financing Corp. (Cofina), which was approved by a majority of the bondholders in a preliminary plan. The terms, however, have been objected to because these could lead to another default and result in stringent austerity measures to be able to pay the debt. Junior Cofina bondholders have also raised objections about their low recovery in a proposed bond exchange.

“A lot of the opposition to the Cofina deal is ideological or is pursuing the economic interests of other parties,” he said.

One of the objections to the Cofina deal argues that the oversight board manipulated the negotiations because it has control over the commonwealth side of the dispute, as well as Cofina, in a conflict of interest. The FOMB, however, delegated the negotiations toward the debt deal to two independent agents.

“I was not in favor of the agent structure then, and I still don’t agree that it was the best procedural structure, but I am happy with the results. We would have been able to do it without the agents,” Sobrino said.

The government, he noted, does not favor the view that the island’s debt should be wiped out but restructured according to the island’s condition. “A more moderate approach, in which you recognize that Puerto Rico’s debt needs restructuring, is better. Otherwise it does not work,” he said.

Regarding allegations that Cofina may have fraudulently filed for bankruptcy because the government has failed to submit audited financial statements since 2015, Sobrino replied that the process of doing the audits for 2016 and 2017 has been difficult because of the complexities with the island’s fiscal state. “It is easier said than done,” he said.

He said he was surprised the oversight board recently published a letter chastising the government over delays with audited financial statements because they have been kept informed about the problems and complexities to finish them.

He dismissed claims Cofina may have fraudulently filed for bankruptcy by saying, “The people who have said that are now parties to this deal…. That is not true at all.”

Claims to fame

Sobrino also rejected allegations Puerto Rico can pay its debt because it has billions of dollars or nearly $4 billion in its Treasury Single Account (TSA). Aafaf publishes weekly reports on the level of funds in its TSA. What should people understand about the TSA?

Sobrino said allegations that Puerto Rico is being dishonest about its liquidity is a “misreading of the facts…. How can you be dishonest when you are the one publishing the reports?”

He noted that while it may seem like Puerto Rico does not have liquidity problems, it does have solvency problems and has yet to determine the impact of the Pay-Go provisions (pay-as-you-go) on the fiscal state of its retirement systems. “The reason it has accumulated so much cash is because we are operating under a budget that we think cuts too [much]. [The TSA] is high but I would not generate a false sense of security because, while it may appear Puerto Rico does not have a liquidity problem, it does have a solvency crisis. It is there and may turn into a liquidity problem,” he said.

May is the deadline for avoidance of claims. Can you tell us something about actions or claims that may have been unjustified? Sobrino said he does not participate on the board’s Special Claims Committee but noted the group was taking its job very seriously. This week, the Special Claims Committee virtually said that bond debt incurred by the island after 2012 was illegal because it exceeded the island’s constitutional debt limits. The committee sought to annul $6 billion of total debt from two bond issuances, one for $2.3 billion and the other for $415 million, issued in 2012, and one done in 2014 for $3.5 billion, contending they were illegal. “All claims were based on invalid GO bonds that should be disallowed because the bonds were issued in violation of the debt-service limit and, in the committee’s view, the balanced budget clause, and, therefore, the bonds are null and void and the holders of such bonds have no remedy against the commonwealth,” the committee said.

Sobrino said that with the situation in Puerto Rico, it is easier to say something illegal happened but “a lot of this is structural in how some institutions were working…. I am sure corruption happens, but I would not say Puerto Rico’s entire fiscal situation is that. What we are facing in Puerto Rico is much larger,” he said.

Asked what he thought caused Puerto Rico’s fiscal crisis after reading the debt investigation completed by Kobre & Kim, he said: “I think a lot of the issues were due in part because people were forgetting that the GDB was not a piggy bank and a lot of pressure was put on its debt and that pressure was transferred to the general fund…. But it is much more complicated than that,” he said.

