Weekly Update – April 23, 2018

Welcome to your weekly Title III update for April 23, 2018. Once again, not much happened in the cases but outside matters have really burgeoned.

Last week, the Board had two days of meetings to discuss the fiscal plans it was going to certify; but before I start explaining what transpired, there is a recurring theme that I must mention. During the hearings of the 19th, during the comment period, there was this important exchange on the questions swirling around Ana Matosantos’s ethics, which garnered an interesting response from the Board’s general counsel, Jamie El Koury:

 “This issue has come up at least three times now. It came up before my time, when Ana was vetted for her appointment at the board, both by the Treasury and the White House. They found that she was complying with the requirements of PROMESA and therefore that the President should go ahead with the appointment. This was in August in 2016. Again, this was reviewed in the summer of 2017 when the issue again came up. We at the board, both the ethics advisor, myself [and] our outside council reviewed the financial disclosures by Ms. Matosantos and we reviewed the conflict of interest requirements under PROMESA, which refer you to federal law section 208—the basis of which is financial interest. Again, the determination was made that there was no conflict of interest and that the financial disclosures had been complied with. Again, the issue came up one more time in March of this year. Again the ethics advisor, myself as general counsel and [the] outside council reviewed the situation and [the] determination was the same. That the disclosures were made, that the conflict of interest rules were complied with, and that therefore there was no impediment for Ms. Matosantos to engage in the proceedings. The fourth time came up recently with letters that were sent by two groups—one was an open letter sent to the Attorney General Sessions and the other was sent to chairman Bishop and to Speaker Ryan. Again, outside council, ethics advisor and myself looked at this situation and made the same determination that the financial disclosures [were complied with] and that no conflict of interest had risen. Just to make [it] clear, of course, whenever pieces of information such as this come up, I hope it’s by now established that we take them seriously, that we do have procedures at the board to take a look, [to] consider those matters and that a full consideration is made of those concerns. Thank you.”

The problem with this exchange is that it leaves many questions unanswered. When Andrew Scurria of The Wall Street Journal commented on Twitter on El Koury’s statement, I mentioned that his statement was a bit perfunctory and Andrew answered, He offered no substantive explanation of his determination.”  If each time there was an ethics complaint, Mr. Koury, General Counsel for the Board, and Andrea Bonime-Blanc, the Board’s Ethics Advisor carefully reviewed each and rejected them, they each had to write a report with lots of references to statutes and case law. Where are these reports? Where the reports sent to the United States Office of Government Ethics? Where they sent to the Department of Justice, to Congress, to the Oval office?

Recently, the National Legal and Policy Center sent a complaint on Matonsantos’s alleged conflicts of interest to the Justice Department, which declined to comment. If there is no validity to these ethical challenges, why are the internal Board reports not made public? After all, the People of Puerto Rico are paying for these reports. As Justice Louis D. Brandeis once said: Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” There are other questions that will become clearer as the saga of the fiscal plans unfolds.

Continuing with the drama, the Board released its own fiscal plans on April 18th, and early on the 19th, Governor Rosselló said he would not execute those parts of the fiscal plan with which he did not agree. The meetings business started with Gerardo Portela from AAAFAF presenting the Commonwealth’s fiscal plan. During his presentation he said three times Puerto Rico was undergoing a “humanitarian crisis.” I had to look twice to make sure it was Gerardo Portela speaking and not Alejandro García Padilla or Antonio Weiss. During his presentation, it was obvious the Board members were not paying attention and Portela made clear that the Commonwealth would execute that which was in their fiscal plan but not that with which it did not agree or thought the Board was invading public policy. After the presentation, Board members asked questions of the AAFAF staff, which looked ill at ease when asked what where their projections on economic growth after the federal relief funds were spent. After oohing and awing, the confessed to a .5% to 1% yearly growth, truly anemic in my opinion. Another interesting question was how does AAFAF believe it will reduce payroll and the answer was by providing incentives for retirement? When asked what happened if the employees do not retire, AAFAF had no answer.

After the questions to AAFAF, Ms. Jaresko spoke as to the Board’s fiscal plan and she was questioned by the Board. There was a period of public questions and the Archbishop of San Juan, who insisted that bondholder claims be cut, but not pensions or employees. This same character has closed Catholic schools, fired hundreds of employees and suspended payment of the teachers’ pension plan. Total hypocrisy.

At one point, I was able to ask about page 16 (23 of the PDF) of the Board’s fiscal plan. There is a detail of the surplus post measures SR/s which is detailed until 2023 and totals $6.697 billion. In the Commonwealth Fiscal Plan of April 5th, at page 50, the surplus post measures totals $6.333 billion. I asked if that was the money for debt service minus any discounts mentioned in the plans. Ms. Jaresko answered quite plainly and said that debt service would be negotiated with each creditor but that was the amount available for service. Ms. Jaresko also cautioned that these were economic estimates that could vary with time, etc. So it is likely that little less than $1 billion per year for debt service would be available, which is slightly higher than the $787 million allocated in the March 13, 2017 Fiscal Plan, but for less than the approximately $3.3 billion per year the Commonwealth owes. Problem with Ms. Jaresko’s qualification as to the economic estimates is that a Plan of Adjustment has to specify the treatment of each class of creditors and it cannot be a plus or minus, UNLESS, the Board will not commit to a specific amount but simply offer to exchange claims for growth bonds. That is something not likely to be accepted by creditors.

After the period of public comments, the Board went directly to the voting and Matosantos had a surprise statement, saying she would not vote for any of the fiscal plans and that the Board’s was too austere. This is the first time that publicly the Board members have had a non-unanimous vote on something. The only other non-unanimous vote was on the PREPA RSA, and we still don’t not know the composition of that vote. Could it be that the claims of conflict of interest have forced her to decide to do dissent? Since the workings of the Board anything but transparent, we can only speculate. After her statement and that of others, the Board’s finally tally was 6-1 in favor of certifying its own fiscal plan for the Commonwealth, which I predicted it would since the end of November of 2017.

Before getting into the differences of each fiscal plan, I must point out that both fiscal plans for the Commonwealth are 90% in agreement and Ms. Jaresko emphasized how collegiate had been the effort to prepare said plans. There are however, fundamental differences. The Commonwealth rejected the 10% reduction in pensions mandated by the Board, refuses to furlough or fire any public employees (even though its fiscal plan mentioned rightsizing the Department of Education and the Department of Health) or enacting the Labor Reform requested (although the Governor had originally filed the bill with the Legislature but withdrew it when the Board put conditions on an increase of the minimum wage and the elimination of the Christmas bonus). The certified fiscal plan requires the enactment of this Labor Reform that will apply to all employees by May 31, 2018, although the Legislature has already claimed it won’t obey this part of the fiscal plan.

There was a similar procedure with PRASA and again AAFAF said that the Commonwealth would not put into effect that which it did not agree with. This time the main bone of contention is the pensions, which again must be reduced by an average of 10%, which AAFAF refuses to undertake. These fiscal plans, different from the others, have very little differences, except the pension reduction and the assertion by Ms. Jaresko that PRASA would need an $80 million loan from the Commonwealth on or before September. Interestingly, Ms. Jaresko said it was probable that PRASA would get a consensual restricting from its creditors. Interesting, but based on the information I revealed last Tuesday, any CDL loan to a public corporation requires that it be in Title III. We will see that happens.

The last fiscal plan certified on the 19th was PREPA’s. Again, Mr. Portela objected to the possible reduction of pensions and that the Board should not lead in the Integrated Resources Plan (IRP) and did not agree with the Board as to keeping the rates below 20 cents per kilowatt-hour, operational directives or transactions requirements. Nor can the Board interfere with the Commonwealth’s public policy according to Portela.

