Puerto Rico watch

[Arthur Itas]

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DEVELOPMENT BANK
http://newsletters.briefs.blpprofess...lzokoc5e/front

Puerto Rico Development Bank Risks Receivership
BY MICHELLE KASKE AND ALEXANDER LOPEZ, BLOOMBERG NEWS
Puerto Rico’s Government Development Bank, whose regulator says faces a cash shortfall of as much as $1.3 billion in June, will continue to operate on its own — for now.
The bank, which lends to the commonwealth and its municipalities, is insolvent, Puerto Rico’s Commission of Financial Institutions, the bank’s regulator, concluded in its most recent report on the GDB’s finances. That determination allows the island’s Treasury Secretary to ask a court to appoint a receiver to oversee the GDB. It’s a move the administration won’t make at this time, Jesus Manuel Ortiz, a spokesman for Governor Alejandro Garcia Padilla, told reporters yesterday in San Juan.
“We are constantly monitoring the liquidity of the GDB and no receiver will be named in the short term,” Ortiz said.
The GDB serves as the commonwealth’s financial adviser and structures municipal-debt sales for the island. The bank’s cash crunch has hampered its ability to lend to the commonwealth and provide short-term funds. The GDB is experiencing a liquidity shortfall that will reach a negative $1.3 billion in June, according to a Monday court opinion of Wal-Mart Stores Inc.’s successful suit against Puerto Rico to end a tax that applied its highest rate on the retailer. The opinion quoted from the commission’s November report, which isn’t public.
The commission’s report found that the bank’s “liquidity levels are critically deficient in relation to its weakened financial conditions caused by an elevated debt exposure and obstructed access to capital markets,” the court opinion quoted from the report.
The bank has disputed the findings. Melba Acosta, president of the Government Development Bank, is cited in a footnote in the report as saying the report was "obviously written by someone who doesn’t understand the GDB.”
The bank in November warned that it was at risk of receivership, which would suspend the GDB’s operations and settle its obligations. It owes investors a $422 million bond payment May 1 that Garcia Padilla has said cannot be paid. Puerto Rico and its agencies must pay an additional $2 billion in principal and interest on July 1.

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PENSIONS

http://dailysignal.com/2016/03/23/in...n-liabilities/

In addition to Puerto Rico’s $72 billion in public debt, the U.S. territory owes another $44 billion in unfunded public employee pension benefits. This mountain of pension debt could cause certain bondholders to lose some or all of their investments.

Who will lose what is yet to be determined, but Puerto Rico’s pension debts are almost certainly much higher than $44 billion. That’s because Puerto Rico, along with all other U.S. states and localities, uses its own assumptions to evaluate unfunded pension liabilities.

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Pensions Over Bondholders
It’s important for investors to know companies’ and governments’ true unfunded pension obligations because typically, pensions are prioritized over bondholders. When governments, such as those of Detroit, Stockton, and now Puerto Rico, become insolvent, unfunded pension obligations often dictate how much creditors receive.

When it entered bankruptcy, Detroit reported some $650 million in unfunded pensions. Using a more conservative but still optimistic assumption of a 7-percent rate of return, Detroit’s unfunded pension liabilities soared more than fivefold to $3.5 billion. Because Detroit pensioners experienced only minimal reductions, this nearly $3 billion difference was borne almost entirely by Detroit bondholders. Had those bondholders known Detroit’s true pension liabilities, they would have either not purchased those bonds or required a much higher price for them.

In Puerto Rico, some creditors are prioritized over pensioners, but many others are not. And the administration and others in Congress want to protect pensioners at the expense of all other bondholders—even if it means violating constitutional protections.

Consequently, if Puerto Rico’s true pension liabilities turn out to be more than $44 billion, a lot of creditors—many of whom are American and Puerto Rican retirees—may not get paid. This is not fair to investors who purchased Puerto Rican debt based on understated pension liabilities.

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http://www.bloomberg.com/news/articl...s-bond-insurer

Puerto Rico `Not Serious' on Consensual Plan, Says Insurer
Assured Guaranty sends letter to Washington on commonwealth
Insurer says it hasn't received financial information

Assured Guaranty Ltd. is seeking financial information from Puerto Rico, and is looking to Washington for help.
The bond insurer, which guarantees repayment on about $3.8 billion of commonwealth securities, sent a letter Wednesday addressed to Cleary Gottlieb Steen & Hamilton LLP, which is representing Puerto Rico in its attempt to restructure $70 billion of debt, detailing multiple requests for information. The letter signed by Bruce Stern, Assured’s executive officer, was also sent to U.S. Treasury Secretary Jacob J. Lew, House Speaker Paul Ryan and other federal lawmakers working on legislation to address the island’s fiscal crisis.
Assured says that it has failed to receive complete financial information that it is entitled to as insurer of commonwealth securities after repeated appeals during the last 18 months, beginning with a request for Puerto Rico Highways & Transportation Authority maintenance agreements in September 2014. Assured is also seeking current balances for accounts that repay Highways debt and Puerto Rico Convention Center District Authority bonds after the two agencies began using reserve funds to make their Jan. 1 debt-service payments. Assured needs the data to plan for possible draws on its insurance policies, Stern wrote in the letter.