While this year, President Trump and Congress are slated to change the composition of the oversight board, Sobrino said he can work with whatever he has. He also considers the federal Promesa law, which rules the island’s bankruptcy process, does not need to be amended. “When the law is administered correctly, it can work. I don’t think it has that many gray areas. If it is administered properly, it can work,” he said.

Gov’t, Bondholders File Lawsuit Over Fund Distributions

Editor’s note: The following originally appeared in the Dec. 20, 2018 – Jan. 2, 2019, issue of Caribbean Business.

The government and bondholders of the Puerto Rico Sales Tax Financing Corp. (Cofina) have asked the court for an emergency scheduling to resolve a dispute contained in Cofina’s debt-adjustment plan, which is slated to be evaluated in January by the U.S. District Court.

Resolving the dispute is essential for moving forward with the Cofina deal, a source said. Judge Laura Taylor Swain heard the request for time to resolve the dispute at the omnibus hearing which took place Wednesday, Dec. 19.

The dispute is related to Section 19.5 of the plan, which discusses delivery of distributions. The section states that distribution and deliveries to bondholders will be made to their respective addresses. However, the initial distributions of cash by the disbursing agents will be made to the Bank of New York Mellon (BNYM) as trustee of the existing securities, which will then distribute the funds.

The section says that the distribution shall not be stopped on account of lawsuits filed by Whitebox and Ambac, a provision that is at the core of the dispute. Whitebox sued BNYM in New York state court in April 2017 alleging the bank breached its duty as trustee for Cofina debt to protect senior bondholders. Whitebox said BNYM should have accelerated or frozen payouts on Cofina debt after technical defaults by Puerto Rico that began in 2015, including the government’s plan to restructure its debt. The lawsuit was stayed. A similar lawsuit was filed by Ambac Assurance Corp., which was also stayed.

The government wants the court to agree to a schedule to resolve the dispute. BNYM wants the court to determine if it should withhold any amounts of money that it had incurred to defend itself from the lawsuits.

“The Cofina plan provides for the court to determine whether BNYM is entitled to any security from Whitebox or Ambac, in the form of a distribution holdback or a bond being posted for the benefit of BNYM in connection with fees and expenses which may be incurred by BNYM in the defense of the lawsuits, and if such security is warranted,” the government said in court documents.

As a result of discussions with mediators, the Financial Oversight & Management Board as well as the lawyers for BNYM, Whitebox and Ambac, developed procedures regarding consideration of the dispute contemplated in Section 19.5 of the Cofina debt plan, to which all parties had agreed to in September 2018.

The schedule is the following: Jan. 2, 2019, will be the deadline by which BNYM must file any briefs or declarations supporting the amount the bank contends should either be withheld from distributions to Whitebox and Ambac or posted by Whitebox and Ambac pursuant to Section 19.5 of the Cofina plan. It is also the deadline on which Whitebox and Ambac must file any brief or declarations supporting their position that no amounts are required either to be withheld from their distributions.

On Jan. 9, 2019, BNYM must file any responsive papers to the Whitebox and Ambac declarations. Whitebox and Ambac must also file their responses. From Jan. 10 through Jan. 15, 2019, each party can take depositions. Then, on Jan. 16, there will be a hear-ing on the dispute. A confirmation hearing on the Cofina debt agreement is also slated for Jan. 16.

[Editorial] Wolves of Wall Street Feed on Misery

Editor’s note: The following originally appeared in the Dec. 20, 2018 – Jan 2, 2019, issue of Caribbean Business.

What a year. Fresh off the onslaught of a natural disaster of epic proportions, the Year In Review 2018 could be described as Wolves of Wall Street feed on the Walking Dead—the Horror. Indeed, the kumbaya spirit that prevailed in the immediate aftermath of the storm seemingly vanished with the ringing in of 2018; no sooner had the lights been turned on in far reaches of Puerto Rico, talk about forgiving debt gave way to more legal harangues and political gamesmanship between members of the Financial Oversight & Management Board (FOMB) and the administration of Gov. Ricardo Rosselló.

