A group of creditors that hammered out an $8.3 billion restructuring proposal covering Puerto Rico’s bankrupt power authority are receiving $151 million in special payments for their trouble, pushing their recoveries higher than the baseline of 77.5 cents on the dollar, WSJ Pro Bankruptcy reported. In exchange for negotiating the proposed deal, certain bondholders and bond insurers are collecting extra fees that will add about 1.62 percent to their aggregate recovery, according to papers filed last week in the Puerto Rico Electric Power Authority’s court-supervised bankruptcy. Those extra fees are on top of the baseline recovery that all creditors are receiving. They are being shared among bondholders, including Knighthead Capital Management LLC, BlueMountain Capital Management LLP and Marathon Asset Management LLP, and bond guarantor Assured Guaranty Corp. If more creditors sign on to the proposed settlement, they too could grab a portion of the $151 million pot, according to a spokesman for Puerto Rico’s financial oversight board, which has been steering the debt negotiations.
A federal control board overseeing Puerto Rico’s finances sued the U.S. territory’s governor Wednesday, saying he refuses to submit required documents and has approved tens of millions of dollars in unbudgeted spending amid a 13-year recession, the Washington Post reported. The board also accused Gov. Ricardo Rosselló of signing nearly two dozen joint resolutions to appropriate funds for expenditures not approved by board-certified budgets. “Puerto Rico cannot fall back into an era of uncontrolled spending,” board chairman Richard Carrión said. “This led us into bankruptcy and resulted in pain and suffering on our island.” The suit says this “is not the first instance of the governor misinterpreting the scope of his authority” after Congress created the board. Rosselló has long maintained that the board’s powers do not supersede his. The board also is asking a federal court to bar the local government from enforcing a law that Rosselló approved last month eliminating the obligation of Puerto Rico’s 78 municipalities to pay the central government for hundreds of millions of dollars in pension costs related to their own retirees. Board members said this would undermine the central government’s ability to pay public pensions if it is in fiscal distress. The lawsuit also was filed against Puerto Rico’s Fiscal Agency and Financial Advisory Authority. It says that body and Rosselló are repeatedly failing to comply with a U.S. law passed in 2016 to address the island’s financial and economic crisis. The lawsuit comes as the governor and the board clash over austerity measures in this year’s fiscal budget as Puerto Rico continues to restructure a portion of its more than $70 billion public debt load.
A lawsuit to invalidate $14 billion of Illinois bonds draws inspiration from Puerto Rico’s restructuring, according to a Bloomberg editorial. Indeed, munis are off to a blistering pace in 2019, with mutual and exchange-traded funds focused on the debt on track to pull in a record amount of cash this year. Investors are buying even though a closely watched gauge of relative value would suggest the bonds are a screaming sell. Never mind that at the start of the year, a federal oversight board argued that more than $6 billion of Puerto Rico’s general-obligation bonds should be declared null and void because issuing them in the first place breached the island’s constitutional debt limit. John Tillman, the CEO of conservative think tank Illinois Policy Institute, and Warlander Asset Management’s Eric Cole, a protege of Appaloosa Management’s David Tepper, are teaming up in an effort to invalidate a whopping $14.3 billion of Illinois debt on the grounds that the state’s pension bond sale in 2003 and securities issued in 2017 to pay a backlog of unpaid bills were in fact deficit-financing transactions prohibited by the constitution. It’s still very early days, especially for this type of fundamental challenge to a state’s ability to finance itself. Illinois general obligations have long been considered to have some of the strongest legal protections among states. And most crucially, it’s not Illinois looking to invalidate its own debt but rather a hedge fund and Tillman, who has been at the forefront of legal challenges to public employee unions and progressive taxation. Even if they prevail, the state could very well repay investors entirely, according to the editorial.
Puerto Rico’s federally created fiscal oversight board yesterday imposed a fiscal 2020 budget on the bankrupt U.S. commonwealth that for the first time limits spending choices by its government, according to the board’s executive director, Reuters reported. Natalie Jaresko said that the $20.2 billion budget for the central government that includes $9.1 billion of general fund spending complies with the fiscal plan for the island, which filed a form of bankruptcy in 2017 to restructure about $120 billion of debt and pension obligations. “It reflects the priorities of that fiscal plan — public safety, healthcare, education and the continued right-sizing of the government,” Jaresko said. She added that the budget for the fiscal year that began yesterday contains new “detailed” spending levels that will prohibit the government from moving money around to pay for things not in the fiscal plan like employees’ Christmas bonuses. Governor Ricardo Rosselló told reporters the board did not include the bonus payment in last year’s budget but “we found a way to pay for it.” Puerto Rico lawmakers on Sunday approved an approximately $9.6 billion general fund budget that includes roughly $500 million in pension and healthcare payments previously paid by cash-strapped municipalities and public corporations, as well as money for bonuses. Read more.
In related news, Puerto Rico’s oversight board has sued several companies it alleges took fraudulent payments and compensation from the state power utility, Bloomberg News reported. The Financial Oversight and Management Board for Puerto Rico charged on Sunday that, between 2012 and 2015, the commodities trading and logistics company Trafigura and the energy and commodities company Vitol supplied the Puerto Rico Electric Power Authority “with oil that did not meet the applicable contractual or regulatory specifications, but nonetheless received payment” at the price of the higher quality fuel oil. The board is also suing three laboratories — Carlos R. Mendez & Associates, Inspectorate America Corp. and Altol — alleging they received payments for falsifying tests of the quality of the oil supplied to PREPA. The cases were filed in the U.S. District Court for Puerto Rico. “These payments contributed to PREPA’s insolvency by increasing the cost of its operations and causing PREPA to slide deeper into debt," according to the statement. Read more.
