Muni Credit News July 30, 2015

Joseph Krist

Municipal Credit Consultant


PREPA disclosed that it is seeking to push debt maturities on its $8.1 billion of bonds back by five years, during which time no principal would be paid and interest would be cut to 1%, unless the authority’s cash position warrants it. Those features contrast the more common approach of simply cutting principal and interest payments. Under PREPA’s plan the debt of the forbearing bondholders and the debt of those non-forbearing bondholders who elected for this plan would be subject to what the Commonwealth is calling a moratorium. Non-forbearing bondholders would also have the right to elect to take immediate payments with haircuts from 30 to 35%.

In PREPA’s plan, insured debt would be excluded from these treatments.

The president of the House of Representatives Jaime Perelló said, “We are going to start a dialogue case by case concerning our (the Commonwealth’s direct) debts to see if we can extend their payment by five years,” the same period found in PREPA’s proposal. PREPA made its proposal to its bondholders on June 25, though it was not made public until after Perelló’s comment.

Perelló is one of five members of Puerto Rico’s government sitting on the Working Group for Economic Recovery for Puerto Rico, which is assigned to come up with proposals for restructuring the commonwealth government’s debt by Sept. 1.

One has to turn on the old way back machine to find an example of the kind of fiscal semantics being attempted by PR officials. The last time that this stunt was attempted was by New York in 1975 when it enacted a ‘debt moratorium’. This was seen for the semantic game it was and fooled no one while NY claimed that it had not actually ‘defaulted’ on the debt, they just postponed repayment.

PREPA is the logical candidate for a restructuring as a revenue backed enterprise with a discrete source of revenues for operations and debt service. There could be many reasons for creditors in this scenario to go along with a restructuring of that kind of enterprise. In the case of tax-backed debt like GO’s, the issue is much more difficult as the creditors will potentially viewed as being in direct competition with the provision of essential services.


The dimensions of the fault line between creditors and the current administration become clearer this week. Centennial Group Latin America, a consulting firm, based in Washington, was hired several months ago by the group of hedge funds and other investment firms to analyze Puerto Rico’s economy and finances. It produced a study for that group, the Ad Hoc Group, which includes Fir Tree Partners, Brigade Capital Management, Monarch Alternative Capital and Davidson Kempner.

The Ad Hoc Group owns about $5.2 billion of debt, mostly general-obligation bonds and other bonds that are guaranteed by the central government. Economists working for that group say that the government could solve its debt crisis largely by improving tax collections and obtaining additional financing over the next two years. The message of sustainability is in real contrast with the recent announcement by Puerto Rico’s governor, Alejandro García Padilla, that the commonwealth’s debt is “unpayable.”

“There may be an issue of liquidity in the short term,” in Puerto Rico, “but the debt itself, in global terms, is sustainable,” according to the hedge funds’ consultants.  They estimate that Puerto Rico would need short-term financing of about $2.5 billion to get through 2016 safely. That would cover current overdue bills to vendors, scheduled payments on existing debt and finance a budget deficit projected to be less than $500 million.

The economists said they were not suggesting that Puerto Rico ought to impose any more tax increases on residents who were already paying the taxes they owe. The report shows the commonwealth collects far less of the taxes due than the 50 states, and that it would not have to increase tax rates at all if it could capture what residents are now supposed to be paying. The advisers also argued that Puerto Rico could improve its finances by privatizing the operation of its public works. The commonwealth had already contracted with a Mexican firm to operate its largest airport, and privatized of its toll highways.

Some of the hedge fund holders also offered earlier this year to loan Puerto Rico about $2 billion, to help get the commonwealth through another year of its perennial budget shortfalls. But the government declined those offers, saying the terms were too onerous. Víctor Suárez, chief of staff to Gov. García Padilla said, “The simple fact remains that extreme austerity placed on Puerto Ricans with less than a comprehensive effort from all stakeholders is not a viable solution for an economy already on its knees.”