Truth be told, the flimsy foundations for Puerto Rico’s crooked recovery were set in motion only days after Hurricane Maria. The first mistake made by the Rosselló administration that could have reduced the thousands of preventable deaths traced to his refusal to accept a National Incident Commander with full command and control over Title 10 military personnel and government officials. It took a National Incident Commander named Russell Honore in New Orleans to help that city get back on its feet. When that option was offered to the governor, he respectfully declined because Rosselló wanted to give the impression that he was in control.

Fresh off his seemingly stellar performance in the aftermath of Hurricane Irma, a category-5 storm that skirted Puerto Rico’s north coast, the governor perhaps underestimated the magnitude of the devastation wrought by Maria. Who could forget Rosselló’s meeting with U.S. President Donald Trump during which Puerto Rico’s governor declared that the island had survived Hurricane Maria with a mere 16 deaths—if only he knew then, what he knows now, that as many as 3,000 preventable deaths occurred in the months after the storm.

Sadly, the governor misspoke. With those remarks, he exposed Puerto Rico to a misguided response by a Bounty-lobbing commander in chief who has said repeatedly that Puerto Rico wasn’t in such bad shape and that its government could not be trusted to handle federal relief funds.

Thus, when Congress enacted the Additional Supplemental Appropriations for Disaster Relief Requirements Act in October 2017, it stipulated “that the Secretary of Homeland Security, in consultation with the Secretary of the [U.S.] Treasury, shall determine the terms, conditions, eligible uses, and timing and amount of Federal disbursements of

loans issued to a territory or possession, and instrumentalities and local governments thereof….”

Initially, Homeland in consultation with the U.S. Treasury determined that Puerto Rico’s liquidity—its Treasury Single Account (TSA)—had to dip below $800 million to disburse Community Disaster Loan (CDL) funds. The Rosselló administration took exception to those liquidity triggers and intended to have all funds channeled through the administration.

After a weeks-long public harangue, U.S. Treasury Secretary Steve Mnuchin announced that UST raised the liquidity threshold to $1.1 billion—Puerto Rico’s TSA moved to $1.45 billion. So, when Puerto Rico’s government officials call U.S. Treasury, there is a message on the answering machine that goes something like “Call us when you need the cash”—not a single penny in CDL funds has been disbursed.

And although Puerto Rico has already received some $4.9 billion in federal relief funding, there is another $1.5 billion in Community Development Block Grant (CDBG) funds scheduled for disbursement in October pending the presentation of a plan for their use. Despite the lack of verification of a clear plan for use—we only know that there is $100 million and $300 million coming down in two separate tranches—departing Deputy Secretary of the Department of Housing & Urban Development, Pamela Hughes Patenaude, announced HUD funds were disbursed.

As soon as the federal funding spigot opens, Puerto Rico’s economy should get a much-needed shot in the arm say some economists interviewed by this newspaper in our annual Year in Review report. Yet, we are still not exactly certain how the money will be used. Trump is none too pleased.

Policy wonks inside the Trump administration have therefore been discussing the possibility of drafting an Executive Order that would create a Coordinator of Federal Support for the Recovery & Rebuilding of Puerto Rico, selected by the President and reporting directly to the Secretary of Homeland Security to oversee the use of funds. This post is in very preliminary discussion stages.

A more likely scenario is that the FOMB, which recently held meetings at the White House, might work in conjunction with the Office of Management & Budget to draft Master Distribution Agreements to be approved by the oversight board. Given the contentious history between the FOMB and the Rosselló administration, this newspaper sees further delays and court dates over much-needed federal aid. One source with knowledge of the initiatives stressed that the word “unencumbered” is not in the vocabulary for the CDBG funds.

Trump would rather distance himself from the federal aid process and let existing authorities handle the oversight of CDBG funds, which would likely lead to higher legal costs down the road and adding to the $300 million in legal and professional fees that have been billed thus far. Hardly the yellow brick road some were selling when federal disaster relief was announced for Puerto Rico. Happy New Year.

