Muni Credit News June 9, 2016

Joseph Krist

Municipal Credit Consultant


The magnitude of the gap between the various interests involved in the process of dealing with Puerto Rico’s impending default were presented in stark relief this week at a conference for institutional investors held in NY this week. Representatives of investors, bond insurers, and one gubernatorial candidate attended as did the head of the GDB.

The lack of information transparency was noted by several, especially the continued lack of audited fiscal 2014 audited financials. The head of Assured Guaranty expressed sentiments which have bothered us for some time. “You have a government that seems to ignore every law…. How can we do anything if they don’t follow the law. When do we get to choose which law or constitutional provision is enforced?” he said.

The comments of various participants shed a light on the continuing schisms between the various investors classes. Representatives from the credit-union group, believe an entity-by-entity approach should be quickly adopted and that the commonwealth’s negotiation strategy “has been divided among creditor groups.” Individual investors representatives explained how the group representing their interests formed precisely out of local bondholders’ frustration from not being part of the negotiations. The director of the GDB said the superbond would help the commonwealth manage its debt more efficiently, but conceded the structure is not set in stone.

Many views on Promesa were expressed. Gubernatorial candidate Rosselló was quick to point out his opposition to Promesa, and proposes a joint commission, “which essentially is a fiscal control board, but specifically for managing the debt restructuring,” he said. He still believes federal government involvement is important moving forward, providing assistance in such areas as tax-revenue collection. He explained his plans to reduce the government’s size and spending, and how his plans are more suitable to solve the island’s problems.

AMBAC’s representative expressed support for Promesa and its debt-restructuring components, includingTitle VI, which provides for collective action as did institutional investor reps. Assured’s chairman would rather see a voluntary process under Title VI, instead of following the path of Title III, where both Puerto Rico and the market could lose. Title III would allow for a court-ordered debt-restructuring process if the fiscal oversight board approves it.

Meanwhile,  P.R. House Treasury Committee Chairman Rafael “Tatito” Hernández is cancelling, through the 2017 fiscal budget, the contracts extended to Millstein & Co. as restructuring. Hernández said that instead of getting paid from the general fund, the advisers should be paid at the closing of the transaction as it was done in the case of AlixPartners and Chief Restructuring Officer Lisa Donahue, who handled the Puerto Rico Electric Power Authority’s $9 billion debt restructuring. Cleary Gottlieb’s Richard Cooper and Millstein & Co.’s founder, Jim Millstein, were hired by the Government Development Bank as restructuring advisers, and they have been paid more than $65 million. The cancellation will take place starting in July with the new fiscal year.


The U.S. Supreme Court ruled in the case of COMMONWEALTH OF PUERTO RICO v. SANCHEZ VALLE ET AL. The case involved an issue of double jeopardy in a criminal matter but the decision reached would be based on the Court’s interpretation of Puerto Rico’s status as a commonwealth. Prosecutors argued that Puerto Rico and the United States are separate sovereigns for double jeopardy purposes and so could bring successive prosecutions against each defendant. The Puerto Rico Court of Appeals consolidated the cases and reversed. The Supreme Court of Puerto Rico granted review and held, in line with the trial court, that Puerto Rico’s gun sale prosecutions violated the Double Jeopardy Clause.

The justices’ 6-2 ruling on the Puerto Rico v. Sánchez Valle case says Congress is the ultimate source of the island’s legal power even though Puerto Rico has its own constitution. Opponents of a fiscal control board being imposed on PR through Congressional action had pinned their hopes on a ruling in favor of the Commonwealth. The court had to decide what is “the ultimate source” of the commonwealth’s authority to prosecute. If the local and federal courts derive their prosecutorial power from the same ultimate source, they are not separate sovereigns.

Those in favor of a Congressionally imposed solution process for Puerto Rico’s debt problems will be heartened by the decision. Our view is that Puerto Rico has been trying to have things both ways in its approach to investors, justifying many of its requests on its status as part of the U.S. while invoking sovereignty when it came to matters of oversight, fairness, and transparency.

