Last night, Puerto Rico's primary bondholders, including Oppenheimer Funds, Franklin Advisers, and Santander Asset Management—two out of the four municipal insurers backing the Island’s public debt and almost a dozen hedge funds—, sent a letter to Governor Ricardo Rosselló Nevares and the Oversight Board (OB), where they practically demolish all the assumptions, projections, and estimates contained in the fiscal plan.
The letter also warns that the fiscal plan meant to balance the budget of the Puerto Rican Government is a violation of PROMESA, which would outright impede entering a process to renegotiate the Island's debt.
All those who signed the letter, which El Nuevo Día had access to, jointly represent $10.125 billion of Puerto Rico's current debt. We learned that other creditors and insurers were considering joining the signers in their claims last night.
“Unfortunately, the fiscal plan undermines the investors’ confidence in Puerto Rico's commitment to pay its debts, making it unlikely that Puerto Rico could return to the market under reasonable interest rates,” reads the 14-page letter signed by attorneys Andrew Rosenberg, Thomas Moers Mayer, and Mark C. Ellenberg.
Rosenberg, of the Paul, Weiss, Rifkind, Wharton & Garrison law firm, represents the general obligations bondholder group (Ad Hoc-GO). Moers Mayer, of the Kramer Levin Naftalis & Frankel law firm, represents the group of primary Puerto Rico Sales Tax Financing Corporation (COFINA, by its Spanish acronym) bondholders (Cofina-Major). Meanwhile, Ellenberg—of Cadwalader, Wickersham & Taft—has a similar role for Assured Guaranty Corp. and its affiliate, Assured Guaranty Municipal Corp.
Different but United
The signers urged the OB and Rosselló Nevares’s government to correct the fiscal plan as soon as possible, which confirms reports made by El Nuevo Día regarding the discomfort felt among the various groups of Puerto Rico's bondholders, as the new government and the federal entity adopted a plan that essentially cuts 80% of Puerto Rico's debt service over the next 10 years.
There was a glimpse of the bondholders’ animosity last week, during a congressional hearing held to examine the debt renegotiation for the Puerto Rico Electric Power Authority (PREPA). At this hearing, Rosselló Nevares asked for additional time to revise the renegotiation agreement, since he understands it does not benefit the Puerto Rican people.
This letter has also come after OB Chairman José Carrión and Rosselló Nevares’s government made separate statements saying that they would look for a mediator to renegotiate the Island’s debt.
The letter, which was received only a few weeks before PROMESA’s automatic stay on litigations expires, is an unprecedented move: even though the signers are holding debt balances with different rights andpriorities, and are even fighting each other in court—such as is the case between COFINA’s and the GO bondholders—, they jointly attacked the alleged deficiencies in the fiscal plan.
Now they are subscribing to the observations made by several economists, who have questioned the plan’s assumptions and the possibility of reaching the objectives and collections imposed on the Government.
Plethora of Deficiencies
According to the letter, the fiscal plan has at least seven numerical errors, it would allow Puerto Rico to continue its pattern of “long-standing” budgetary overdrafts in agencies like the Health Insurance Administration (PRHIA) and others, while violating certain provisions in PROMESA, such as respecting the payment priority established by Puerto Rico's laws, including the Constitution.
Among the deficiencies, they mention that the plan shows a reconciling adjustment of $6.2 billion to expenses not budgeted for 10 years. They also denounced that, during that same period of time, the public payroll will increase by $1.8 billion, instead of decreasing, and that the operational expenses would also increase by another $500 million.
The letter from bondholders and insurers also points out that, during the time the fiscal plan remains valid, the Government would still face a $9.3-billion deficit in certain governmental units outside the General Fund, and it questions the economic assumptions that serve as a basis for the plan’s estimated revenues and expenses.
The signers accuse the OB of approving Rosselló Nevares’s plan even though it fails to comply with Section 201 of PROMESA, which calls to “respect the lawful priorities and lawful liens” that are applicable according to the Constitution and other laws.
According to the letter, the fiscal plan also violates provisions regarding the bonds from COFINA, the Convention Center District Authority, the Highways and Transportation Authority, and the Authority for the Financing of the Infrastructure of Puerto Rico.
Essential Services or Debt
“As it was certified, the fiscal plan assumes that all non-essential expenses will be paid before issuing any debt service payments,” the letter adds, noting that the numbers show that the Government would perpetuate an expense trend similar to that of 2015, instead of making the cutbacks outlined in the plan.
The issues identified by the group of bondholders and insurers in the letter are so many and so diverse that it could be said that the plan needs to be redone in its entirety.
“This plan is lacking reliability,” said one of our sources who is knowledgeable in the prevalent dynamic between the creditors and the Government. “There is no need for a mediator at this time,” the source added.
In the letter, the signers ask for an “immediate” meeting to solve the plan’s deficiencies, and they reiterated their interest in reaching a voluntary understanding.
During the election campaign, and after taking over the reins in the government, Rosselló Nevares and the OB have said that they wish to enter voluntary negotiations with the Island’s creditors through Title VI of PROMESA.
Nevertheless, according to our sources, so far there have been no actual meetings, and no confidentiality agreements have been signed, which would have been necessary to formally initiate the negotiations.
The OB Warns the Legislature
Yesterday, while the bondholders seemed to intensify their attacks against the Government and the OB, the federal entity did the same thing with the Legislature.
In a letter addressed to Rosselló Nevares, the OB made it clear that the Legislature will have to follow its instructions, or the federal entity will decide from now on how they should collect and spend every cent received from the taxpayers.
Yesterday, for the second time this year, the OB told Rosselló Nevares that any public policy or legislation approved must be compatible with the recently certified fiscal plan and include its corresponding fiscal impact analysis.
“The Government and the Board must now cooperate to ensure that the measures required to comply with the fiscal plan are implemented, and to prevent these actions from being inconsistent with the fiscal plan,” reads the letter sent yesterday by Carrión.
Earlier this year, the OB told Rosselló Nevares that, according to PROMESA, he should present the federal entity with all the approved laws and their corresponding impact analyses within seven days—something that has not yet been done.
On March 22, the OB notified the Government and legislative leaders of these requirements, and imposed a working schedule for the Executive to submit the next budget, and for the Legislature to make the according amendments until it complies with the provisions in PROMESA and the fiscal plan, which is now being questioned by the bondholders as well.
For his part, Senate President Thomas Rivera Schatz criticized the OB.
“I have always been against the Board. The Board is more expensive for Puerto Rico than anything else; $3 million a month is what the Board costs,” said the Senate President. “They suggest that Puerto Rico's Government should implement policies to generate savings, but they don’t apply it to themselves. They criticize the contracts, but the juiciest ones are for the firms contracted by the colony’s Board. So for me, the Board has no moral authority to make any comments.”
Meanwhile, the Speaker of the House of Representatives, Carlos “Johnny” Méndez, refused to issue any comments, since he had not received the letter.
Reporter Leysa Caro collaborated in this note.
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