Oversight Bill
“The financial situation of the commonwealth and its public agencies remains opaque,” Stern said. “In the absence of a legitimate reason for this opacity, Assured is left to speculate what ulterior purpose the continued refusal to provide basic and readily-available financial information serves.”
Stern sent the letter as the House Natural Resources Committee plans to introduce on April 11 its bill that would establish a federal oversight board to manage any Puerto Rico debt restructuring and weigh in on annual budgets. The goal is to end the commonwealth’s practice of borrowing to fill budget deficits. U.S. territories, including Puerto Rico, don’t have access to municipal bankruptcy.

Puerto Rico has been in discussions with Assured and its advisers during the last two years as part of financial diligence on a variety of commonwealth issuers and to work out a restructuring plan, Barbara Morgan, a spokeswoman at SKDKnickerbocker in New York, which represents Puerto Rico’s Government Development Bank, said in an e-mail.
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Creditor Counterproposal
Governor Alejandro Garcia Padilla in June said the island was unable to repay its obligations on time and in full. Two agencies have missed bond payments since then and the government has redirected revenue from the Highways and Convention Center authorities to instead pay general-obligation bonds, which have the highest priority under its constitution.
Creditors, including mutual funds, bond-insurance companies, and hedge funds are working together on a unified counterproposal that would reduce Puerto Rico’s debt after island officials last week offered their latest debt-restructuring plan to the different parties. Puerto Rico has said it wants to reach an agreement with its creditors, an assertion that Stern questions.

[Completely Absorbed]

Puerto Rico pensions made the front page of Reuters.

http://www.reuters.com/investigates/...rico-pensions/

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Originally Posted by Completely Absorbed

Puerto Rico pensions made the front page of Reuters.

http://www.reuters.com/investigates/...rico-pensions/

Some excerpts:

SAN JUAN, Puerto Rico – When Puerto Rico attempted to shore up its chronically underfunded public-employee pensions in 2013, Francisco del Castillo “knew grown men and women who wept.”

Under the reform package, retirement ages rose. So did employee contributions. Current and future participants were transferred to less-generous defined-contribution accounts, similar to 401(k) retirement savings plans. Del Castillo, then the deputy chief of the island’s largest government-employee pension system, said members of his own staff who were on the verge of retirement suddenly faced the prospect of working seven or eight more years for reduced benefits.

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To give the politically painful fixes time to take hold, the reforms required government employers to fund the pensions in the short term through annual lump-sum payments. The central government was supposed to have made $367.6 million in such payments since 2014; so far, it has forked over just $22.7 million.
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Puerto Rican leaders have been eternal optimists, “always thinking things would eventually improve,” said del Castillo, 40 years old and now legal counsel to the Teachers Retirement System (TRS), one of two main public-employee pensions on the island. “But things continued to deteriorate, and deteriorate, and deteriorate.”

Today, TRS and the other main pension fund, the Employees Retirement System (ERS), together covering about 330,000 workers and retirees, are virtually penniless. Their combined unfunded liability totals $43.2 billion. With about $1.8 billion in assets to pay $45 billion in liabilities, the 96 percent combined shortfall is among the biggest of any U.S. state pension this century, and probably the biggest ever for pensions “of this size and scale,” said Keith Brainard, research director at the National Association of State Retirement Administrators.


And they’re only sinking further. Their combined burn rate – the difference between what they pay out and what they receive in contributions – is more than $1 billion a year, forcing them to rapidly liquidate assets. At that rate, they are forecast to run out of money in 2019, according to a 2015 report by actuarial and consulting firm Milliman, on whose recommendations the government relies.
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Absent a permanent fix, the responsibility to cover benefits will shift to the Puerto Rican government, creating a pay-as-you-go system funded mostly by taxpayers. At $1 billion a year, retirement benefits would cost the island around 11 percent of annual revenue, an unsustainable burden when combined with the 36 percent of revenue now going toward paying bondholders.

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http://www.wsj.com/articles/puerto-r...ill-1459958912

Puerto Rico Bonds Tumble on Debt Moratorium Bill
Bill allows U.S. commonwealth to stop making debt payments while awaiting help from Washington
By HEATHER GILLERS and AARON KURILOFF
Updated April 6, 2016 6:12 p.m. ET
3 COMMENTS
Some Puerto Rico bond prices touched record lows after Gov. Alejandro García Padilla signed a bill that would allow the commonwealth to suspend debt payments while awaiting help from Washington in dealing with the island’s financial crisis.