The ruling would seem to limit the potential scope of legal challenges to Promesa should it ultimately be adopted by the Congress.


It is proposed that in the next fiscal year, the Puerto Rico government would have to pay $1.78 billion in total debt service payments, an amount that is around 19.5% of the service is 12% of the budget of $9.5 billion. In 2013, debt service was 6% of the $9 billion budget. In 2012, the debt was 7% of the $9.2 billion budget.

The budget package is comprised of 11 measures. One of the most controversial would amend the 2006 Fiscal Reform Act to require that all monetary earmarks given to entities will be fixed according to the fiscal state of the government and not as established by special laws. “There will be no debt or obligation resulting from any difference between the amount that has to be provided and what is provided,” the bill states. For example, if the government were required by a special law to earmark $5 million to a program in the Family Department, it would be able to allocate a lower amount under the proposed legislation.

Another measure, House Bill 2962, would suspend all monthly payments to the Amortization and Redemption Fund for General Obligation (GO) bond payments. The government has been since 1976 setting aside GO payments in the fund. The government would stop all deposits to the fund unless it is able to obtain $1.2 billion in tax-revenue anticipation notes. The government owes $1.78 billion in total debt payments that include $24 million owed by the Treasury Department, $21.4 million by the Land Authority, $408 million by the Aqueduct and Sewer Authority, $322 million in public debt, $64.4 million by the University of Puerto Rico, $10 million by the courts, $545 million by the Electric Power Authority, $1.4 million by the Infrastructure Financing Authority, $20.8 million by the Puerto Rico Industrial Development Company, $17.6 million by the Public Housing Administration, $31.2 million by the Housing Financing Authority, $283.4 million by the Public Buildings Authority, $3.8 million by the Infrastructure Financing Authority and $30 million by the Convention Center District Authority.


Maybe municipalities are learning something about stadium finance and its risks. Manchester, NH has seen the downside of government funding for sports facilities with its negative experience with its indoor arena. That facility was financed with entertainment tax debt through the State of NH. Ultimately those revenues were insufficient and the local American Hockey League franchise was moved to California. Now the city’s Board of Mayor and Aldermen voted unanimously to approve an agreement with the minor league baseball New Hampshire Fisher Cats that commits city funds to pay for stadium improvements at a ten year old facility.

This agreement contains a concession from team ownership regarding collateral if they attempt to move out of Manchester before 2028. In exchange for the city funding $948,000 in repairs to Northeast Delta Dental Stadium, the contract contains language that pledges that the ownership team (NH Triple Play) will pay $9 million of principal balance on the city’s stadium bonds if there is an attempt to move the team out of the city prior to 2028.

According to an amortization schedule provided by the city, approximately $18 million of principal balance remains on the city’s bond for the stadium project. According to the agreement, half of the principal balance will be paid from NH Triple Play’s annual payments to the city. Under the new agreement proposed Tuesday, ownership agrees to secure the remaining $9 million of bond payments by providing the city with a security agreement, secured by its financial interest in the team.

The original request made last year was for the city to pay for about $1 million in improvements at Northeast Delta Dental Stadium, including putting in a new fire suppression system and replacing the playing field at the ballpark. The city’s deal with the stadium ends when the stadium bonds are fully paid off, projected to be in 2028. The team currently pays a $730,000 rent-like payment plus another $167,627 a year to cover stadium building costs it agreed to pay beyond the $25 million stadium project.

Ownership offers to pay the city $500,000 a year in rent beginning from 2029 to 2035, if city officials will commit to earmark half that amount for a capital reserve fund to be used for stadium maintenance. if the stadium capital reserve fund doesn’t cover capital expenditure costs for any given year, the team will fund any additional money required. After five years, if capital reserve funds come up short for any year, the additional funding needed will be split 50-50 between the city and team “after both parties agree on the need.” The city will also prepare a city-owned parcel of land between the stadium and the railroad tracks for additional parking.

So the deal does force the team to provide more security, lessening the chance that the city will be left with stranded costs. In our view, it is good to see municipalities insisting on better protections for their own investment and some mitigation of the long run risk to taxpayers.

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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