During the public comments section, I asked about the N.Y. State Smart Grid Consortium announcement of a contract with PREPA to assist in the long-term grid planning efforts and Undersecretary Walker’s testimony. In essence, who is in charge of the IRP and the sale of PREPA. Ms. Jaresko was quick to say that PREPA was in charge of both and that the IRP had to be consistent with the fiscal plan. Also, Mr. Sobrino stated that the PREPA sale law would pass this week, something I find extremely unlikely. As with the Commonwealth Fiscal Plan, there are substantial agreements but again, the Board certified its own fiscal plan for PREPA.

The next day, the fiscal plans for HTA, GDB, COSSEC and UPR were presented. Again, Mr. Portela objected to the HTA pension reduction, 15% payroll reduction, as well as the toll increase required by the Board. Again, the Board certified its own fiscal plan with pension reductions and toll increases.

The GDB fiscal plan presented by the Commonwealth, with a likely Title VI qualified modification was certified by the Board, the only one not authored by the supervisory agency.

The President of the UPR Governing Board, Walter Alomar, objected to any pension reductions, further reduction of appropriations, the Board increase of cost per credit. He reiterated that the UPR Governing Board would deal with the pensions. During the discussions, Mr. Alomar explained the campus consolidation that entails that there will be a review of courses to see what will be kept and that there would be reduction in deans, and other personnel, but no reduction of the workforce. Sounds like business as usual to me. Again, the Board certified its own fiscal plan.

As to COSSEC, the Government agency that regulates the credit unions (called Cooperativas in Puerto Rico) and guarantees deposits up to $250,000, the Board insists that it must be independent of any stakeholder. The COSSEC leaders explained that they were dealing with the Legislature as to this. They also explained the stress testing made and assured the Board that COSSEC can handle a run on the cooperativas of between 5%-25%. After some further discussion, Ms. Jaresko recommended that the fiscal plan approval be postponed until further testing can be done. Seems to me that Ms. Jaresko is not quite sure what was done was quite correct and mentioned some new help was coming in. Not very encouraging for depositors.

The Governor, then, had only 1 fiscal plan certified out of 6, for an anemic 17% batting average. But the Fiscal Plan certification was about control, not what is best for Puerto Rico or creditors.

The Commonwealth objects to the reduction of pensions and further reduction of employees as a violation of their right to make public policy. It also claims that pensions cannot be reduced since some have property rights over them. But the Commonwealth is wrong. I have mentioned that section 201 of PROMESA gives the Board power to certify fiscal plans that must include how to “improve fiscal governance, accountability, and internal controls“ and “enable the achievement of fiscal targets.” Moreover, Board certifications cannot be reviewed by Judge Swain, who has already ruled she lacks jurisdiction to review them. Also, anyone who has dealt with any aspect of fiscal policy knows that expenses are driven by what is the entities public policy. Hence, you cannot separate one from the other. As to any constitutional protection of pensions, those entities such as ERS, the Commonwealth and PREPA, I have no doubt may be impaired as was done in Detroit, where the Michigan constitution prohibited the impairment of pensions (in Puerto Rico pensioners are jurisprudentially protected). That, however, is not the case of PRASA and UPR, who are not in Title III. One would have to make the leap to believe that PROMESA endowed the Board with the power to ignore Puerto Rico’s laws and constitution outside Title III and Judge Swain’s ruling in the Zamot PREPA affair makes that unlikely. On the other hand, section 108(a) of PROMESA states the following:

“Neither the Governor nor the Legislature

may—

(1) exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or

(2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.” (emphasis added)

Does this mean that if the Legislature does not pass the Labor Reform, the Board may ask Judge Swain to declare Law 80 invalid and unenforceable? Possible, but the end result would be colonialism in the raw. In addition, although the Legislature and the Governor have both expressed willingness to go to jail in disobedience of the Board, that would hardly be necessary. The Board only has to ask Judge Swain for control over the Commonwealth’s accounts and an order to banks not to honor Government checks not issued by the Board.

Finally, although Mr. Portela insisted that the Board file the Plan of Adjustment forthwith, this difference in the fiscal plans will make that difficult. The Plan of Adjustment, as per section 314 of PROMESA, has to be consistent with the fiscal plan but if the Commonwealth will not comply as to pensions, tolls, payroll, etc., how can it be approved by creditors, much less by the Court?

In the legal arena, not much happened except that some of the Unions agreed to a protective order as to their request for Rule 2004 discovery with the Commonwealth. Sooner or later, this information will come out and we will know more about. In addition, on April 25th, Judge Swain will hold an Omnibus Hearing where the issue of certifying the COFINA issues before her to the Puerto Rico Supreme Court. Given that she already said no to a previous attempt by COFINA bondholders and that she held oral arguments on the Commonwealth v. COFINA adversary proceeding, it is unlikely she will grant it. I will be listening in (I am outside the jurisdictions of Puerto Rico and New York) and will report on what transpires.

In parting, I must mention something that transpired in Twitter between Mr. Andrew Biggs, Board member, and Andrew Scurria, from The Wall Street Journal. Mr. Biggs, who will engage anyone who treats him with respect, told Mr. Scurria that PROMESA did not require that the Board define essential services. Moreover, Mr. Carrión has said that the Board would not define them. Although that may be grammatically true, section 201(b)(1)(B) states that the fiscal plan must “ensure the funding of essential public services,” not government services. How can you fund essential services if you do not know what they are? To me, this is a major flaw in the Board’s endeavors since it has been allowing the Commonwealth to fund all the government, irrespective of what is essential. Are the State Elections Commission an essential service outside election year? Is WIPR, the Government radio and TV station an essential service? I can go on and on.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Deciphering the CDL “Additional Terms” Conditions

Yesterday, Wall Street Journal reporter Andrew Scurria revealed the Commonwealth of PR’s additional terms to the CDL loan. This is only one of the three documents encompassing the loan, the other two being the Promissory Note and the Local Government Resolutions-Collateral Security, which have not been made public yet. Nevertheless, the document is very illuminating.

The amounts to be lent was left blank but it makes clear that the Court may reduce said amount in its authorization for the loan in its “financing order.” The loan will mature, unless the Federal Government (“the Government”) agrees to something different, on the earliest of two dates, (1) the effective date of the confirmation of the Plan of Adjustment or (2) July 1, 2038. More on this later.

The terms state, Interest will accrue and be payable in accordance with the Interest section herein. Cash payments of interest on the loan shall begin July 1, 2020, with graduated principal amortization payments beginning July 1, 2023, and ending on the maturity date, as specified by the Government in an amortization schedule.” This means that the loan must be repaid, in full, by the time the Plan of Adjustment becomes effective, which considering the Board has said it will be filed this year, would mean that PR believes it can be approved before July of 2020. Interesting.

The next section, “Security and Collateral” is worth a few reads.

“Security and Collateral

The Note is a general obligation of the Borrower secured by the full faith and credit and taxing power of the Borrower.

All amounts owing under this Note shall be secured by and are payable from a perfected first priority priming security interest in all revenues, including but not limited to income taxes, corporate taxes, excise taxes, receipts, and income of the Borrower of every type and description from all sources wherever located and whether now or hereafter existing and whether now owned or hereafter acquired, and whether encumbered or unencumbered, including, but not limited to, any revenues currently or previously used to support or secure repayment of General

Obligation bonds of the Borrower or CO FINA bonds, together with all liens, guarantees, rights, remedies, and privileges pertaining to the foregoing and all accounts or funds in which such revenues are deposited, pursuant to 11 U.S.C. § 364(c)(2) and (d), as applicable in each case, as incorporated into PROMESA under Section 301.

All amounts owing under this Note shall constitute superpriority administrative claims in the Borrower’s Title Ill case pursuant to 11 U.S.C. § 364(c)(l) as incorporated into PROMESA under Section 301, payable in full in cash upon the effective date of a confirmed plan of adjustment of the Borrower.”