Puerto Rico government account balances grow

A summary of the bank account balances of the government of Puerto Rico showed they grew by $263 million in a month from April 30 to May 31.

The balance – obtained from some 800 bank accounts whose data is now centralized – stands at $8.9 billion, a growth from $8.6 billion.

According to a report put out by the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA) this week, the hike was driven by a $267 million increase in central Government’s Treasury Single Account (TSA) balance, $48 million hike in Pension Related funds and $26 million for Public Corporations and Legally Separate Entities.

The hike took place although there was a $62 million reduction in Non-TSA Central Government funds and $17 million reduction in Restricted Accounts that are subject to Title III proceedings. Non-TSA Central Government balances are concentrated in the Public Housing Authority, lottery related funds, Department of Labor funds and the Child Support Administration.

FAFAA started its efforts to identify government bank accounts and their balances to obtain a comprehensive view of the cash position of the Government. Requests were sent to governmental instrumentalities, the Office of the Commissioner of Financial Institutions and various commercial banks.

“The exercise and the inventory described in this presentation, which had not been conducted by prior administrations, obtained information on plus 800 bank accounts. FAFAA now has centralized access to bank account information for most of the Government. Aafaf has conducted this process in consultation with the Financial Oversight and Management Board (FOMB) and its advisors, and has been providing periodic reports to the FOMB since July 2017,” the report states.

The information excludes balances from the cities, Legislature and the courts. It also excludes investment accounts.

Puerto Rico new-home sales rising

Assured Guaranty asks FOMB to reconsider certification of Fiscal Plan for Puerto Rico

The head of Assured Guaranty Corp. and Assured Guaranty Municipal Corp., is asking the Financial Oversight and Management Board (FOMB) to reconsider its certification of the commonwealth fiscal plan.

The firm insures about $1.6 billion of commonwealth general obligation bonds and about $1.9 billion of revenue bonds issued by other entities including the Highway and Transportation Authority, Cofina and the University of Puerto Rico.

On October 6 of last year, Assured withdrew a lawsuit othe legality of the the fiscal plan the Oversight Board approved on March 13 of 2017 that at the time the monoliner said violated the Puerto Rico Oversight, Management, and Economic Stability Act among other laws.

“Assured withdrew its lawsuit because it had been led to believe that the Oversight Board sought to “reset” its relations with Puerto Rico’s creditors and that the Original Fiscal Plan would be redrafted. Assured hoped that this “reset” would entail a more open fiscal plan development process aimed at producing a constitutional and Promesa-compliant fiscal plan benefitting from the input and support of creditors,” stated the letter written by Dominic J. Frederico, president and CEO of Assured.

“Unfortunately, the Oversight Board again formulated a fiscal plan without appropriate transparency of information and assumptions, and without collaboration with creditors,” he added in the letter dated Tuesday.

He said the fiscal plan approved on April 19 of this year violates Promesa.

Puerto Rico General Obligation and Cofina Creditors Pitch Deal

First, he said, the new fiscal plan does not respect lawful priorities and lawful liens in that it prioritizes general government expenditures instead of debt payments. It also violates Promesa dispositions that prevent the transfer of resources from one entity to another. The plan diverts revenues from the Highway and Transportation Authority, the Convention Center and the Infrastructure Financing Authority that were used to pay debt, to the commonwealth general fund.

The Fiscal plan also does not identify essential services and does not provide for a method to access capital markets.

“In addition to these legal defects, the Revised Fiscal Plan suffers from flawed methodologies and assumptions that result in an artificially pessimistic projection of Puerto Rico’s future revenues,” the firm said.

The Revised Fiscal Plan also suffers, he said, from the ongoing lack of up-to-date audited financial statements or other public information sufficient to develop or assess a realistic fiscal plan.

