Muni Credit News December 3, 2015

Joseph Krist

Municipal Credit Consultant


Debt service may have been paid but the Puerto Rico debt crisis entered a new phase. The government of Puerto Rico was able to meet in full a $354.7 million payment on outstanding Government Development Bank (GDB) notes due Tuesday, Dec. 1, the governor’s fiscal team announced that certain revenues pledged to pay debt held by five public entities will be “clawed back” due to the severe cash crunch affecting the commonwealth.

Executive Order 2015-46, signed Monday by Gov. Alejandro García Padilla, allows the central government to use revenues that cover debt service of certain public corporations — the Highways & Transportation (HTA), Infrastructure Financing (AFI), Metropolitan Bus (AMA), Integrated Transportation and Convention Center District authorities — to pay debt carrying the commonwealth’s guarantee. In all, the government would claw back about $329 million in such revenues for the payment of commonwealth-guaranteed debt and would allow to maintain essential government services, officials say.

This opens the door to potential litigation by creditors of the impacted agencies that would test the validity of the “claw back” now that it has been used for the first time.  GDB President & Chairwoman Melba Acosta said the Dec. 1 payment was met using the bank’s funds and is intended to show its creditors Puerto Rico’s willingness to honor its obligations as it continues to seek a consensual debt-restructuring deal. Puerto Rico’s liquidity position continues to be “severely constrained” despite the extraordinary measures.

At the same time, revenue estimates for the current fiscal year have been further adjusted, about $508 million less than originally projected in the commonwealth’s budget for fiscal year 2016, from $9.8 billion to $9.3 billion. In a government quarterly financial report released Nov. 6, the administration had already hinted at the possibility of the “claw back” through which it could tap these revenues to pay debt guaranteed by the commonwealth. Citing the Puerto Rico Constitution, the government could do so “if there is an insufficiency of available resources to meet debt service on general obligation debt.”

“In the case of the contracts where a clawback could be carried out, they provide that if there is a need of cash flow to pay debt with more legal protection and government services, a clawback can be executed,” Secretary of State Víctor Suárez said.

Meeting the Dec. 1 GDB payment proved to be a challenge for the government, with several payments looming , and as soon as Jan. 1, the administration would have to come up with more than $600 million if it is to meet all its debt obligations that come due on New Year’s Day. Primary among those Jan. 1 payments, the government faces $331.6 million due on general obligation (GO) debt. There is also some $115 million due on HTA debt, about $36 million due on Infrastructure Financing Authority (AFI) and $9.5 million corresponding to the Convention Center District Authority.

The GDB said that despite the  decision to claw back revenues pledged to the public corporations, they would still have enough resources to meet their debt-service schedule. “What we are doing is clawing back on the money that goes to the trustee. Most of these agencies have sufficient reserves to pay their scheduled debt service payments. Not sending the money [to the trustee] doesn’t necessarily mean that we are not going to pay that debt. Each entity is different. The executive order was signed yesterday, and the first clawback was yesterday, of some $22 million that was going from HTA to its trustee,” Acosta said.

The action was concurrent with a U.S. Senate hearing on Puerto Rico’s problems. According to the testimony submitted by Governor García Padilla for the  hearing over the Puerto Rico fiscal crisis, the governor stated that “in simple terms, we have begun to default on our debt,” as a result of his decision to sign the order that allows for the clawback. Other spokesmen for the Government were more equivocal saying, “According to each contract, there are different definitions on what a default would be. From a technical default, to a default or a breach of contract, there are different definitions”.

The  Justice Secretary César Miranda said the administration’s decision to use these pledged revenues to pay other public debt “could be interpreted as a technical default, in the way that we are retaining money that would have been used to eventually pay a debt when it’s due. Certainly, the debt hasn’t matured. When it is due and not paid, then there could be an absolute default. Someone may interpret that retaining the money that would have been used to pay certain debt could constitute a default. It is questionable legally, and would depend on what is stated under each particular contract.”


The other large troubled credit made some level of progress this week. Gov. Bruce Rauner and House Democrats on Wednesday came to a rare compromise to release more than $3.1 billion to pay Illinois Lottery winners and help cities and towns operate 911 centers, plow roads and train firefighters. Normally, municipalities receive a share of gas tax, 911 surcharge and gambling revenue to finance up day-to-day operations.  Those dollars have been on hold due to the state budget impasse. Legislation passed 107-1 by the House would free those funds. Of the total, $1 billion would be for the lottery which had stopped making large payouts because the state hasn’t had a budget since July 1.

The bulk of the $3.1 billion in new spending is money set aside in accounts earmarked for specialized purposes, though lawmakers also signed off on $28 million in spending from the state’s main checking account. About $18 million of that will go to domestic violence shelters and another $10 million was set aside for the Secretary of State’s office, which stopped mailing yearly reminders for drivers to renew their vehicle registrations.

By year’s end, Comptroller Leslie Munger projects the backlog of delayed bill payments could reach $8.5 billion. Areas that remain unfunded include colleges and universities, scholarship programs for low-income students and various programs for victims of sexual assault and those with developmental disabilities.

Rauner said he would support the bill if it also included more money for things like debt payments and salting and plowing of roads.  He billed the move as a compromise, although it also provided him political cover as some House Republicans were willing to vote for the plan in the face of pressure from suburban mayors to free up the money. Following Wednesday’s House vote, Rauner said there were some things in the bill he liked and some things he didn’t, but “what we did is we compromised.”

The Senate is scheduled to return to the Capitol on Monday of next week to vote on the legislation. Rauner and Democrats also were able to find common ground on a bill that could make workers ineligible for unemployment benefits if they do things like drink on the job, lie on an employment application or refuse to follow an employer’s instructions.

It says a lot that those last items represent a real achievement in Illinois budget politics.


If there is one industry that has faced more challenges to its at ability to plan financially over the last two decades it has to be the healthcare industry. This week will present yet another example. It is likely that as we go to press that the U.S. senate will use the reconciliation process to approve a repeal of Obamacare. It would represent the first  time in the six year history of the ACA that both houses approve such legislation. It will have no practical impact as all involved agree that the bill will be vetoed and that the votes to override such a veto are not to be had. It will however thicken the cloud that hangs over the law and add to the uncertainty about exactly what pool of revenues will be available to hospitals and other providers going forward over the long term.

The other headwinds are pretty well established and have been highlighted during the current enrollment period for coverage for 2016. Between stories about higher premiums, fewer insurer participants, and the possibility of changes under a new administration in Kentucky the stream of news about the ACA has not been positive. Of course this excludes the fact that millions of Americans have gotten health insurance and that the % of Americans uninsured is at a multi-decade low.

All of these factors conspire to make the job of hospital CFO more unenviable by the day. Our view is that they combine to continue the support for scale on the part of providers although scale without efficient use of technology, especially in billing is not a sufficient panacea. In fact, technology at any facility whether it be large or small, urban or rural, is a key issue. Having said that, smaller and stand alone facilities will remain the most vulnerable to the uncertainties inherent in the battle over the ACA. we believe that investors should keep that in mind as they continue or consider their investments in credits in this sector.

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