Puerto Rico Creditors Say Oversight Board Is Breaking the Law

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Holders and insurers of $11.9 billion of bonds sent a letter to the Puerto Rico Oversight Board arguing that its fiscal plan breaks the law by ignoring creditor rights.

The letter, sent late Monday, was jointly prepared by representatives of the Ad Hoc Group of Puerto Rico General Obligation Bondholders, Assured Guaranty Corp., and Assured Guaranty Municipal Corp., and representatives of funds managed by Franklin Advisors, Oppenheimer Funds, and Santander Asset Management.

The creditors said that the Puerto Rico Oversight Management and Economic Stability Act indicates the board's fiscal plan should "respect the relative lawful priorities or lawful liens" in Puerto Rico's constitution and laws. The board this month approved a plan which would maintain some services while limiting payment to 23% to 24% of debt due over the next 10 years.

"By providing that payment on constitutional debt comes after all of the commonwealth's expenditures, the fiscal plan violates Puerto Rico's constitution and [PROMESA] 201(b)(1)(N)," the bondholder groups wrote.

Assured Guaranty Municipal Corp. and parent company Assured Guaranty, which is directed by President Dominic Frederico, insure more Puerto Rico debt than any other bond insurer.

The funds deem themselves the "Major COFINA Bondholders" because they hold $3.65 billion in the sales tax revenue bonds and $1.85 billion in other Puerto Rico bonds.

The Major COFINA Bondholders said that by transferring the COFINA revenues into Puerto Rico's General Fund, the board's fiscal plan is breaking the same section of PROMESA.

Assured argues that PROMESA bars the diversion of collateral that secures bonds issued by the Highways and Transportation Authority, Puerto Rico Infrastructure and Finance Authority, and Puerto Rico Convention Center District Authority.

The creditors together argued that revenues clawed back from particular bonds may not be used for the General Fund, as the fiscal plan assumes. Puerto Rico law and PROMESA strictly reserves the clawed back revenues for use to support paying the island's GO and guaranteed debt, they stated.

The creditors also said that the Board has failed to identify what of the fiscal plan's expenditures would be for essential services. The creditors complain that apparently non-essential services are being funded in favor of paying back the debt.

The creditors complained that the fiscal plan includes a contingency reserve totaling $6.2 billion over its 10 years. This is contrary to PROMESA's focus on eliminating structural deficits and shouldn't be necessary in practice, they argued.

The creditors said they don't understand why the plan assumes steadily expanding authority and component unit expenses. They called for explanations of this and the estimation methods underlying the plan's macro-economic projections.

The creditors complain that the board is excessively pessimistic about how much improvement can be made in reducing tax evasion.

They question the plan's failure to include any recommendations from PROMESA's Congressional task force, which released a report for improving the island's economy on Dec. 20, 2016.

"The signers of the letter have respectfully asked for the opportunity to immediately discuss these issues with the Oversight Board and the commonwealth, with the expressed goal of advancing negotiations and achieving a consensual resolution under Title VI of PROMESA," in the words of a spokesman for the Ad Hoc Group of GO Bondholders.

As of 2:30 p.m. Tuesday afternoon the board hadn't publicly responded to the letter.

In a related development, the board directed Puerto Rico Gov. Ricardo Rossell-, directing to follow PROMESA section 204(a) by sending the board all approved laws within seven days of their approval. The board directed the governor to include an estimate of the laws' impacts on revenues and expenditures, following PROMESA. Additionally, the board told the governor to do the same with all laws and joint resolutions already passed, if he hasn't already done this.

Responding to the board's appointment Thursday of Natalie Jaresko as executive director of the board at $625,000 per year, Hector Ferrer Ríos, who the leader of the primary opposition party – the Popular Democratic Party, said, "It is immoral for a person to end up a millionaire in just a few years at the expense of the pocket of Puerto Ricans. With what morality does the Fiscal Supervision Board tells us how to handle the finances of the country when their actions are completely removed from good judgment in ensuring the proper use of public funds?"

According to the El Vocero news website, Rossell- and Puerto Rico's nonvoting representative in the U.S. Congress Jenniffer Gonzalez Col-n also criticized the salary. Gonzalez Col-n said the pay was "ridiculous" and "disrespectful" of the Puerto Rican people.

The board plans to hold a public meeting on Friday in San Juan, Puerto Rico where it will hear presentations all day on ideas to improve the island's economy. The board will present the meeting on its web site, https://juntasupervision.pr.gov/index.php/en/home/, starting at 9 a.m. Atlantic Standard Time.

Finally, the board announced that it had signed a lease with Puerto Rico's government of office space in San Juan for the board's use.

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