The use of the GO language here is very telling. Seems the Federal Government does believe that GO protection is the best. Wonder what COFINA bondholders will say. In addition, the language seems to include any income that may come from the SUT, whether it is pledged to COFINA bondholders or not, it is secured by lien or not, but is subject to the adequate protection and notice and a hearing requirements of 11 U.S.C. §364(d). At the same time, the amounts owed are a superpriority administrative expense, which means that the loan will be paid if the Title III is still ongoing in 2020. Additionally, the Commonwealth cannot lend to any public corporation that is not in Title III. Very possibly we will see PRASA in Title III.

Moreover:

“The Borrower hereby pledges and assigns to the Government and grants the Government a continuing security interest in all right, title, and interest of the Borrower in any bonds, notes, or other evidences of indebtedness or collateral issued by a public corporation to the Borrower to secure on-lending of loan proceeds to such public corporation, in accordance with the terms specified herein.”

Also, the document states that the security interest created in the document “be broadly construed in favor of the Government and the security interests created secure all obligations of the Borrower pursuant to this Note, whether now existing or hereafter arising.” The loan may be drawn up until October 31, 2018, which only gives the Commonwealth six months. The repayment of the loan will be as follows:

“Consistent with the Term and Amortization provisions herein:

  • Repayments of principal and interest shall be made semi-annually on July 1 and January 1, and on such other days as may be required in accordance with the terms hereof.

  • Repayments shall be applied first to accrued interest and then to outstanding principal.

  • Any amounts repaid by the Borrower may not be re-borrowed.

  • Any amounts received by the Borrower from a public corporation as repayment of on-lent amounts to such public corporations shall be used exclusively and applied promptly to repay or prepay the Note, in any event within 5 business days of receipt.

  • For the period starting on January 1, 2020 and ending on the maturity date, the Borrower shall maintain a segregated non-commingled debt service account and shall deposit into such account on the first business day of each month at least one-sixth of the semi-annual interest and principal due as necessary to ensure the account has sufficient funding to make the semiannual debt payments required hereunder and is replenished for each semi-annual debt payment. Amounts deposited in the debt service account shall be used to make payments on the Note and solely for such purpose.”

The interest rate will be “the current market yields on outstanding marketable obligations of the United States of comparable maturity at such drawdown, as determined by the Secretary of the Treasury.” Many times CDL loan repayment are waived by Federal Government but this does not seem the case here.

The document states that the maximum cash balance for the TSA is $800 million. The document has no date and but its properties show it was created in 4/8/18 and modified in 4/9/18 making it likely it is was created around that date. If it is so recent, why did the Commonwealth say that Treasury had agreed to raise that amount to $1.1 billion? What is the amount? Questions, questions.

Irrespective of the TSA account or the $4.9 billion available for CDL loans, the Government may limit the amounts drawn based on “cash on hand and analysis of expected cash collections and disbursements through the accounts of the Borrower, its component units, and the public corporations.” In addition:

“The Borrower must itemize and certify, to the satisfaction of the Government, the end uses of requested drawdown amounts by the Borrower and the public corporations, based on categories specified by the Government.

The Borrower must certify to the Government its current cash position with each drawdown request. If the purpose of a drawdown is for on-lending to a public corporation, the Borrower also must certify to the Government the cash position of the applicable public corporation. . .

If the purpose of a drawdown is for on-lending to a public corporation, the Borrower must certify to the Government any of such public corporation’s payments, transfers, or deposits made since the last drawdown, regardless of the source of funds, for credits to accrual accounts, reserve funds, trust funds, contingency accounts, and the like that do not represent a cash disbursement to continue current operations.”

The Federal Government wants lot of information from the Commonwealth and this is a theme seen throughout the document.

For what purposes are the loan proceeds to be used? It is not quite clear but:

“Eligible and Ineligible Expenses and Uses of Loan Proceeds for the Borrower and the Public Corporations

Eligible expenses and uses of loan proceeds constituting governmental operations for essential services of the Borrower and the public corporations include:

  • Employee payroll and benefits, including pension payments or contributions at rates and levels no higher than those immediately preceding Hurricanes Irma and Maria.

  • Facilities maintenance costs that are not capital expenditures or infrastructure improvements

  • Normal operational materials, supplies, vendor, and services payments

  • In the case of the Borrower, on-lending to the public corporations for the forgoing purposes

Ineligible expenses and uses of loan proceeds that do not constitute governmental operations for essential services of the Borrower and the public corporations include:

  • Debt service including but not limited to payment of any indebtedness existing prior to the date of this Note, except as permitted by the terms set forth in the Refinancing of Previous Postpetition Loans section herein.

  • Refinancing outstanding debt of the Borrower or a public corporation, except as permitted by the terms set forth in the Refinancing of Previous Postpetition Loans section herein.

  • Capital improvements

  • Repair or restoration of damaged facilities

  • Paying the non-federal share of any Federal program

  • Tax refunds

  • Lobbying

  • Title III costs including but not limited to judgments arising from Title III cases and related cases, and legal or advisory fees

  • Deposits, transfers, or payments to accrual accounts, reserve funds, or contingency accounts that do not represent an actual, immediate cash disbursement to continue current government operations for essential services

  • Administrative costs of Federal disaster assistance grants and loans

  • Disaster related expenditures eligible for reimbursement from the Federal Government

  • Any other amounts not constituting current expenses under the trust agreements of the applicable public corporation”

Does this mean that payment of pensions and government employees is an essential service? After reading it several times, it seems to me that pensions and government employees who are essential services are the recipients of said money but that requires the definition of essential services, something PR and the Board have refused to do. Will the Government define them? On the other hand, if all pensions and all public employees are essential services, the amounts paid cannot be higher than the levels preceding Irma and María. Hence, if the Board requires the furlough of employees and reduction of pensions, the Federal Government is ok with that, as well as the Commonwealth funding these as essential services.

The document also allows the Commonwealth to lend to a public corporation for the repayment of a previous loan, but with reporting conditions. Obviously thinking of PREPA.

As mentioned before, there are many reporting requirements. Until December 4, 2018, the Commonwealth “must submit reports on actual and projected cash receipts, cash outlays, restricted and unrestricted cash balances, accounts payable and accounts receivable balances, the waterfall of cash through deposit accounts, and other cash flows, for the Borrower and its component units as specified by the Government, on a weeklybasis and with each drawdown request.” This seems to apply to the Commonwealth whether it takes the loan or not.  Also:

“While the Note is outstanding, the Borrower must submit budget reports on actual and projected revenues and expenditures at least monthly, and must submit a copy of annual audited financial statements within the time period required under 2 CFR 200.512(a)(l) as adopted in 2 CFR 3002.10.”

The first CFR requires that audits be done within the earlier of 30 calendar days after receipt of the auditor‘s report(s), or nine months after the end of the audit period. The second CFR deals with debasement and suspension of federal programs. Hence, if PR does not comply, the Federal Government may not send any more money to the island. Big stick.

Information must also be submitted as to the use of the loan proceeds and nothing can be done that would impede the Government’s ability to verify the use of loans, a clear reference to the Whitefish contract that impeded review by federal authorities. Who said Whitefish was not important?

Budgets must be promptly submitted and any changes must be quickly notified. In addition, “[w]hile the Note is outstanding, and so long as the Financial Oversight and Management Board is in operation, the Borrower must submit status reports at least monthly on any potential or proposed changes to its fiscal plan certified pursuant to PROMESA, and how such changes may

affect the Borrower’s responsibilities and commitments under the Note.” Also, the Commonwealth must promptly submit to the Government any proposed changes to the Fiscal Plan and any certified Fiscal Plan, as well as any insurance payments received.

The same information as to any public corporation that is lent money must be submitted as well as any proposed rates and fee changes of said corporation (PREPA and PRASA come to mind) or if will accept something of value in lieu of said rates or fees. Any default by the public corporation to any loan made with CDL funds must be notified within 5 days.

