Muni Credit News April 28, 2016

Joseph Krist

Municipal Credit Consultant

PR HURDLES TOWARDS DEFAULT THIS MONDAY

Puerto Rico’s government still has not set a delivery date for Puerto Rico’s audited financial statements for fiscal year 2014, Public Affairs Secretary Jesús Manuel Ortiz said Wednesday.  “Certainly, we don’t have a delivery date,” said Ortiz, while adding that meetings between KPMG and government officials are still underway. The government of Gov. Alejandro García Padilla was expected to release the financial statements early this month. However, uncertainty over the  Government Development Bank (GDB) has again delayed the delivery of the statements, which were due almost a year ago.

At the GDB,  there remains uncertainty in figuring out the government bank’s loan loss reserves. If the government can restructure its debt, then there would be more money on hand; if the government isn’t able to restructure, then there is less money. Many assumptions tied to the central government are difficult to value.

Ironically the administration is currently evaluating a proposal from KPMG to perform the audited financial reports for fiscal year 2015, which are due May 1. KPMG also produced the audit for fiscal 2013, which was delivered two months past its deadline. During the past three years, KPMG has been paid roughly $20 million in professional-services contracts, according to government records.

Congress heading out of Washington on Friday, missing deadlines on the budget and on helping Puerto Rico with its financial crisis. Having failed to enact a bill by the May 1 deadline to help the territory, lawmakers are now focusing on a July 1 deadline, when around $2 billion in principle and interest payments come due.

The government is expected to keep operating as usual, but economists warn that its access to capital markets will shut down and that eventually this will curtail public services if a debt-restructuring mechanism isn’t approved. Puerto Rico expects multiple lawsuits to be filed shortly after Monday’s anticipated default. A House bill would create a control board to help manage the island’s $70 billion debt and oversee debt restructuring. But the legislation has stalled in the Natural Resources Committee, as some conservatives and Democrats have objected to the approach.

Speaker Paul Ryan, R-Wis., has pushed the bill, saying the U.S. may eventually have to bail out the territory if Congress doesn’t act soon. Utah Rep. Rob Bishop, the Republican chairman of the Natural Resources panel, says he hopes the island’s impending default will create more urgency among his colleagues. The Senate is expected to wait to see what happens in the House first.

The Puerto Rico government is expected to keep operating as usual, but economists warn that its access to capital markets will shut down and that eventually this will curtail public services if a debt-restructuring mechanism isn’t approved. Puerto Rico expects multiple lawsuits to be filed shortly after Monday’s anticipated default.

Democrats called upon House leaders to modify this spring’s three-weeks on, one-week off legislative schedule to keep working, as Puerto Rico moves toward its default on Sunday. “It’s very, very hard to get anything done if you are a drive-by Congress,” said House Minority Leader Nancy Pelosi, D-Calif. “We’re barely here. And these deadlines are coming.” Hours later, however, Democrats joined Republicans in adjournment.

It is clear that Congress has yet to figure out which outcome generates political upside. With national attention focused on the presidential nomination process, it has been hard  for Puerto Rico to generate a sufficient level of political traction and attention in order to drive a resolution of its situation. In the meantime, it appears that the coalition of political leaders who initially supported tax increases earlier this year is falling apart. With the island’s gubernatorial election process beginning to take shape, Sen. President Eduardo Bhatia Gautier, Sen. José Nadal Power, House President Jaime Perelló Borrás, Rep. Rafael Hernández Montañez, and PDP gubernatorial candidate David Bernier all announced their opposition to the planned tax changes. A scheduled increase in VAT has been delayed due to this opposition.

Meanwhile it has been about seven months since the initial announcement of a PREPA restructuring agreement and it has still to be implemented. PREPA  is seeking to prolong a bond-purchase agreement with its creditors to May 2, averting a potential termination of a larger debt-restructuring deal. The agreement  would have bondholders and insurance companies agree to buy $111 million of three-year bonds from PREPA. The contract expired late Wednesday and is part of PREPA’s plan to restructure $9 billion of debt. The larger restructuring pact will end if the bond-purchase agreement fails to continue.

MEANWHILE IN ATLANTIC CITY

Assembly Speaker Vincent Prieto will post his Atlantic City rescue bill for a vote next Thursday. Prieto released a schedule for the Assembly on that includes a voting session on Thursday. Prieto’s bill gives the city two years to meet benchmarks in order to solve its financial crisis. If the city fails to do that, it will be taken over by the state.

Senate President Steve Sweeney is reported to have tried to compromise with Prieto by offering a bill that gives the city 130 days to meet benchmarks, but Prieto is said to have been unwilling to accept it. Atlantic City Mayor Don Guardian and Council President Marty Small have repeatedly said they support Prieto’s bill.

May 15 is the deadline date for action by the State that would enable Atlantic City to avoid a default. Much of this has been lost in the fog of the market’s attention on Puerto Rico and its woes.

We believe that while much smaller in terms of dollars, the failure of the State of New Jersey to help Atlantic City avoid a default would have implications for the market, especially for the ability of not only New jersey’s municipalities but also for the State itself.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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