Retirees ask court to appoint panel for Prepa pensioneers

Puerto Rico General Obligation and Cofina Creditors Pitch Deal

By Philipe Schoene & Eva Lloréns Velez

Puerto Rico’s debt game is on the verge of its first rook to pawn move with the final tweaks of a deal between the Commonwealth General Obligation (GO) bondholders and the Puerto Rico Sales Tax Financing Corp. (Cofina) creditors about to be sealed.

According to a joint settlement outline obtained by Caribbean Business, the preliminary deal “supported by certain holders or insurers of GO Bonds and certain holders or insurers of Cofina Bonds (Supporting Parties) would settle the Commonwealth-Cofina dispute based on the creation of a trust into which all Cofina Bonds would be contributed and which would make an exchange offer for all GO Bonds and allow general unsecured claims (GUCs). The trust shall be an independent entity employing a lock box mechanism and, to the fullest extent permitted under applicable law, structured as a bankruptcy remote entity, on terms acceptable to the Supporting Parties.”

The documents shared with the Financial Oversight & Management Board (FOMB) and Puerto Rico Fiscal Agency & Financial Advisory Authority (Fafaa) stipulate, “Implementation of the settlement would be that (i) Cofina Bondholders receive 52.5000 percent of Distributable Value, and (ii) the participating GO Bondholders [would] receive 46.2330 percent, and GUCs…1.2670 percent, for an aggregate Commonwealth-side share of 47.5000 percent.”

The so-called Commonwealth-Cofina dispute over who has a priority in debt payments is one of the key areas that needs to be resolved in the government’s Title III bankruptcy process under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) as it has repercussions in determining how assets will be distributed.

“This is hugely important because, as you know, these are the two creditor constituencies with a claim to priority hierarchies; they are the first groups of creditors that should be resolved so everything else starts to fall into place,” one Wall Street source with knowledge of the matter told Caribbean Business.

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“The deal includes a significant number of Cofina bondholders—including seniors, subs and the hedge funds, and a significant number of General Obligation bondholders, which also includes all of the hedge funds.”

The agreement reportedly uses the structure of Cofina—the revenues of the Sales & Use Tax (IVU by its Spanish acronym) as a mechanism to fund the deal. “In essence, they are going to use Cofina revenue to pay the GOs a portion, Cofina Seniors a portion, Cofina Subs a portion. Another set-aside will be made for unsecured creditors and the remainder for the Commonwealth,” the Wall Street source added.

The preliminary agreement, which has been discussed with members of Gov. Ricardo Rosselló’s restructuring brigades and members of the FOMB, is significant because it sets a starting point for consensus in a legal harangue between two Puerto Rico creditor constituencies who believe their paper to be holy. “They have come to a preliminary understanding of the level of haircuts they would be willing to take to drop their legal claims and enter into the structure enabled by this deal,” a second source involved in the negotiations told Caribbean Business. “Cofina remains in place as a very important structure enabling an agreement on how to set up the different tranches and hierarchies with the main creditors being paid with agreed-upon haircuts. It frees up the Commonwealth’s general fund so the government frees itself of the legal claim.”

The Wall Street source confirmed the deal “is going to be an exchange where everyone is going to tender their current bond and they receive back a Cofina bond, which depending on the tranche you are in, will have a particular haircut, coupon and maturity.”

The bond exchange contemplates revenue streams contingent upon certain levels of growth in the economy and the capture of Sales & Use tax. In essence, it stipulates that payment to holder of the new paper is based on the revenue streams achieved by the Cofina structure. “Analysts made their projections based on the forecast for economic growth—they based creditors’ recovery on those expected revenues—if it is more, you get more; if it is less; you will receive less. But it is nonrecourse—so if it is less, you can’t go outside the structure to make a claim. So, the government can say this is what my dedicated revenue stream is going to be. Of course, there are a bunch of hurdles that remain.”

