Last night PR released the Basic Financial Statements and Required Supplementary Information fiscal year ended June 30, 2013.  It has chilling admissions as to PREPA’s financial situation.


“PREPA currently faces heightened liquidity and market access risk as a result of thematurity in July and August 2014 of two short-term lines of credit in an aggregate principal amount of $671million. PREPA’s management is currently negotiating the renewal of these lines of credit with the corresponding commercial banks. PREPA’s ability to repay its outstanding lines of credit is limited and its ability to extend, renew or replace these lines of credit is uncertain. This raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion on the aggregate discretely presented component units is not modified with respect to this matter.” (underlining added Page 4 of the statement)


Later, the statement says:


“At June 30, 2013, PREPA had a net deficit of $791 million. Subsequent to June 30, 2013 PREPA has continued experiencing weak financial performance and currently faces heightened liquidity and market access risk stemming from the maturity of two short-term lines of credit (LOCs) and the required repayment of outstanding borrowings totaling $641 million in July and August 2014. PREPA’s management is currently negotiating the renewal of these lines of credit with the corresponding commercial banks. PREPA’s ability to repay its outstanding lines of credit is limited and its ability to extend, renew or replace these lines of credit is uncertain. In addition to this immediate liquidity need, PREPA has had material recurring operational deficits (negative cash flow), currently has a very high level of debt and faces large non-discretionary capital expenditure requirements, all while facing a declining demand for electricity. As a result, if PREPA is unable to address these issues in the short-term, it may need to seek relief under the Debt Enforcement Act. As of June 27, 2014, PREPA has set aside sufficient funds to cover the debt service payment due on July 1, 2014 on its revenue bonds.” (Underlining added, page 87 of the statement)


In other words, PREPA may pay today but it still has mayor liquidity problems and eventually will file for Chapter 2 protection. Clearly, if it does not do it today, Franklin and Oppenheimer’s lawsuit will suffer from a ripeness problem and could be dismissed. Stay tuned.


In the Meantime, Puerto Rico Perishes

“ubi solitudinem faciunt, pacem appellant” Tacitus (they make desolation and call it peace)


Puerto Rico is in dire straits. It is in its 8th year of recession. April’s tax receivables were $400 million+ under what the present administration projected and even with a good May it is still over $320 in the red for THIS fiscal year. Rumor has it that it is really $1 billion.  Hacienda has resorted to declaring Doral’s closing agreement null and begging foreign corporations to prepay its future taxes.

In any rational administration, this tax shortfall would force a reexamination of the 2014-15 budget but we have not seen any. Sources tell me that it will be hammered out next week. How? We don’t know although impairing union contracts seems the order of the day. PC 1922 did that and much more and was approved by the House yesterday in a lighting session with only 5 minutes for opposition debate. Previously, the administration had come to impairment agreements with the Government union leadership, agreements which have yet to be ratified by its members. Since they lack the legal right to strike, it is unlikely the agreements will be rejected.

That leaves the unions of the Government’s public corporations, which have the right to strike. One of PREPA’s unions has agreed to strike and the leadership of the powerful UTIER, largest of the unions has called for a meeting June 17 to discuss striking and yesterday proceeded to a 24 hour work stoppage. Add to this the latest downgrade by Fitch. Analysts believe it will go down to B. Add to this that PREPA has admitted it cannot comply by 2015 with the EPA’s mercury emissions requirement to say nothing of the new green house emissions requirements. Not good news for PREPA.

With $70+ billion in debt, PR needs to restructure. From February to March 31, PR hired Cleary Gottlieb and Proskauer Rose LLP for $1.3 millions each. The GDB also hired Millco Advisors, LP, subsidiary of Millstein & Co. LP for $500,000. Then, from April 11 or April 15, it rehired them until June 30 for $500,000 for the first two and $1.4 million for Millco. But, Ingrid Vila, Secretary of the Governorship insists there will be no restructuring for now and that these companies are hired to advice how to prevent restructuring. Anyone believe it? Because if you do, I have a little bridge in Brooklyn I can sell you. Even with all this, this administration is seriously considering a $2 billion bond issue from COFINA and COFIM. Some analysts have said they don’t see the numbers but I am sure the administration does not much care as long as it can limp into the 2016 election without mayor changes.

The future is really bleak when your best hope is a new administration in 2017 and the opposition party has not come up with any plan or idea on how to face the present crisis and is more worried about who will be the candidate. In the meantime, Puerto Rico perishes.

Puerto Rico’s Restructuring Revisited

Cate Long brought to our attention an article from Caribbean Business on April 17, 2014  In it, the Chairman of the PR House Treasury Committee, Rafael “Tatito” Hernández stated the following:


“There will be across-the-board adjustments that will be fair to all, but there are a lot of adjustments that need to be made within each agency or public corporation,” Hernández said.

Earlier this year, Gov. Alejandro García Padilla enacted Law 24, which ordered government agencies to pay off their debts with the Government Development Bank and barred them from seeking financing without a clearly identified repayment source and without having the financial capacity to assume the debt. Not only did the legislation bar such practice, but it also holds government officials personally responsible for violating the law.

Hernández, who along with Rep. José “Connie” Varela (PDP-Caguas) has been holding public hearings this year on the operations of public corporations, said a measure similar to Law 24, but targeted at public corporations, will be approved along with other budgetary measures.

‘We are waiting to bring down the new measure along with the budget, because it has some very heavy language. It will give a directive to the heads of these entities to sit down with all its suppliers and creditors and say, ‘You know what? I have too much debt. Let’s make a payment plan and let’s adjust the rate. If not, I will find someone else with whom to do business,’ he said.

Hernández said he is talking about ‘everything,” from negotiating with suppliers and creditors to renegotiating contracts with labor unions. “If we don’t do this, some of these public corporations will close because they don’t have access to financing and can no longer count on a bailout from the Legislature. They will automatically collapse if they do nothing,’ he said.


Sounds great but there are a couple of problems with this. To sit down with creditors and suppliers and say, you have to restructure my debt begs the question, what if they say no? There are contractual obligations guaranteed by the PR and US Constitutions and can only be modified by the enactment of a law, during a clear and defined crisis and the law has to resolve or greatly ameliorate said crisis. This was the holding of the PR Supreme Court in the recent Teachers Retirement Fund case, Asociación de Maestros de PR, et als, v. Sistema de Retiro de Maestros de PR and Trinidad v. ELA, 2013 TSPR 73. The First Circuit Court of Appeals had essentially the same holding in United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011). Second, no public corporation or municipality in PR is eligible to Chapter 9 of the Bankruptcy Code, see, 11 U.S.C. § 101(52) and the PS 993, for the local bankruptcy law, is moving at a snails pace. The next budget must be completed by June 30, 2014 and how these negotiations with suppliers and creditors are going to take place is an open question. Finally, please remember the US restructuring firms that had contracts with PR from February to March (see here my take on it ) More and more it seems that PR restructuring at least part of its debt is no longer an if but a when.