All these reporting conditions, and others that I will mention infra, put the Government as another overseer of the Commonwealth. It is quite obvious the Government means to keep a close eye on the money it is lending.

In addition, as a condition precedent to the notes effectiveness, a drawdown manager must be appointed by the Commonwealth. More importantly, the Commonwealth must certify “all restricted and unrestricted cash accounts under the custody of the Puerto Rico Treasury and the public corporations, the balances of such accounts, and a narrative statement detailing the waterfall of credits to such accounts for any revenues or income received.” The “discovery” of almost $7 billion in 800 accounts by the Commonwealth has not escaped the scrutiny of the Government. Question is how quickly will this be done when only recently the Commonwealth and the Board hired companies to make a forensic investigation on this subject?

As conditions precedent to the initial funding, the Government requires “receipt of customary certificates and opinions and evidence of all required approvals, consents, and authorizations, including, without limitation, authorization by the Legislature of the Borrower for the incurrence of obligations under the Note as ‘public debt’ of the Borrower and approval by the Financial Oversight and Management Board.” Obviously, the Government wants to take advantage of Article VI, Section 8 of the PR Constitution that puts priority over all else on the payment of the debt. The problem with this is that the Constitutional Convention and the record of the 1961 Amendments to the Constitution make it clear that public debt is not any kind of obligation of the Commonwealth but bond debt in particular and acknowledgement by the Legislature will not make it so. Another issue for Judge Swain to decide.

A financing order by the Court is also required and a certified fiscal plan that reflects said loan are also required as conditions precedent. There cannot be any outstanding notice of non-compliance with the Fiscal Plan by the Board. Clearly another “motivation” for PR to comply with the Board’s orders. Agreement by the public corporation and the Board are also required, as well as the permanence of the Court order as required by the Government. Moreover, “[n]o amounts may be drawn down and on-lent to a public corporation until the Borrower shall have confirmed in writing to the Government the satisfaction of the foregoing conditions precedent to such on-lending.

There is a list of actions requiring government approval while the note is outstanding. These are:

  • “sell, pledge, grant security in or liens on any real property, tangible assets, intangible assets, financial assets, or accounts, or any revenue streams, or incur any debt under any indenture nor resolution, or otherwise borrow money, or

  • refinance, prepay, or repay any other indebtedness or borrowings other than pursuant to an effective plan of adjustment confirmed pursuant to a Title III case under PROMESA that provides for the repayment of the Note in full in cash, unless the Government agrees to an alternative treatment in writing, or

  • approve any waivers or amendments to any lending agreement between the Borrower and a public corporation, or

  • extend any loans, credit support, or otherwise bear credit risk to or for the benefit of any corporate entity, government entity, or other institution.”

Similar limitations are imposed on public corporations that receive the CDL loans. Does this mean that PREPA cannot be sold without the Government’s approval? Any other part of the PR government? What will the Board think of this, especially given what Under Secretary Walker testified before Congress? Questions abound.

The Government may collect on the loan regardless of whether the amounts are due and regardless of a default, including but not limited to the offset (set off in more traditional parlance) as established by 31 U.S.C. § 3716.

As to events of default, there are many. These include, breach of any conditions by the Commonwealth, the payment by the Commonwealth of any principal or interest of any prepetition debt via cash or adequate protection, an order dismissing the Title III or a petition by the Commonwealth to dismiss the Title III or the appointment of a receiver for the Commonwealth (interesting) or a public corporation, a request or an order amending the financing order or violations of said order, failure of Commonwealth authorization to the loan (the Legislature or the Board may do this), any unstayed judgment of $10 million or more, the filing of a Plan of Adjustment that provide for full payment of the loan, failure of the liens to remain in full effect, default by any of the public corporations, failure of PROMESA (the Aurelius litigation or any other constitutional challenge). Any suspected breach must be reported to the Government or it will be a breach.

The default has many remedies. The Government may suspend all or part of the commitment amount, declare all or part of the Note due and payable, increase the interest rate by 50 bps or any other action available under the law. Moreover, once there is a declaration that the note is due and payable, “all revenues and other amounts pledged hereunder shall be applied solely to repay this Note including any interest thereon in full before being used for any other purpose.”

The document also includes some General Covenants which put further supervisory restrictions on the Commonwealth. Some of them are to provide prior notice to the Government of any consensual debt restructuring proposals submitted or reported to other creditors, the Board, or any regulatory agencies, make sure the Fiscal Plans reflect the loan debt, notice of proposed changes to the Fiscal Plan, provide prior notice of all material motions or filings by the Board in the Title III case and maintain the level of insurance. The prior notice requirements mean that the Federal Government wants to know what is going on in the case before all others do. Control anyone? Wonder what the Board will think of this?

As per the agreement, the Commonwealth represents some very interesting things:

“As set forth in more detail below, the Borrower represents and warrants that it has authority to execute the Note and to give full force and effect to, and comply with, all terms and conditions herein.

The Borrower represents and warrants that nothing in its certified fiscal plan pursuant to PROMESA, and in the public corporations’ certified fiscal plans pursuant to PROMESA, is inconsistent with the terms and conditions of this Note.

The Borrower has all requisite governmental power, consents, and authority to execute and deliver this Note and, upon entry of the financing order, shall have all requisite governmental power and consents to perform all obligations hereunder, including, without limitation, the creation of security interests by the Borrower as contemplated hereunder.

The execution and delivery by the Borrower of this Note has been duly authorized by all necessary governmental action and does not, and will not, contravene any law, rule, or regulation of the Borrower, and will not result in the creation or imposition of, or the obligation to create or impose, any encumbrance upon any assets of the Borrower pursuant to any obligation, except  pursuant to this Note.”

This last representation requires some thought. By tapping into what the COFINA bondholders consider their property, this agreement could be considered to be against PR law. By placing the loan as “public debt”, the GO bondholders can claim that the agreement is in violation of the PR Constitution and if the legislature accepts the loan is public debt, they are violating said Constitution. Food for thought.

The terms of this loan are of such nature that would make any government hesitate before accepting them. On the other hand, the Rosselló administration desperately wants extra cash in order to spend its way a 2020 reelection. At the same time, the Executive was not much involved in the Title III since PROMESA did not provide it with a role. Now it wants to know what is going on before at the same time as the Board. Will Governor Rosselló try to play any Federal Government v. Board rivalry to his advantage? In addition, does the Commonwealth TSA account have to get down to $800 million or $1.1 billion in order for the loan to be provided? Even if the TSA account goes down to the required amount, the Government may “cash on hand and analysis of expected cash collections and disbursements through the accounts of the Borrower, its component units, and the public corporations,” and the loan could be denied. Finally, without the missing documents we cannot really understand the full details of the loan but we have gotten a glimpse. More information is needed but neither the Government nor the Commonwealth are transparent. We will to wait.

Monday Update – April 16, 2018

Welcome to your weekly Title III update for April 16, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

As I mentioned last week, Judge Swain held a four hour oral argument on summary judgment motions on the issue of the validity of COFINA. Although as was expected, Judge Swain took the issues under advisement, sometimes the questions a judge asks gives you a glimpse of how she is thinking. Given her questions, it is obvious Judge Swain is concerned as to the title of pledged revenues, that securitization involved tangible assets and the timing of the transfer of the SUT, both as to when it was a tax and the constitutionality of transferring future taxes. When the GO representative came to argue, the Judge raised the issue of services v. payment of public debt. Judge Swain stated that the GO position could entail the rewriting of the PR Constitution and that their position as to available resources included all taxes. That is true, but it also what the Constitutional Convention intended.

From what I could surmise from press reports, the questions by Judge Swain do not swing the pendulum one way or the other since they were mostly public policy questions, not questions of law. In any event, they are simply the questions normally posed to the parties during oral arguments. The markets, however, interpreted the hearing as very positive for COFINA and its prices went up.

