Duff & Phelps study is a necessary but insufficient step in Puerto Rico’s financial reporting - Debtwire

Duff & Phelps study is a necessary but insufficient step in Puerto Rico’s financial reporting

19 March 2019 - 12:00 am

On 15 March 2019, the Financial Oversight and Management Board for Puerto Rico (FOMB) released an analysis by Duff & Phelps, LLC (D&P) of Puerto Rico bank accounts and balances as of 30 June 2018. At FOMB’s request, Duff & Phelps focused on borrowers operating under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).


The portion of D&P’s project regarding accounts of the Puerto Rico Sales Tax Financing Corporation (COFINA by its Spanish acronym) was suspended when that entity and its creditors entered into a settlement in October 2018. The University of Puerto Rico (UPR) was included by D&P due to UPR’s reliance on commonwealth funds for its operations.


The report originated with a request for proposals issued by the FOMB on 19 December 2017. One day earlier, the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) released its initial summary of bank account balances, but the FOMB apparently decided it wanted an independent evaluation of FAFAA’s information.


This appears to have been a wise decision, as D&P found during the summer of 2018 that it could not verify balances reported by FAFAA. The FOMB and D&P subsequently agreed that their respective staffs would obtain information directly from banks, their depositors, and other sources.


Once information from these parties was obtained, D&P attempted but was unable to reconcile about USD 1.3bn, or 11.6%, of the USD 11.6bn that was initially identified as held in various accounts. D&P states that in some cases duplicate account information was provided, either in error or when an account was reported by multiple sources. D&P eventually decided to disregard USD 738m in deposits. The reason this figure was chosen rather than the USD 1.3bn indicated above is not readily apparent in the report.


Another major D&P finding regards Puerto Rico’s Treasury Single Account, or TSA. The aggregate value of TSA accounts as of 30 June 2018 was USD 2.7bn, which the commonwealth indicates was unrestricted. But due to TSA’s receipt in part of federal funds, charges for services, and amounts to be held for fiduciary funds, D&P differs with the overall characterization of TSA monies as unrestricted.


Analyst takeaway


The issues described by Duff & Phelps in its report help illustrate why major portions of the commonwealth’s 30 June 2015 financial statements, its most recent, merited “modified” rather than “clean” opinions. Puerto Rico’s persistent administrative and accounting problems also detract from reliability of its fiscal plans and the likelihood of investor reliance on any upcoming plan of adjustment.


The chart below indicates recent improvement in trading values of various Puerto Rico bonds. It’s difficult to discern any overly good news specific to Puerto Rico that could be causing this trend.




by Greg Clark