PRASA access to CDL is contingent upon it commencing a Title III proceeding - Debtwire

PRASA access to CDL is contingent upon it commencing a Title III proceeding

27 February 2018 - 12:00 am

The Puerto Rico Aqueduct and Sewer Authority‘s (PRASA) access to community disaster loans (CDL) is contingent upon it commencing a Title III proceeding, according to an official letter written by Puerto Rico Governor Ricardo Rossello. 
In a letter dated 26 February to US Congress leaders—posted on the governor’s Twitter page today—Rossello urged action on the disbursement of the USD 4.7bn CDL by the US Treasury Department. It addressed Senate Majority Leader Mitch McConnell (R-KY), Senate Minority Leader Chuck Schumer (D-NY), House Speaker Paul Ryan (R-WI), and House Minority Leader Nancy Pelosi (D-CA).
Excerpts from the document follow:
I write to bring to your attention the US Department of Treasury (UST) arbitrary conduct over the last four months, which has effectively blocked Puerto Rico’s access to approximately USD 4.7bn in CDL program funds that Congress made available last fall. The damage and devastation from Hurricanes Irma and Maria left no doubt that Puerto Rico was in desperate need of federal assistance to restore and maintain essential services for the island’s 3.4 million residents. In fact, Congress acted swiftly in late October to grant the commonwealth of Puerto Rico immediate access to federal loans through the CDL program to compensate for loss in tax or other revenues, whether temporary or permanent, which imperils the government’s ability to maintain public services. Despite Congress’ swift actions, the UST has failed to timely advance the loans and has imposed conditions inconsistent with the CDL program’s very purpose.
V. The UST’s Preliminary Terms and Conditions Dramatically Deviate from the Appropriations Act’s Spirit
After months of delay, on 20 February 2018, the UST finally presented the UST proposal to Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA). The proposal included terms for a USD 2.065bn commitment to support actual, immediate cash needs as necessary to maintain essential services of commonwealth and its public corporations, including Puerto Rico Electric Power Authority´s (PREPA) . But the UST proposal also includes terms that, on their face, substantially deviate from the purposes and Congressional intent of the Appropriations Act. Specifically, the UST has told FAFAA that the UST will only lend pursuant to terms consistent with five “principles”:
1. Any loan terms must provide for maximum protection for the US taxpayers;
2. Any loan terms must account for the “indefinite and unknown” future of PREPA;
3. Any loan terms must include detailed reporting and protective covenants;
4. The UST believes the commonwealth has sufficient liquidity to repay and the US taxpayers should not accrue risk of a loan; and
5.Any loan terms must be consistent with customary terms provided to debtor-in-possession lenders in cases filed under chapter 11 of the Bankruptcy Code.
Finally, the UST has contended that, for PRASA to gain access to CDL loans, it must commence a Title III proceeding under the Puerto Rico Oversight Management and Economic Stability Act (PROMESA). The UST is insisting on a Title III filing for PRASA because of the UST’s desire to be assured repayment through imposition of a “priming” lien, which would not be available under a less costly, consensual out-of-court Title VI restructuring. The government believes a Title III filing for PRASA is costly and unnecessary, as a Title VI consensual debt modification may be achieved with its bondholders.
VI. Conclusion
By passing the Appropriations Act, Congress clearly intended to make CDL funding of USD 4.7bn available this past November to the commonwealth and its public corporations to assist them in the face of severe revenue losses following Hurricanes Irma and Maria. Despite PREPA continuing to face dire liquidity constraints that have forced it to seek emergency funding from the government, the UST has (i) recklessly delayed Puerto Rico’s access to the congressionally approved CDL funding; (ii) inexplicably reduced the initial funding amount of USD 4.7bn to USD 2.03bn; (iii) created serious obstacles for Puerto Rico to obtain access to that reduced amount of funding; and (iv) overridden the ability of any CDL loan issued to Puerto Rico to be forgiven, in clear contravention of applicable law. While the President and Congress opened the door for emergency relief for Puerto Rico last fall through the Appropriations Act, Puerto Rico now approaches spring in the same precarious financial situation with the prospect of statutorily approved federal aid being quashed by the UST.
The Government of Puerto Rico’s main objective now is to work closely and collaboratively with all relevant parties to obtain approval of the CDL and avoid both: (i) a catastrophic shutdown at PREPA due to its imminent liquidity issues, and (ii) unnecessary strain on the Government of Puerto Rico’s liquidity position, given all of the uncertainties it presently faces in its Title III case.
Priming lien on all commonwealth and COFINA revenues
  • Proposal requires that debt incurred is to be secured by a lien on all revenues of the commonwealth and Puerto Rico Sales Tax Financing Corporation (COFINA by its Spanish acronym), which “primes” holders of commonwealth’s general obligation and COFINA bonds.
  • The UST has informed us that they will inform Judge Swain that no federal loan will be issued to Puerto Rico if the Court does not approve a “priming lien” in favor of the UST
Link to original source (part one)
Link to original source (part two)