In addition, Judge Swain may be trying to pressure the parties to come to some type of agreement as to COFINA. I have always thought that COFINA wants to make a deal with the Board, but any deal is subject to a challenge and possible lawsuit from GO’s. But if GO’s believed they are likely to lose, it could be the incentive they need to agree to a deal. I doubt this scenario since any deals are contingent on the amount of money offered by the Board, which was meager to start with and since November seems to have been reduced to “growth bonds.”

In addition, some of the questions posed by the Judge put in jeopardy the UCC’s hints that much of the bond debt is illegal as it was issued in violation of the debt limits of Article VI, section 2 of the PR Constitution. If Judge Swain’s question as to this issue was her decision, then the 15% limit would only apply to PR General Obligation Bond debt, which does not exceed a limit so calculated.

Also, Judge Swain could hold out her decision until after the plan of adjustment is filed by the Board. If the COFINA decision was handed down today and was favorable to bondholders, it would mean the debt must be paid and there would be no incentive to settle for less than full payment. By waiting until the plan of adjustment is filed and beyond, Judge Swain could be thinking this would force the parties to settle. Again, doubt it would happen with what the Board is offering, but you never know.

Moreover, even if the Court were to find in favor of COFINA bondholders this does not mean that she would find against GO bondholders. She could very easily say COFINA money is not available resources under Article VI of the Constitution but that GO’s have a priority over all other debt, as stated by section 8. That would definitely leave the Board and Government hung out to dry. This year and next are going to be very interesting.

Several bondholders have objected to Magistrate Judge Dein’s order as to Rule 2004 discovery. They want more documents, not less. In addition, the GO bondholders and others filed a motion to compel compliance with the Court’s February 26, 2018 Order addressing the production of Fiscal Plan Development Materials. The motion states:

“Per the Court’s Order, Movants promptly wrote to Respondents identifying the Fiscal Plan Development Materials that they believed were deemed produced pursuant to Section 2004. See Ex. C (Letter from G. Orseck to M. Bienenstock & J. Rapisardi (Feb. 27, 2018)) & Ex. D (Letter from G. Orseck to M. Dale & J. Rapisardi (Mar. 7, 2018)). Respondents refused, arguing that, because the Court had found that Movants had not shown that they needed to immediately use the Fiscal Plan Development Materials, Respondents did not need to produce them at all pursuant to Rule 2004 or the February 26 Order. See Ex. E (Letter from M. Dale & J. Rapisardi to G. Orseck (Mar. 1, 2018)) & Ex. F (Letter from M. Dale & E. McKeen to G. Orseck (Mar. 12, 2018)). Respondents insist instead that they have the unilateral right to determine, on a document-by-document basis, whether to produce any Fiscal Plan Development Materials. See Ex. F. To date, Respondents have refused to produce a single one. See id. As Respondents would have it, Movants are in precisely the same position with respect to the Fiscal Plan Development Materials that they were in before they began litigating the 2004 motion over six months ago.”

Clearly, this is not what Rule 2004 or the Court’s order require. This steadfast refusal to produce documentation on the Fiscal Plans begs the question of what, if anything, is the Board hiding. In any event, the information will become relevant or not when later in the year the plan of adjustment is filed.

Although the PR Senate has unanimously passed a resolution to defund the Oversight Board, the House Speaker, Mr. Méndez, stated that he would not issue such resolution since the Governor requested he do not. As I have said before, the Resolution was nothing more than politicking given Section 107(b) of PROMESA.

The local press has repeatedly reported the Board will hold hearings on April 19-20 to certify fiscal plans, but there is no mention at the time of writing of this in its website. If there are hearings, I will try to attend or at least view it on my computer and report.

What is in the website of the Board is a Letter of Engagement for Duff & Phelps, LLC assist in independent forensic analysis in the following:

“Phase I Scope of Services would be to perform, assess, recommend and/or report to the PROMESA board or its delegates on the following:

  1. (1)  Validate with a high level of certainty the completeness of the list of bank accounts in the AAFAF report of January 19, 2018 and the values of those bank accounts as of the reported date;

  2. (2)  Recommend additional procedures that need to be undertaken if the completeness of the list in the AAFAF report of January 19, 2018 is determined to be insufficient;

  3. (3)  For all materially sized accounts, and for a random selection of other accounts identified by the Government as restricted, identify the documented legal restrictions, e.g., federal, bond-related, local legislature, or local executive.

  4. (4)  D&P to provide periodic status updates and a report and recommendation to the PROMESA board regarding the above items, which will include D&P’s estimates of time and fees to perform the agreed upon tasks, once commissioned by PROMESA.”

In other words, almost 9 months after the Board and PR exchanged emails as to the discovery of accounts with billions of dollars, a company is being hired to conduct an investigation as what, if any, limitations these accounts have. Very expeditious work by the Board. Another waste of PR taxpayer dollars by the Board for something they were already aware of.

PREPA has been in the news here and in Washington. The United States House of Representatives Committee on Energy and Commerce, Subcommittee on Oversight and Investigations held a hearing on April 11 on PREPA and its recovery efforts. One of the witnesses was Assistant Secretary Bruce J. Walker, Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy. During his testimony, he stated that the DOE had spoken with Governor Rosselló and he had agreed that the Southern States Energy Board would create the policy and legal framework for the regulatory process for privatization of PREPA. Local news has reported that the contract to be paid by the DOE is for $1.3 million. This was confirmed on Friday during a radio talk show where Senator Ríos of the PNP who added that the Governor had designated Senator Seilhammer, who is an engineer, as his representative.

What is the Southern States Energy Board? According to its website:

“The Southern States Energy Board (SSEB) is a non-profit interstate compact organization created in 1960 and established under Public Laws 87-563 and 92-440. The Board’s mission is to enhance economic development and the quality of life in the South through innovations in energy and environmental policies, programs and technologies. Sixteen southern states and two territories comprise the membership of SSEB: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, U.S. Virgin Islands, Virginia and West Virginia. . .

SSEB was created by state law and consented to by Congress with a broad mandate to contribute to the economic and community well-being of the southern region. The Board exercises this mandate through the creation of programs in the fields of energy and environmental policy research, development and implementation, science and technology exploration and related areas of concern. SSEB serves its members directly by providing timely assistance designed to develop effective energy and environmental policies and programs and represents its members before governmental agencies at all levels.”

Now it seems it will be in charge of designing the sale of PREPA. Stay tuned.

Mr. Walker also stated that PREPA does not have a good model for their electrical system and this impedes determining where it is a good place to put renewables and where is a bad place to put them. This model for the electrical system is being developed by the DOE and should be completed in 60 days. Does this means that PREPA is being federalized? It certainly feels that way. Moreover, you may have noticed there is no mention here, nor was there mention during Mr. Walker’s testimony, of any role of the Oversight Board in the sale of PREPA. Maybe that is why the Governor accepted the SSEB’s role in the sale of PREPA. In any event, it is VERY UNLIKELY the Board will relinquish its “control” over PREPA. Nevertheless, a model for the PREPA electrical system, the Integrated Resources Plan, required by the PR Energy Commission also will be scrapped, as well as any fiscal plan that does not include said model.  Once the fiscal plans are certified, we will be in better position to see what it will do. We know they are focused on control of all matters.

Very few people know, however, that Congressman Don Young, an old friend of the PNP, has been circulating a draft of legislation on the sale of PREPA. This bill essentially puts the sale of the generation, transmission and distribution electrical systems of Puerto Rico in the hands of the Department of the Treasury.  The Secretary must consult with PR and the Board but he makes the ultimate decisions as to the sale, including selecting the entity to which it would sell PREPA. The selected entity must operate at least one facility involved in generating, transmitting or supplying of fuel in the United States (could be an error to mean electricity). It must have the financial strength to be able to operate and proposals that include a capacity to supply fuel for electricity generation, etc., will be given preference. The process will start within 60 days of the approval of the bill, applications no later than 120 days of the approval and the selection no later than 180 days after approval of the bill. Hence, this should be very fast.