People with knowledge of the matter say that the mediation between lawyers for several creditor constituencies that were at odds with each other have recently made headway as they try attempt to cross T’s and dot the I’s. Yet there are many moving parts that remain, which are tracing mostly to objections by some of the hedge funds owning GO and Cofina debt.

The dispute between the GO and Cofina debtors has been ongoing in the courts for some time, prompting the FOMB to appoint officials to represent each side to resolve the matter. The dispute was part of the adversary proceeding in Official Committee of Unsecured Creditors vs. Bettina Whyte, who is the Cofina bondholders’ representative in the case.

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U.S. Judge Laura Taylor Swain last week took under advisement whether to have the Puerto Rico Supreme Court answer questions involving the constitutionality of Cofina and whether the sales & use tax belongs to Cofina or to the island’s general fund.

The issue’s resolution is important because while the Cofina enabling law, or Act 91, says the sales & use tax belongs to Cofina, the law also calls for part of the money to go to the general fund. The Cofina enabling law created a Dedicated Sales Tax Fund, to be held and owned by Cofina separate and apart from the central government’s general fund, and provided, among other things, that each fiscal year the first receipts of the Commonwealth’s Sales & Use Tax, in the amount specified in the law, be deposited in this special Dedicated Fund to pay sales-tax revenues. The rest goes to the general fund.

Supporters of allowing the local Supreme Court to decide the issue contended that it is a matter of pure local law and that the federal court should have a deference to the local courts before declaring a Puerto Rican law unconstitutional. Opponents say the matter was a federal dispute that could be answered by the U.S. District Judge.

The legality of Cofina or the transfer of ownership of the sales & use tax to Cofina has never been interpreted by any court.

Fafaa, FOMB react to the proposed settlement

The Financial Oversight & Management Board (FOMB) said today that the economic terms of the General Obligation-Cofina creditor proposal made public today do not align with the New Fiscal Plan certified on April 19, 2018. The Board stated that it “remains very interested in achieving a broad-based, consensual restructuring of Puerto Rico’s complex and unaffordable debts and is encouraged that our major creditors, even those with competing claims, are working together toward that same goal. However, the economic terms of this creditor proposal were not crafted with any prior input from either the Oversight Board or the government and are completely unaffordable.”

In the Board’s view, the proposed terms would create large and recurring structural deficits over the long run as compared to the long-term primary surpluses projected in the certified New Fiscal Plan, which are highly dependent on the government’s full implementation of the Fiscal Plan, with no aspect as critical to long-term economic growth as prompt enactment of the proposed labor reform.

“The Board welcomes the opportunity to engage with all of Puerto Rico’s creditors toward a consensual and comprehensive debt restructuring that has economic terms that are affordable, sustainable and consistent with the certified New Fiscal Plan over both the short and long terms,” the Board added.

Meanwhile, the Puerto Rico Fiscal Agency & Financial Advisory Authority (Fafaa) announced that after having consulted with its advisers and counsel, as well as the FOMB, has determined the Bondholder-Proposed Settlement terms are not acceptable.

“Fafaa’s decision is based upon the conclusion that the Bondholder-Proposed Settlement debt-service requirements are not sustainable in light of Puerto Rico’s projected fiscal and economic situation, as reflected and explained in the Commonwealth Fiscal Plan submitted to the FOMB”, the financial organism said on behalf of the Government of Puerto Rico.

[Editorial] ‘Túmbame La Pajita’ Economics

Editor’s note: The following editorial originally appeared in the April 12-18 issue of Caribbean Business.

The most recent round of the rumble in the congressional jungle between Gov. Ricardo Rosselló and the Financial Oversight & Management Board (FOMB) is more akin to wrestling where the arm-twisting is for show. In essence, Puerto Rico’s government launched one more prefight publicity salvo in refusing to follow 35 of the 48 measures the board wanted included in revisions to draft fiscal plans delivered on April 5.

