Puerto Rico to pay some debt while creditors brood

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By Nick Brown | NEW YORK

NEW YORK Puerto Rico Governor Ricardo Rossello
said on Thursday the U.S. territory would make a $1.4 million
interest payment on constitutionally backed bonds by drawing on
so-called “clawback” money deposited at Banco Popular.

The payment to general obligation bondholders, which was due
on Feb. 1 and initially missed, represents a departure from a
series of defaults triggered last year by ex-Governor Alejandro
Garcia Padilla and may help assuage creditor concerns that
Rossello would follow suit.

“We demonstrate today that our administration’s vision is
very much different from the past, which was defaulting. Ours is
compliance,” Rossello said at an event in San Juan with private
sector leaders.

Rossello, sworn in on Jan. 2, said he would fund the payment
by drawing on a $146 million account at Banco Popular. That
money, initially earmarked to pay other debts, was pulled into
the account through the use of a “clawback” measure introduced
by Garcia Padilla last year as the island grappled with its
fiscal crisis.”

Rossello said he would transfer the money to a new trust
account that can only be used for general obligation payments.

Puerto Rico has $70 billion in total debt, a 45 percent
poverty rate and unemployment more than twice the U.S. average.

Garcia Padilla did not seek re-election. Rossello campaigned
as more conciliatory to Wall Street, vowing to cut government
spending and try to pay as much of Puerto Rico’s debt as
possible.

FICKLE CREDITORS

Just six weeks into his term, however, Rossello’s
credibility with bondholders appeared to be eroding, with
investors worrying privately that he might double down on his
predecessor’s populist approach.

“He’s a disaster,” one creditor said earlier this week,
saying Rossello’s rhetoric was creditor-friendly but that his
policies changed little from the last administration. “It’s
ready, fire, aim.”

In January Rossello signed a fiscal emergency law allowing
him to set aside funds to pay for “essential” government
services ahead of debt payments. It gave him unilateral
authority to define “essential,” which some creditors feared
would be interpreted broadly.

Elias Sanchez, the governor’s liaison to the federally
appointed board managing Puerto Rico’s finances, told Reuters on
Thursday that government officials would put every expenditure
through a “litmus test” to determine if it was essential. He
said the methodology will be made public as part of a fiscal
turnaround plan the governor plans to present on Feb. 28.

Sanchez said creditors would be allowed to comment on the
plan only after it is presented.

The final version of the fiscal emergency law also dropped a
key provision that would have given Rossello more oversight of
public money by letting him to seize control of funds that were
outside the island’s general fund.

Privately, creditors said the law might violate Puerto
Rico’s constitution by prioritizing services over G.O. debt, an
issue already being litigated after Garcia Padilla’s decision
last year to skip debt payments.

Rossello faces an uphill battle to keep creditors on his
side, but the payment announced on Thursday may help his cause.

PREPA IN PLAY

Creditors also recoiled at what they perceived as intent by
Rossello to upend an $8.3 billion debt restructuring between
Puerto Rico’s power authority, PREPA, and its bondholders.

Agreed over a year ago, the deal is considered all but
complete as it awaits court validation. Bondholders would accept
15 percent payment reductions, while insurers like MBIA Inc. would fund a $450 million surety to protect against defaults.

According to two people close to the matter, Rossello’s
administration has hinted it wants more concessions from the
insurers.

But Sanchez said the island’s financial advisers,
Rothschild, is studying the deal and has not decided whether to
support it. He downplayed a sense of doom for the PREPA deal,
saying, “We think it will be a quick success story.”

He suggested the governor’s reservations toward PREPA are
more about the agency’s structure and said the agency should
pursue public-private partnerships to modernize and integrate
renewable energies under its 2015 Integrated Resource Plan.

“The current plan is predicated on keeping PREPA the
prehistoric monopoly that it is,” Sanchez said.

Several creditors told Reuters that during a Jan. 27 PREPA
board call, Sanchez and other government advisers abruptly told
the agency’s restructuring chief Lisa Donahue, a holdover from
the Garcia Padilla administration, she was no longer in charge.

Parties to the deal interpreted the move as a lack of
understanding for how close the deal was to completion and the
chilling effect it could have to reopen talks.

“If you can’t even bring home the deal that was teed up on
the fairway, how can other creditors expect you to get deals
done with them?” one creditor source said. “If PREPA doesn’t get
done, it’ll crater and we’ll be in litigation.”



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