Humanitarian crisis takes precedence over Puerto Rico fiscal recovery, debt restructuring

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WASHINGTON – Hurricane Maria's and Irma's devastation of Puerto Rico and the resulting humanitarian crisis will wreak havoc with the Commonwealth's fiscal recovery and attempts to restructure its massive debt load, experts said this week.

Given the breadth of the destruction in Puerto Rico, bondholders should expect their interests to be put onto “a deep back burner,’’ said Matt Fabian of Municipal Market Analytics.

“I think that speaking too pointedly about bondholder concerns at this point is probably in poor taste,’’ he added.

Judge Laura Taylor Swain, who sits on the U.S. District Court for the Southern district of New York in Manhattan, issued an order on Tuesday indefinitely postponing the Title III bankruptcy case's omnibus hearing, which had been scheduled for Oct. 4. She asked stakeholders to submit comments by Sept. 28 on when the hearing should be rescheduled and said that all future hearings will be held in New York.

Swain's order followed a request on Monday by lawyers for Puerto Rico’s Fiscal Agency and Financial Advisory Authority that the omnibus hearing be shifted to Oct. 18 from Oct. 4.

“Despite Puerto Rico’s current circumstances, FAFAA desires to move forward with these Title III cases with as little disruption as possible,” the lawyers said. “FAFAA believes that any significant delay in advancing these Title III cases would place a cloud of uncertainty over these proceedings and potentially undermine the progress achieved to date.”

Meanwhile, several members of the Puerto Rico House and Senate, according to the El Vocero news website, called for the oversight board to stop enforcing the fiscal plan's austerity measures for at least this year and possibly over the next five years.

Also on Tuesday Puerto Rico House President Carlos Méndez Núñez reportedly asked the oversight board to suspend all legal proceedings against the Puerto Rico government.

According to Municipal Market Data on Monday Puerto Rico’s general obligation bond maturing in 2035 traded in a block-sized trade at 52.75 cents on the dollar, an all-time low for that particular issue. Markit reported that this issue had traded at 59 cents on Sept. 13.

President Trump on Tuesday amended the Puerto Rico Disaster Declaration, saying the U.S. government will cover 100%, rather than the normal 75%, of costs for debris removal and emergency protective measures undertaken of the Commonwealth as of Sept. 17.

Trump also announced he will visit the island territory on Tuesday. “The infrastructure was in bad shape, as you know, in Puerto Rico, before the storm,’’ Trump told reporters. “And now, in many cases, it has no infrastructure. So you're really starting from almost scratch.”

Trump had issued a series of tweets about Puerto Rico on Monday evening, including a reference to the “billions of dollars … owed to Wall Street and the banks which, sadly, must be dealt with.’’

Trump ended with a reminder: “Food, water and medical are top priorities - and doing well.’’

He was criticized by Senate Minority Leader Chuck Schumer, D-N.Y., in a speech from the Senate floor on Tuesday for raising the debt issue, which he said, “pales in comparison to the immediate humanitarian crisis that the island faces.”

“Puerto Rico needs help from aid workers, not debt collectors from Wall Street,’’ Schumer said. “Yes, Puerto Rico needs debt relief, but first they need humanitarian relief. Water. Food. Medicine. Fuel.”

New York’s senior senator urged the Trump administration to prepare an immediate federal aid request to Congress for a vote by the end of the week.

“The administration submitted a request for aid for Hurricane Harvey less than a week after the storm made landfall,’’ Schumer said. “We are rapidly closing in on that same marker for Maria hitting Puerto Rico.”

Congressional leaders are now trying to put together a recovery package.

A group of 10 Democratic U.S. senators sent a letter Tuesday to Senate Majority Leader Mitch McConnell, R-Ky., and House Speaker Paul Ryan, R-Wis., asking for both chambers to begin “immediate consideration of a supplemental appropriations bill to provide relief for Puerto Rico and the U.S. Virgin Islands in the wake Hurricane Irma and now Hurricane Maria.’’

"Specifically, we are asking that additional funds be provided to ensure an adequate balance in FEMA’s Disaster Relief Fund, and Community Development Block Grants for disaster recovery along with other disaster relief accounts be authorized and funded to respond to this catastrophe,’’ the letter said.

Ryan said that Puerto Rico will get the same kind of help and aid as Texas and Florida.

“The bill we passed out of here a couple of weeks again for FEMA equally applies to Puerto Rico,” Ryan said, referring to the $15 billion in hurricane relief approved by Congress.

The entire island remained without power on Tuesday, except for generators being run by hospitals, officials of the Federal Emergency Management Agency told U.S. Sen. Robert Menendez, D-N.J., in a briefing. FEMA said it has been focusing on keeping backup generators operating at hospitals.

The agency does not have an estimate of when power or communication will be restored, but it identified the supplies needed for power restoration that will be delivered by barge once the seaports are reopened.

Catastrophe risk modeling firm AIR Worldwide estimated that more than 85% of the $40 billion to $85 billion in estimated insured industry losses caused by Maria are in Puerto Rico.

The company said its estimate does not include infrastructure repair and replacement, the cost of hazardous waste cleanup, damage to pleasure boats and other marine craft, damage to levees or uninsured property.

Officials of the government of Puerto Rico are working on their official estimate of rebuilding costs.

Rep. Jenniffer Gonzalez-Colon, a Republican who is the island’s sole non-voting representative in the U.S. Congress, said Monday that her rough estimate is that Maria caused at least $25 billion in damage.

Kent Hiteshew, the former director of the Treasury Department’s Office of State and Local Finance who has extensive knowledge about Puerto Rico, said, “In the short-term, Hurricane Maria is likely to produce a severe economic and fiscal shock in Puerto Rico and may further accelerate out-migration off the Island – at least temporarily.”

“Longer term, Maria’s silver lining will likely be significant amounts federal recovery aid that could stimulate Puerto Rico’s economy and rebuild its infrastructure in a way that would not have otherwise been possible absent the hurricane,” he said.

Hiteshew, who as a former banker was involved in rebuilding efforts in Florida and New Orleans after Hurricane Katrina, pointed out that, apart from Trump’s announcement that FEMA will pick up 100% of certain initial cleanup costs, any rebuilding aid provided by FEMA will probably come with limitations.

“FEMA’s programs are administratively complex, funded on a reimbursement basis and generally project- rather than general fund-based,” he said. “FEMA only funds repair and rebuilding of damaged facilities – not necessarily the broader capital plan envisioned in PROMESA’s Fiscal Plan. We will have to await more detailed assessments of Maria’s damage before we can fully understand the FEMA rebuilding opportunities.”

“Lastly, PROMESA’s Fiscal Plan will likely need to be revisited in light of all of these factors with potentially even fewer available revenues for debt service – at least in the near term,” Hiteshaw said. “Any adjustments in the Fiscal Plan will impact the current litigation and debt restructuring mediation because, under PROMESA, any Plan of Adjustment must comply with the Fiscal Plan.”

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