Gov. Rosselló’s refusal to include measures he views are beyond the FOMB’s purview—dictums in the realm of public policy such as the elimination of the Christmas bonus and minimum wage—are painful austerity policies that come with a political cost. The question that observers on the Hill are asking is whether this is mere finger-wagging prior to succumbing to fiscal plans that the board is submitting or whether Rosselló is in this for the full 15 rounds.

A drag-out tussle could be very costly. The Rosselló administration asserts that the estimated cost in legal and professional fees could reach $1.4 billion over the next decade as the various creditor constituencies sue over grievances in the restructuring of their debt under Title III bankruptcy proceedings contained in the Puerto Rico Oversight Management & Economic Stability Act (Promesa).

Given the recent shenanigans between the governor and the board, there are some creditors who fear the Rosselló administration’s estimates are conservative. The túmbame la pajita accounting underpinning Junateconomics could drive legal costs into the stratosphere. Even before the WWE caged match in the U.S. District Court for the District of Puerto Rico, Caribbean Business was told by one influential creditor from the monoline bond insurance realm that the legal costs could reach 5 percent of Puerto Rico’s total debtload—somewhere in the vicinity of $3 billion. At the time we thought it an exaggeration—now, not so much, given the added layer of hyper-mitosis between Rosselló and the FOMB.

How high these legal and professional costs climb will depend largely on how far the Rosselló administration is willing to go beyond these first stages of saber rattling. If, as expected, the Rosselló administration relents and merely blames the board—call it condemning the condemner—for all the pain Puerto Rico’s people will suffer in this rationed new world, perhaps the legal jamboree can be kept in check. It is certain, however, that there is pain coming down the pike for everyone except the lawyers and financial advisers who will make out like bandits.

In short, the opening shots—a scathing letter to U.S. House Natural Resources Committee Chairman Rob Bishop and the most recent missives to the FOMB—have already cost Puerto Rico immediate access to Community Disaster Loan (CDL) funds appropriated by the U.S. Congress.

Standing between Puerto Rico and as much as $2.03 billion in relief funds are an additional set of conditions drafted by the U.S. Treasury that address encumbrances tied to the reality that Puerto Rico’s debt is being worked out under Title III of Promesa. The U.S. Treasury will not allow the Puerto Rico government to use the money unencumbered—it is not to pay debt service, nor to pay for lobbying, nor to pay to restore damaged facilities. That reconstruction money will come from a different bucket and there will be no “double-dipping” here.

Put succinctly, a source on the Hill with ties to the Trump administration told Caribbean Business that Puerto Rico could have been receiving that money since the measure was first passed by U.S. Congress because all the objections to the conditions tied to the CDL funding and because “to the best of everyone’s knowledge, the government’s financial forecasting—that it would run out of money—has been wrong every step of the way.” Oh, by the way—Rosselló has until Oct. 31, 2018, to draw down from that account.

Thankfully, there is hope on the horizon in the form of some $18.4 billion for the reconstruction of infrastructure and housing destroyed by Hurricane Maria, and “mitigation activities.” Some $1.5 billion has already been earmarked for release by the Department of Housing & Urban Development (HUD) but is pending a concerted plan by the Rosselló administration. Important meetings between HUD, Puerto Rico’s government officials and leaders of the private sector have already occurred, and plans are in place to receive that money for works that include everything from providing housing to those who are living in subcode homes to building community centers and rebuilding damaged roads and bridges.

Many creative ideas have been thrown about by the Puerto Rico Builders Association and the Associated General Contractors of America on the housing front. For instance, there is a voucher program being discussed that would provide access for those who are living in gutted hovels to purchase or have new homes built—to code. With the construction will come jobs. Best to focus on meeting the milestones to secure HUD funds than to continue to add legal costs in the “snit for show” between the administration and board.

U.S. Treasury drafts conditions tied to Puerto Rico’s CDL funds

U.S. Treasury building in Washington, D.C.