On the funding side, a $2.95 billion bond issue through the Puerto Rico Infrastructure Financing Authority (AFI by its Spanish acronym) will not be pursued at this time, as “there is no market for it,” Suárez said Monday. The deal was intended to repay a $2.2 billion loan that the Government Development Bank (GDB) provided to the Highways & Transportation Authority (HTA), after transferring the loan to AFI. Recent hikes to the petroleum-products tax were legislated to serve as repayment source for the transaction and would have also provided cash for HTA operations.

“We are trying to achieve a smaller transaction, with reasonable terms, of some $400 [million] to $500 million,” according to Suarez. Meanwhile, Puerto Rico is seeking to finalize before mid-August a $400 million TRANs deal from three public corporations in a bid to ease the commonwealth’s current cash crunch. The commonwealth faces a $59.7 million payment on Public Finance Corp. bonds on August 1. We have discussed previously that Puerto Rico would be unable to meet with the current government’s liquidity. The government has reiterated that the priority will always be to provide essential services to citizens, such as security, health and education.


Cook County Judge Rita Novak threw out the pension changes adopted earlier this year by the City of Chicago on Friday. Her decision was based on an earlier Illinois Supreme Court ruling that said similar changes to state pension funds violated the state constitution. The decision was not unanticipated.

The overhaul sought to eliminate a $9.4 billion unfunded pension liability by cutting benefits and increasing contributions. Workers, retirees and labor unions sued, saying the constitution prohibits reducing pension benefits. In a statement Friday, Chicago corporation counsel Stephen Patton says the city is disappointed in the decision. He says the city looks forward to having its arguments heard by the Illinois Supreme Court.

Those arguments include the City’s contention that the City’s changes preserved and protected the funds from the depletion of their assets. It further legally binds the city to actuarially based contributions to fully fund the system, and obligates the city on pension annuities, which the city argued prior statutes did not. The judge said that this argument was “wholly inconsistent with constitutional teachings” saying “it disregards the settled distinction between pension benefits, which are constitutionally protected, and funding choices, which are not.”

Another argument was that the new provisions afforded fund members provide consideration for the cuts, a legal theory in contract law that allows for detrimental changes to be made in exchange for some perk if parties agree. The city notes that 28 of 31 impacted unions signed off on the plan. The judge said that the city failed to show it had authority for such an expansive interpretation of a “bargained-for exchange.” She further found that argument fails in ignoring the individual rights of fund members who are not in the unions that were party to the negotiations.


This month an Orange County Grand Jury released a report that helps investors to understand what analysts face in trying to obtain and follow important credit-related data supporting this important class of largely non-rated debt. Much of this debt is held by individuals and their mutual fund proxies. The review covered only community facilities district debt issued within Orange County. Its findings, however have broad implications for the sector statewide.

The Grand Jury found that there is a significant lack of transparency regarding CFDs. Information pertaining to a CFD that is provided to the homeowner often does not include the intended purposes of the special tax. Administrative costs and servicing costs of the bond are often not openly revealed. It has been suggested to the Grand Jury that the only way to get good information is for the homeowner to request detailed accounting records (internal financial statements) of the CFD-T under the Freedom of Information Act. There is a lack of transparency to homeowners relative to how CFD funds are being used.

The Grand Jury discovered that the State does not require a complete accounting of the use of CFDs. The only information required by the State CDIAC is the original amount of bond funding, bond balance, taxes outstanding to be collected, and the end date of the bonds. There does not seem to be appropriate oversight and auditing of CFDs and special tax expenditures within the County of Orange. While the assumption is that the CFD debt would be repaid in a finite period of time, there is a mechanism available to controlling entities to extend debt obligations and thereby extend the CFD special tax in perpetuity.

The Grand Jury recommended that each local agency that established a CFD should create an oversight committee and an audit committee to provide for an independent, transparent view of the manner in which CFD funds are being expended. Audit report information, as delineated in California Government Code, 1982 § 53343.1, should be made available to the CFD taxpayers on a website after each fiscal year for each CFD number.


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It’s time to rest and recharge so we will not be publishing in the first two weeks in August.

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