The selected entity will have a $3 billion fund to offset any revenue shortfall which is essentially a Congressional subsidy. It prohibits Contributions in Lieu of Taxes which is a subsidy to Municipalities, a drag on PREPA’s revenue.

The Federal Energy Regulatory Commission is entrusted in the Young bill with establishing, in coordination with the PR Energy Commission, the electricity rates “in exercising this authority, the Commission shall approve a tariff containing rates, charges, terms, and conditions of service that it finds to be just and reasonable and not unduly discriminatory or preferential.” (Section 5(a)(5)). The FERC is also entrusted with authorizing a gasport or pipelines. Finally, gives federal court jurisdiction of any eminent domain claim for a right of easement of over $3,000.

Again, it seems the federal government, both the Executive and the Legislative, want to federalize PREPA. It seems this bill only reinforces why the Southern States Energy Board has been engaged.

In other news, at the local level, the Institute for Energy Economics and Financial Analysis issued a report criticizing the PREPA sale bill. Some of the criticism is very valid, for example, at page 8:

“As demand declines, the fixed costs of electricity generation will be spread over fewer customers, putting upward pressure on rates.  In this situation of highly uncertain and declining electricity demand, investments in large-scale centralized generation facilities carry the additional risk of overbuilding, i.e. that the electricity demand may not materialize to support the new investment. This is why IEEFA has advocated strategically-timed retirements of existing generation facilities and the development of smaller generation facilities as needed to replace them.”

At page 9, it states that the “privatization bill provides essentially no role to the FOMB, nor does it incorporate the proposed privatization transactions into an overall debt management strategy for PREPA.” (bold in the original) The report also criticizes the bill as creating uncertainty and not removing politics from PREPA. Also, at page 12, it states:

“Recent actions taken by Governor Rosselló’s administration indicate that the governor is not serious about changing what the Puerto Rico Energy Commission identified as a core governance problem: “continuous and short-sighted political interference” without independent, professional oversight. The Rosselló administration has worked aggressively to thwart any independent oversight of PREPA.”

On the other hand, when it comes to the bondholder’s debt, the report is totally outside the scope of the possible at page 20:

Elimination of PREPA’s legacy debt. Repayment of the current debt would crowd out the necessary capital investments to rebuild and modernize the electrical system. Bondholders should pursue partial recovery of losses from insurance companies and from legal cases against bond consultants and underwriters who approved possibly fraudulent bond issuances. No funds from the sale of PREPA’s assets should be used to defease or otherwise reduce PREPA’s indebtedness.

In addition, Jose Alameda, a local economist hired by UTIER wrote a report saying that the privatization would increase residential bills by almost $1,000 a year. Clearly, given the DOE’s and likely Board’s intervention, it is unlikely to be the vehicle for the sale of PREPA. What is certain is that the federal government does not trust this administration or the Board for that matter, in the sale of PREPA. Now let’s see what the Southern States Energy Commission comes up with.

Lastly, my column last week in Caribbean Business returned to the issue of the CDL. Much like in the 1985 comedy Brewster’s Millions, Governor Rosselló can have up to $4.9 billion from the federal government, in the form of the CDL, but first he must spend hundreds of millions to empty the Commonwealth’s Treasury Single Account and meet the minimum threshold set by the U.S. Treasury of $1.1 billion.

The real question is how he’ll spend hundreds of millions without regard or control; certainly the Oversight Board won’t stop him.

Transparency here will be paramount. Spending money in the hopes of that you will get the $4.9 billion is no way to govern. So while we patiently wait to see the details of the term sheet between the U.S. Treasury and the Puerto Rican Government, we are reminded that watching Brewster’s Millions was, after all, a comedy. However, what is taking place in Puerto Rico is no comedy. Let’s see what happens.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Weekly Update – April 10, 2018

Welcome to your weekly Title III update for April 10, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

The purported clash of titans between the Board and PR continues. The Senate, in a Tarzan-like chest pounding, unanimously passed a resolution instructing the PR Treasury Department not to send money to the Board. The Governor was understandably hesitant to support this and sent out a press release essentially saying he had to comply with section 107(b) of PROMESA, which empowers the Board to use its control over the PR budget to assure itself of the necessary funds. Also, no funds to the Board means no funds for Title III. Populistic posturing by the PR legislature.

In any event, on April 5, 2018, the Governor sent the Board the Fiscal Plans for the Commonwealth, PREPA, PRASA, UPR and HTS, without any adjustment of pensions and many of the other requirements. The Board has said it hopes to certify the plans by April 20. More likely than not, the Board will certify its own fiscal plan which will include the pension reduction and other measures anathema to the Governor, who has vowed not to implement them. If he does not, the Board will file motions with the Court pursuant to section 104(k) of PROMESA and again Judge Swain will have a clash of Board v. Commonwealth.

I will briefly discuss the Commonwealth and PREPA fiscal plans, which are the most pressing since these are the main Title III debtors. The Commonwealth fiscal plan was expanded by 80 pages adding more information and complying with some, but not all of the Board’s requirements. At page 50, you can see a surplus of billions if debt is not paid and deficit if debt is paid. The message is clear, PR cannot pay debt service, but can pay $2.25 billion in pensions. There is an increase in government payroll (page 53) although there is population decrease (page 65-66) and a $6.33 billion surplus by 2023 (page 54 and 69), all without debt payment. Moreover, the Title III litigation is expected to cost $1.46 billion by 2023 (page 54 and 185).

The Commonwealth Fiscal Plan predicts PR growing from 2019 on, although there is a projected population decrease (page 66). Page 71 is equivalent to page 55 of the March 2018 Fiscal Plan and the surplus is increased as well as other numbers changed. Makes one wonder what actually changed in 13 days?

Also, although the Governor said further labor reform was withdrawn, the plan states that it will [i]ncrease productivity and competitiveness by revamping labor laws.” (page 130) The plan includes the rightsizing of the Department of Education continues (page 82) as well as the Health Department (page 94), but whether that means actual firings we do not know. Tax reform starts at page 133 but frankly, I can’t see how you can decrease taxes as dramatically as the fiscal plan calls for and get an increase in revenue. It can work in the US but not here in PR where tax evasion is a way of life.

During the Governor’s address to PR as to PREPA on January 22, 2018, we were told that the process would take 18 months to complete. Now, the fiscal plan states at page 142:

“The transformation process is expected to formally run from the date of certification of PREPA’s revised fiscal plan until confirmation of a plan of adjustment and completion of the necessary concession and sale transactions (Transformation Period). The Transformation Period is expected to last 12-18 months, during which:

A new, independent regulator for the energy sector will be established through legislation). The New Regulator may be the Energy Bureau within the Public Service Commission (PSC).

5 energy commissioners who serve staggered terms to remain insulated from political interference

Advisory and advocacy staff and functions strictly separated for fairness and due process reasons

A ratepayer advocate exists separately from the regulator

Appointments made from a list of persons with specified technical credentials identified through an externally led process.

Supported by expert utility staff.

Decisions will comply with traditional administrative procedures”

Now the Transformation Period will be longer and the Regulator, contrary to what the Board wants, will be part of the Public Service Commission. So much for a politician’s promises.

Finally, the fiscal plan of the Commonwealth is overly optimistic in its estimates and the possibility of using technology. Take the Property Registry of PR for example. Ever since the Acevedo Vilá Administration, the PR government has come with one scheme after another to modernize the process of registering property rights in the island and all have failed with millions of dollars wasted. Why are we to believe it will be any different this time?

The PREPA fiscal plan, contrary to the Commonwealth’s, shrank from 139 pages to 104. Although Governor Rosselló ordered the PREPA Board of Directors to justify Mr. Higgins, the new Executive Director, salary, it seems that he is here to stay since at page 11 the fiscal plans mentions him and his experience. Again, politicians.