The bill empowers Mr. García Padilla to impose a moratorium on payments to keep government cash flowing for essential services. It is the latest attempt by the U.S. commonwealth to protect money it says it needs for police and firefighters while it waits on action from the U.S. Congress or Supreme Court.

Under the provisions of the bill, the governor could evaluate whether to pay debt on an “entity-by-entity basis.” The moratorium powers would generally last through Jan. 31 with a possible two-month extension. The debt would remain outstanding, and missed payments would be due when the moratorium ends.

Some Puerto Rico general obligation bonds maturing in 2035 traded at 62.98 cents on the dollar Wednesday, below a previous low of 64 cents in June 2015, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website.

Puerto Rico owes investors about $70 billion and has been struggling with a decade of economic stagnation and a steep population decline that led Mr. García Padilla to declare its debts unpayable. The island began defaulting on debt with weaker legal protections in August, and the governor has said he would prioritize public safety over payments to creditors.

It's good to be the government. You can just change the laws so you don't have to pay your debts.

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http://www.pionline.com/article/2016...co-bondholders

As Puerto Rico faces upcoming deadlines for paying bondholders and other creditors, all eyes are turning to Washington with hopes that the White House, Congress or even the Supreme Court can work out a solution.
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There are many moving parts, including 20 classes of creditors holding as much as $72 billion in bonds and expecting $2 billion in debt payments in May and June.

With no resources to tap, the commonwealth has resorted to extreme measures, including borrowing from a nearly depleted pension fund, to pay bills and bondholders.

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http://www.bloomberg.com/news/articl...-bond-payments

Puerto Rico Invites Chaos as Debt Moratorium Upends Progress

Puerto Rico risked upending months-long efforts on Wall Street and in Washington to address the commonwealth’s fiscal crisis by authorizing the government to halt payments on a wide swath of its $70 billion debt.
QUICKTAKE
Puerto Rico’s Slide
Governor Alejandro Garcia Padilla signed a moratorium bill Wednesday, just hours after it won final passage in the legislature. It gives him authority to suspend payments through January 2017 on general-obligation bonds, sales-tax securities and debt from the island’s Government Development Bank and other public agencies. A default on those obligations would be a first for Puerto Rico, which so far has only failed to pay on bonds backed by legislative appropriations and rum taxes.
“The commonwealth is insolvent and the situation requires responsible efforts to finding a solution,” Garcia Padilla said Wednesday in a statement. “This legislation provides us with the tools to address the highest priority of needs -- providing essential services to our people -- without fear of retribution.”
The decision marks an escalation of Puerto Rico’s fiscal crisis and complicates talks with creditors and U.S. lawmakers that have been dragging on since Garcia Padilla in June declared that the island’s debts were unpayable. The Puerto Rico Electric Power Authority, known as Prepa, already reached an agreement with bondholders that would lower its obligations. Representatives in Congress, after months of debate, drafted legislation last month that would help Puerto Rico restructure its debt.
Facing widespread defaults from the territory, Republicans and Democrats vowed to move swiftly to address the crisis. House Speaker Paul Ryan said the Natural Resources Committee is working to revise its legislation, which drew opposition from both bondholders facing debt write-offs and island politicians who said it would open the door to a federal takeover. The committee is set to hold a hearing on April 13.

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http://www.bloomberg.com/news/articl...ambit-goes-bad

Puerto Rico's Development Bank on Brink as Debt Gambit Goes Bad

Puerto Rico’s Government Development Bank, which was set up after the Great Depression to chart a course out of poverty, is on the verge of a collapse that would deepen the Caribbean island’s $70 billion debt crisis.
The lender was designed to promote business investment with a long-term horizon, but in recent years politicians turned it into a piggy-bank that lent to the government and its agencies, helping keep them afloat as the island’s economy shrunk. Now it’s rapidly running out of cash and poised to default on a $422 million debt payment due in May -- raising the risk that it may be pushed into receivership or broken up.
The bank’s failure would undermine one of the last sources of cash that Puerto Rican authorities are counting on to pay teachers, firefighters and other employees, in a territory where almost half the population lives in poverty. Hedge funds are also laying claim to the money, filing a lawsuit against the lender this week, while in Washington lawmakers are mulling steps to put the island government under federal oversight and give it legal powers to restructure its debt.
“It’s going to be a day of reckoning for a lot of municipalities,” said Marcos Rodríguez-Ema, who served as the bank’s president from 1993 through 1998. “Few of them know how to manage their budgets. Few of them understand the financing world. They will have to live within the means of the tax collections and that’s it.”