A U.S. District Court judge on Thursday ruled that bondholders’ claim on the assets of Puerto Rico’s public employee pension system ended when the system filed for bankruptcy in May 2017, Reuters reported. The ruling is a setback for owners of nearly $3 billion of bonds sold by the system after a U.S. Appeals Court in January determined they had a legally enforceable claim as of December 2015 on assets pledged by the pension fund to pay off the debt. But U.S. District Judge Laura Taylor Swain decided the claim on employer contributions to the Employees Retirement System did not extend into bankruptcy. Judge Swain is hearing cases involving the U.S. Commonwealth’s attempt to restructure about $120 billion of debt and pension obligations. After completing restructurings for Puerto Rico’s sales tax-backed debt and its Government Development Bank, the island’s federally created financial oversight board is addressing core government debt. The board recently announced an agreement with a court-appointed committee representing more than 167,000 retirees that includes reductions in certain pension payments. Read more.
The Federal Emergency Management Agency is failing to pay out disaster aid in hurricane-stricken Puerto Rico and struggling to work with the commonwealth's government, according to federal contractors on the ground and the agency’s own internal data, the Washington Examiner reported. FEMA is months behind deadline for disbursing billions in disaster aid owed to the commonwealth government, its towns, and its residents nearly two years after Hurricane Maria struck. Only a fraction of the money approved by Congress through FEMA has been delivered, just $380 million of permanent recovery work, a failure that belies President Trump's complaints that the territory and its 3.2 million U.S. citizens have received too much money. Read more.
The U.S. Federal Bureau of Investigation is probing potential corruption and favoritism in how Puerto Rico awarded some government contracts and arrests may be forthcoming, according to the bureau’s special agent in charge on the island, Douglas Leff, Bloomberg News reported. Leff said yesterday that prosecutors would have final say as to when enough evidence had been gathered to justify arrests. The remarks come during an extraordinary week in which Puerto Rican Treasury Secretary Raul Maldonado used a radio interview to disclose an "institutional mafia" within his own secretariat, revealed an FBI probe into the matter, and subsequently lost his job for failing to tell the governor about the problems before going to the press. Then, just hours after Maldonado was asked to resign, his own son took to social media to call Governor Ricardo Rossello himself "corrupt," purporting to offer a firsthand account of the governor’s efforts to alter a report on Hurricane Maria aid, an episode which Rossello vehemently denied had taken place. Until now, the FBI hadn’t spoken out on the matter. Leff confirmed the existence of widespread probe into improper awarding of government contracts at various levels of government, although he declined to specifically say if the Treasury was involved.
Puerto Rico Governor Ricardo Rosselló asked for the immediate resignation of Treasury Secretary Raul Maldonado just hours after the cabinet member disclosed a federal corruption investigation into his own department, Bloomberg News reported. Rosselló said yesterday that he’d never been informed of the “serious irregularities” that Maldonado made public. The governor didn’t divulge details about the allegations, which he said are “grave and could represent serious violations of the law.” Rosselló said that Francisco Pares, assistant secretary of internal revenue and tax policy, would become the acting treasury secretary. Christian Sobrino Vega, chief executive of the Puerto Rico Fiscal Agency and Financial Advisory Authority, will become chief financial officer, a title that Maldonado had held along with his cabinet post. The moves came after Maldonado told the WKAQ-580 radio station that he was collaborating with the Federal Bureau of Investigation as it looked into influence peddling, destruction of documents and other crimes within his own department. Maldonado suggested in the interview that the blame fell on an “institutional mafia” within his department composed of "officials who have been with the department for many years."
Puerto Rico’s federally created financial oversight board asked a federal appeals court yesterday to extend a July 15 deadline for its members to be confirmed by the U.S. Senate, citing concerns that missing it could harm an ongoing restructuring of the bankrupt U.S. commonwealth’s debt, Reuters reported. The action followed an announcement by a U.S. Senate committee that the confirmation process will not begin for several weeks. “Without such an extension, the oversight board would be unable to carry out its responsibilities on July 15, which will throw the debt restructuring process into chaos and threaten irreparable damage to the Puerto Rican economy,” the board said in a statement. The board, which is overseeing the restructuring of about $120 billion of Puerto Rico debt and pension obligation through a form of bankruptcy, asked the Boston-based First Circuit Court of Appeals to extend the deadline pending a U.S. Supreme Court decision on whether to review the matter. The appeals court in May extended a May 16 deadline for the board’s seven members to be reappointed or replaced to July 15. In February, in a case brought by Puerto Rico creditors, the court ruled that the members’ 2016 appointments violated the U.S. Constitution’s Appointments Clause because they were not confirmed by the Senate. The White House yesterday officially sent nominations for the board’s current members to the Senate Energy and Natural Resources Committee, which said it expects to receive paperwork for the nominees “within several weeks and will announce a hearing for (the nominations) shortly thereafter.” The nominations cover only the remainder of the members’ terms, which all end on Aug. 30. A spokesman for the board said the members would continue serving until they are formally replaced. The Supreme Court could announce as soon as Monday whether it will review the First Circuit’s appointments ruling.