Page 14-15 details the PREPA transformation plan of 18 months, which the Commonwealth fiscal plan mentions and is quite ambitious. As the Commonwealth Fiscal Plan, PREPA’s states that it cannot pay debt service except by increasing the cost of kilowatt/hour by 5 cents (pages 25, 27, 46-47, 83).  To be expected from the Government that claimed it would pay bondholders and that Title III was not necessary. Again, politicians.

Page 26 explains that the PREPA pension fund is only 28% funded and is $3.6 billion underfunded. Big problem. The Plan includes reduction of overtime payment from 2x to 1.5x, reduction of contribution to the medical plan and pension “reform” (page 36 and 68-69). I am sure PREPA’s unions will accept it without any complaint. Continuing with the issue of employees, the Plan states that “[a]pproximately 10% of PREPA workforce has submitted paperwork to retire with the Retirement System. If all ~600 retire and are not replaced, PREPA will realize employee costs savings of ~$45 million.” But on pages 23 and 65 of the plan, PREPA complains that since 2012 it has lost 30% of its workforce and that has constrained its ability to respond to challenges. But again at page 44 it mentions rightsizing. Totally contradictory but at page 66 it makes clear that there will be recruiting for skilled workers. Question is, if you are going to hire employees, what about the 600 not replaced workers and the $45 million in savings. Totally contradictory.

The transformation is not the only thing with a timetable. The Integrated Resource Plan (IRP) is being revised and should be completed by September 2018 (page 50). Given how much space is devoted to the IRP (pages 50-53) seems doubtful everything will be completed by September. It includes a differentiated rate system (want better service? You pay more, page 53) and this dozy: “Given the complexities of the IRP process and its range of regulatory approaches, it is not possible, nor credible at this juncture to quantitatively modify the current PREPA Fiscal Plan with the IRP objective function targets.”(page 53) Then why have the fiscal plan at all? Totally contradictory. Again, contrary to what politicians have said, the fiscal plan seems to include the selling of the PREPA monopoly, page 93. Seems PR politicians speak with a forked tongue.

Moreover, last week PR Treasury Secretary Raul Maldonado said that by summer PREPA and PRASA are expected to need a loan from the Commonwealth General Fund.  Let’s take a moment to refresh ourselves with recent comments from Martin Bienenstock, legal representative of the Board, whom have filed several motions on PREPA’s liquidity:

“The undisputed evidence shows PREPA is running out of money and that without an injection of liquidity in the near term there will be insufficient cash to continue to provide power to Puerto Rico.”

“Even with $300 million of postpetition financing PREPA will only be able to continue operation in the ordinary course until late March 2018”

“As explained at the February 15, 2018 hearing, PREPA’s cash availability is at such a low level that PREPA’s operations are in jeopardy. After the hearing, PREPA began to implement plans to ramp down PREPA’s power production and shut down certain generating units in order to conserve its limited cash resources. This exacerbated the risk to an already fragile system and leaves it vulnerable to outages and resulting in brownouts on the island. Unless PREPA obtains access to additional liquidity by mid-next week, PREPA will be forced to further reduce its load and reduce personnel.”

“Movants anticipate submitting a further request for approval of a larger financing within two to four weeks because the instant proposed financing is projected to be consumed before the end of March 2018.”

However, in subsequent hearings and filings, Mr. Bienenstock changed his tune, saying that it was possible, not probable that PREPA would have to borrow money.

“PREPA’s budget reporting since the closing of the post petition facility has indicated materially better actual liquidity than originally forecasted. Barring unforeseen circumstances, PREPA does not currently anticipate a need for supplemental postpetition financing before May 15, 2018, and possibly not until several weeks after that. PREPA therefore expects any motion for approval of supplemental or replacement postpetition financing would be filed on or after April 23, 2018.”

This is nothing but a desperate attempt by the Board and the Commonwealth to spend money so the General Fund  goes below $1.1 billion so they can attain the CDL from the Federal Government. The cash reports of the Commonwealth, however, show that it will be difficult for instead of being reduced, it has grown. Moreover, it will grow larger now that April 17, tax day, approaches.

Some municipalities, however, are going to receive CDL loans since the Treasury decided it can lend them individually and not through the Commonwealth. Twelve municipalities will receive a total of $53 million in loans with another 65 in the process of requesting them. Since the loan cannot exceed $5 million per municipality, the bulk of the $4.6 billion available to PR remain intact and will probably will never be received given the Commonwealth’s finances. That is what happens when you don’t pay debt service.

The issues of Matosantos’s financial disclosures continues to be subject of debate, including by myself. I was informed that her financial disclosure forms do no list her direct interest in Euro-Caribe.  Initially, that did not appear to be a problem because she list her director role with Matosantos Commercial Corporation.  However, a careful review of the corporate documents for Euro-Caribe show that Matosantos was a director as of April 16, 2017 and as of March 5, 2016, she wasn’t. This means that between these two dates she appears to have been appointed as a director.  Matosantos was appointed to the Oversight Board on August 31, 2016.  If Matosantos became a director at EuroCaribe between March 5, 2016 and August 22, 2016, it was not declared on her initial financial disclosure forms. If Matosantos became a director between August 23, 2016 and December 31, 2016; she took on the position during her tenure on the Oversight Board and should have disclosed it in her December 2016 disclosure. If Matosantos became a director between January 1, 2017 and April 16, 2017, she will have to disclose it in her next filing.  It appears that Matosantos took on the director role at Euro-Caribe while she was on the Oversight Board, and further, it’s likely, based on this information that Matosantos signed these disclosures “as of” months beforehand.  There appears to be possible backdating.

As I said from the beginning, adhering to federal conflicts of interests disclosures is required under PROMESA. The possibility that Ana Matosantos violated federal law is clear. This could have a far-reaching impact on current Title III proceedings, and I wouldn’t be surprised to see a complaint before Judge Swain in the near future.

Finally, later today, Judge Swain will have a summary judgment hearing on the COFINA-Commonwealth case, which will determine whether the SUT belongs to the Commonwealth or COFINA. Unfortunately, due to prior engagements in other cases, I will not be able to attend but in any event is its highly unlikely Judge Swain will rule today. There is another hearing at the end of April addressing additional COFINA issues. Right after the Aurelius constitutional challenge that was argued almost three months ago, the COFINA controversy is the most important controversy in case. I expect a decision sometime this year.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – April 2, 2018

Welcome to your weekly Title III update for April 2, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

On March 27, 2018, Judge Swain heard arguments as to the injunction presented by PREC. The regulator had “requested an order providing that ‘the [Oversight Board] is directed to refrain from mandating or authorizing PREPA to take substantive electricity actions that are within [PREC’s] jurisdiction but not authorized by [PREC], and [that] PREPA is directed to refrain from taking substantive electricity actions mandated by [the Oversight Board] if such actions are within [PREC’s] jurisdiction but not authorized by [PREC].””

But the day of the hearing, PREC changed its tune and instead said it was requesting “abandoned its focus on the fiscal plan process. At oral argument, PREC reformulated its request as one for a declaration that a sphere of ‘substantive’ energy-related decisions remains under PREC’s exclusive control, and that the Oversight Board’s area of authority is limited to ‘fiscal’ matters.

Not surprisingly, Judge Swain denied the request for an injunction and said:

PREC has not identified a specific mandate or authorization from the Oversight Board that PREC believes invades PREC’s alleged sphere of control over substantive energy policy. In fact, PREC candidly acknowledged that its reformulated request is instead one that seeks to obtain advice on the spheres of control of the relevant parties in advance of action by the Oversight Board related to such substantive matters. PREC thus seeks premature advice from the Court so as to avoid concrete disputes in the future. The Court lacks jurisdiction to render a declaratory judgment embodying such advice, as it would constitute an advisory opinion. In that PREC’s request for injunctive relief is premised on the rendition of such an opinion, it necessarily fails.