SAN JUAN — When U.S. Treasury Secretary Steven Mnuchin visited Puerto Rico two weeks ago for a meeting with Gov. Ricardo Rosselló and members of the Financial Oversight & Management Board (FOMB), many local government officials were encouraged by news that the feds had increased a liquidity threshold for the release of funds tied to a Community Disaster Loans (CDLs). The original conditions for fund disbursement—that Puerto Rico’s Treasury Single Account had to dip below $800 million—was increased by $300 million to $1.1 billion. The loan agreement is hardly free of terms, according to additional terms being drafted by the U.S. Treasury.

“The conditions tied to the loan are perhaps more complicated because of Promesa [the Puerto Rico Oversight, Management & Economic Stability Act] and what it calls for, which is not something other jurisdictions have to deal with,” one source on the Hill, with ties to the Trump administration, told Caribbean Business. “It is precisely what the governor has been trying to do [get the funds unencumbered,] and the U.S. Treasury has been pushing back because this is not optional. This is the way the U.S. Congress has laid out the law. This is the way it has to be.”

The conditions are mapped out in an addendum that is particular to Puerto Rico’s case, which because of Promesa’s stipulations sets in black and white the CDL funding uses. The doctrine underpinning the set of rules hinges on keeping monies destined far from debt servicing and payment for lobbyists and advisers.

The loan, whose purpose is to support cash needs, may be drawn upon until Oct. 31 and, after that time, no drawdowns can occur. It will be repaid twice a year, in July and January.

The money can be used to fund essential services, payroll and benefits, pensions, facilities maintenance that is not infrastructure improvements and to buy materials or pay suppliers. It cannot be used to pay debt service, refinance debt, pay for capital improvements, restore damaged facilities, provide tax refunds, pay for lobbying or pay for any Title III costs. It cannot be used to transfer funds, pay for administrative costs of federal disaster assistance or pay for disaster-related expenditures.

“The stuff that it cannot be used for seems fairly reasonable, because if you are going to obtain money from FEMA [Federal Emergency Management Agency] to repair things, don’t get charged against this—that is a different bucket of money and we are not going to let you do that,” the Trump source added.

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Two sources with knowledge of the negotiations tied to the loan explained that because Puerto Rico is restructuring its debt through Title III of Promesa, the funds will not be granted unencumbered. “The other important thing to know is that this document is heavily predicated on the Promesa board’s approved budgets—the thing that baffles people is that the governor believes it is predicated on his budget, no matter what the board says. If that is true, he is never going to get that money.”

The Puerto Rico Oversight, Management & Economic Stability Act was enacted in 2016 to provide the island a mechanism for debt restructuring and to chart a course to fiscal austerity led by the FOMB.

Under Promesa, the control board is tasked with the responsibility of approving fiscal plans for Puerto Rico’s government agencies prior to certifying the plans of adjustment in the restructuring of the island’s $69 billion debtload. Thus far, the government has submitted separate fiscal plans for Puerto Rico’s Electric Power and Aqueduct & Sewer authorities, the University of Puerto Rico and the central government.

As of this writing, the Rosselló administration and the control board remained at odds over the final versions of the submitted plans. Gov. Rosselló has taken exception to some of the board’s recommendations because, he says, the board is overstepping its bounds with demands that have more to do with public policy than fiscal affairs.

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“We are recognizing the powers the board has, but also defending the powers of the government of Puerto Rico,” the governor recently said.

The Trump administration source said Puerto Rico could have been receiving this money since the measure was first passed by Congress, and the U.S. Virgin Islands has been receiving money for eight weeks now. Puerto Rico has not received one penny, in part because of the governor’s objections and because Puerto Rico, to the best of everyone’s knowledge, “does not need the money.”

Puerto Rico has twice declared it would run out of money without federal funds. “The point is that Puerto Rico’s own financial forecasting has been wrong at every step of the way. Given the constraints of the Treasury Department—appropriations, the law and that kind of stuff—the money is available until Oct. 31, only if the government needs it. So, this is not a cash infusion for the money to just sit in a bank account.”

Senior reporter Eva Lloréns Vélez contributed to this story.