There was little probability that the original petition would be granted and probably for that reason the remedy requested was changed, although it obviously was a request for an advisory opinion. The fact that the attorneys for PREC, the Board, AFFAF and the UCC are all paid by the PR taxpayers was not wasted on the Judge. At the end of the hearing, Judge Swain took the issue under advisement but her distress was clear. She said PR needs to find a way forward using the resources it had. She encouraged increased lines of communication and to work collaboratively to the advantage of the investors and other stakeholders in order to lower transaction costs. Maybe the Judge will be much stricter in approving fees at the next hearings or start sanctioning complaints similar to PREC’s.

In an important parallel decision not mentioned by the press, Judge Swain denied the remand of cases that PREPA had removed from the Commonwealth Courts’ involving orders from PREC that the utility claimed put it at odds with its fiscal plan. The Judge stated:

“PREPA contends that the specific procedural requirements of the Rate Order that PREC issued place obligations on PREPA that conflict with PREPA’s obligations and the authority of the PROMESA-created Oversight Board in connection with the development and certification of a PROMESA-mandated fiscal plan for PREPA. ICSE contends that the same Rate Order has been invalidated or mooted by PROMESA. Determinations of these issues will affect the manner in which PREPA engages with the PROMESA fiscal plan process, as well as the force and scope of the Rate Order.”

Obviously Judge Swain is concerned about PREC’s orders conflicting with the Fiscal Plan and if so, given her previous decisions, it is likely she will invalidate them.

Last week, I discussed the Commonwealth and PREPA’s fiscal plans that were submitted by Governor Rosselló. On March 28, 2018, the Board sent letters to the Governor notifying of objections to the fiscal plans of PREPA, PRASA and the Commonwealth. The Board objected to the increase of the minimum wage and placed impossible restrictions on them. It also insisted in elimination of the county structure and the $100 million county support fund. In addition, it required that PREC not be made part of Public Service Commission and the continued existence of the Institute of Statistics. Finally, it again required the reduction of pensions above a combined SS/pensions of $1,000. This requirement was included in the PREPA and PRASA notices. The Board gave the Commonwealth until April 5 to provide the revisions and plans to have them certified by April 25.

The Governor wasted no time in saying he was not going to comply with the requirements of the Board and that if that Fiscal Plan is certified, he will not execute it. On Sunday, April 1, 2018, a letter dated April 2 was released where the Governor detailed his position as to the Board’s “requests.”

At page 2 of the letter, the Governor stated that “[t]he Board may not use the fiscal planning process to usurp or impair the Government’s own exercise-through legislation, expenditures, or otherwise-of its political, governmental and operational powers.” The quote ends with footnote 5 which cites section 303 of PROMESA which makes clear that with the exception of Titles I and II, the Court may not “impair the power of the Commonwealth to control, through legislation or otherwise, the territory . . .”

Finally, the Governor will send the Board a fiscal plan without any of the “requests” by the Board. The letter ends with this warning:

“Simply put, as Governor, I will not allow the Board to again seek the exercise of powers it does not have. Should the Board decide to certify a fiscal plan that exhibits an overreach of its powers, know that the elected Government will exercise its discretion when implementing those measures it considers proper and in the public well-being. We suggest the Board refrain from taking actions that will cause more detriment to the task the Board was mandated to execute.”

Governor Rosselló contends that the Board’s instructions are public policy and it cannot do that since that belongs to the Government.  Given the above, the Board will certify its own Fiscal Plan and then a new confrontation between the Board and the Commonwealth will reach Judge Swain’s desk . . . again.

Is the Governor’s complaint valid? Sure the Board is stablishing its own version of public policy for the Commonwealth, but I believe it can. Section 201(b)(1) states:

“A Fiscal Plan developed under this section shall, with respect to the territorial government or covered territorial instrumentality, provide a method to achieve fiscal responsibility and access to the capital markets.”

Most specifically, 201(b)(1)(F-G) state that the Fiscal Plan will include ways to “improve fiscal governance, accountability, and internal control” and “enable the achievement of fiscal targets.” Also, Section 405(m)(1) of PROMESA states

“Congress finds the following:

A combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing has created a fiscal emergency in Puerto Rico,”

Subsection 4 also states:

“A comprehensive approach to fiscal, management, and structural problems and adjustments that exempts no part of the Government of Puerto Rico is necessary, involving independent oversight and a Federal statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly process.”

To me, it is clear that Congress intended the Board to establish public policy for the Commonwealth given its “management inefficiencies.” Section 303 does not protect the Government since section 201 is in Title II which is an exception to Governmental action. Moreover, Judge Swain could determine that PROMESA has preempted state law and given the Board part of Congress’ power. Hence, it is likely Judge Swain will side with the Board on the Commonwealth’s refusal to comply with the fiscal plan. How will this play out? There are several scenarios, and I detail just a few to start the conversation.

If Judge Swain sides with the Board and orders the Commonwealth to comply with the Fiscal Plan, Governor Rosselló will refuse and claim he would rather go to jail. The Board is unlikely to follow that avenue but could ask the Court for control of all of the Commonwealth’s bank accounts and order banks not to honor checks that do not have the FOMB’s imprimatur. The Board’s takeover of the PR government would thus be complete. Although in Downes v. Bidwell, 182 U.S. 244. 289-290 (1901) the Supreme Court said that Congress could give to the inhabitants as respects the local governments such degree of representation as may be conducive to the public wellbeing, to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion,” this would be a decidedly undemocratic result, reminiscent of the most egregious colonialism.

Obviously, Governor Rosselló knows the Court will probably side with the Board and that everything in the case will be put in hold until Judge Swain decides the issue and the controversy is appealed and the First Circuit decides. It is likely that the controversy will not be decided by the First Circuit until after November. By that time the House or the whole Congress could flip and Democrats would rule. Governor Rosselló has sworn to campaign against those who voted against PR in the recent federal tax reform and he has been hobnobbing with Democrats for a while. It seems he is hoping that a Congress dominated by Democrats will give him control of the Title III proceedings and dissolve or severely limit the Board. It is possible, but President Trump has not shown any inclination to substitute its members and is likely to veto any changes.

If Judge Swain sides with the Commonwealth, things would get even more interesting. It would mean that the Board could not determine any changes to the PR Government or pensions or the public corporations that were not approved by Governor Rosselló. This would simply not work since both Governor Rosselló and the Board want to be in total control of PR. Irrespective of this, no cuts to the government’s payroll or pensions would likely result in a plan of adjustment that would not be approved by creditors or crammed down by Judge Swain which would force the dismissal of the Title III petition as per 11 U.S.C. § 930.

Moreover, the Board could determine that it could not accomplish its job under PROMESA and dismiss the Title III. This would leave the Governor without a § 362 stay and would be sued for not paying debt for over two years. Of course, the Governor could sit down with bondholders and negotiate payment, but would he have enough money left over to pay all employees and pensioners? What if bondholders are not in the mood to negotiate and want their pound of flesh after PR’s shenanigans?

Another possible scenario is another type of Congressional action. Rob Bishop sent a letter to the Board and Governor Rosselló where he complains against the former’s lack of Title VI agreements with bondholders and the latter’s defiance. Congressman Bishop has complained in the past of the Board’s actions as to PREPA and he could spearhead an amendment to PROMESA removing its jurisdiction over the utility and establishing a federal trustee to handle its operation and sale.

Finally, I must mention Ana Matosantos. El Vocero reported on her possible conflicts of interest with regard to PREPA, and I wrote a [column on the issue]. If they existed at the time of the Board’s rejection of the PREPA RSA and they were not reported, not only could she be criminally prosecuted but the Board’s decisions on PREPA could be challenged. I would not be surprised if sometime soon PREPA bondholders request leave to conduct discovery pursuant to Rule 2004 of the Bankruptcy Rules as to Ms. Matosantos finances, especially if more information comes forward.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.