Christian Sobrino’s top priority in
his new role as executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority is to complete the commonwealth’s debt restructuring drive - a task he says can be accomplished within the 12-month to 18-month time frame that the PROMESA oversight board has
established as a goal. In an exclusive interview with Reorg Research, Sobrino said that he sees opportunities for quick workouts at a handful of non-Title III entities and said there is still the potential for a consensual agreement with general obligation bondholders who he said continue to participate in the court-mandated mediation process.
In addition to continuing debt restructuring efforts under Title III and Title VI, Sobrino said his other priorities in his new role directing AAFAF include:
- Completing the public-private partnership and privatization efforts for the Puerto Rico Electric Power Authority;
- Completing the pension reform program that was legislated in Act 106 of 2017;
- Continuing the fiscal and financial support program for municipalities, which was begun at the Government Development Bank and will continue at AAFAF; and
- Fulfilling the legal mandate to support Omar Marrero at the P3 Authority and its Central Office for Recovery, Reconstruction and Resiliency, or COR3.
“Those are my five priorities. Those are my five goals. They break down into smaller objectives, but that is my umbrella,” Sobrino explained.
Debt Restructuring
Sobrino described several commonwealth entities outside of Title III as “low-hanging fruit,” saying that the Puerto Rico Aqueduct and Sewer Authority, the Puerto Rico Infrastructure Finance Authority, the Puerto Rico Industrial Development Co. and the University of Puerto Rico are ripe for consensual debt restructuring deals.
“There are some Title VIs that are low-hanging fruit. I don’t know why we didn’t close those before,” Sobrino said, adding that some of those deals could take shape soon. “You have entities that clearly need some level of work, and we just need to be at the table. That’s all,” the AAFAF chief said.
Sobrino said a focus would be on keeping
Government Development Bank and
Puerto Rico Electric Power Authority restructuring deals on paths to resolution while also looking to get additional agreements around other credits. “I want to make sure that when we have an opportunity to get the house in order in other entities, we can do that as well,” he said.
Sobrino said he believes PRASA and UPR can be restructured outside of Title III and said that even if they are forced to enter Title III, they would go in with consensual restructurings worked out. “It would be something that is relatively consensual. … You have something more or less structured, and you go in because there is no other mechanism to implement it.”
He said the PRASA restructuring has been made more difficult by the public corporation’s fiscal plan. He said that although the fiscal planning exercise used to develop the plan is “very good,” it forces PRASA to negotiate against itself regarding debt talks. “If PRASA is going to do its fiscal plan apart from everyone else and they are responsible, they are not going to assume a 20-cent rate case. They’re going to hedge a little and assume maybe 25 cents. The PROMESA board would tell it, ‘No you have to go down to 20,’” Sobrino said, adding that PRASA would likely respond, saying “‘Why would I do that? I’m negotiating against myself in the fiscal planning process, which is not where you negotiate.’” He observed, “That is the kind of stuff that with PRASA is kind of hard.”
Sobrino said restructuring is more difficult at entities where the commonwealth has “clawed back” revenue that used to cover payments on bonds issued by the entities, such as the Puerto Rico Highways and Transportation Authority.
Sobrino confirmed that the PROMESA oversight board is leading Title III debt restructuring talks while the commonwealth is leading Title VI talks. He said that commonwealth and board officials are kept apprised of developments by their respective advisors and that commonwealth officials can knock down Title III developments that they deem unacceptable. He said the commonwealth and oversight board can restructure the rest of Puerto Rico’s debt within 18 months “if we are aggressive and vigorous.”
Speaking in the wake of the proposed
COFINA plan of adjustment, which has drawn support from senior and junior bondholders, bond insurers and local bondholders, Sobrino said that GO bondholders continue to take part in mediation, and he expressed hope that a deal with them can still get done.
If the GO bondholders wage a legal attack on the COFINA structure, it will likely be done during the plan of adjustment, Sobrino said, pointing to Judge Laura Taylor Swain’s
Peaje decision that he said establishes that “any attacks would happen at the plan of adjustment stage. … That is my reading of her decision.”
Sobrino said “minor” legislation may be needed to execute a final term sheet with respect to the COFINA plan of adjustment but said the deal as drafted clearly contemplates a continuing COFINA. “It will depend a lot on what the final term sheet looks like.”
Municipal Finance Concerns and Other Priorities
Sobrino said there is a lot of talent among the 80 employees at AAFAF, and while there are likely to be “some revisions or restructuring,” he said “the team is solid, and we will keep them.” He brought his management team over from GDB, and an evaluation process regarding AAFAF staffing is underway, according to the official.
Sobrino said that AAFAF was created as “an intervening entity” to deal with Puerto Rico’s fiscal and economic crisis, adding that the Office of the Chief Financial Officer that is being developed would eventually take on some of AAFAF’s myriad tasks, which include fiscal oversight of agencies and financial reporting. “The fact that it is backing off and letting rightful agencies do their jobs is a sign of progress,” Sobrino said.
The official said that AAFAF continues to handle issues arising out of Puerto Rico’s legacy debt, adding that the matter of new debt issuances is something that could eventually be handled by the CFO.
The AAFAF chief acknowledged concerns regarding municipal finances and their potential impact on the GDB deal, which he said was disclosed in the
GDB solicitation documents that were sent out last week.
Sobrino said that there are “issues with the pay-go that we clearly need to work on,” referring to municipal obligations for pension system payments after the switch to a pay-go system last year. He said the numbers that were provided when the pay-go was legislated are different from recent estimates, and “clearly there is reconciliation that needs to happen.” Sobrino continued, “And we are working on that with the chief of staff and the pension teams” at the Teachers Retirement System and the Government Employees Retirement System.
The AAFAF chief said that a “comprehensive program” is needed, specifically one that takes into account municipalities’ fiscal health and debt service, as well as their responsibilities under the law and citizen expectations. “That is something that we will be working on,” he said.
Asked about the potential implementation of a county government system, which has been touched upon in past fiscal plans, Sobrino said he didn’t want to be “prescriptive.”
“Municipal reforms in the past have not been successful because they have tried to be top-down. The governor is really a stakeholder-driven person. He wants to hear from everyone and then design an offer. So we are going to be running that to support his vision,” he said.
Sobrino said he does not see municipal government’s being designated as covered entities under PROMESA “right now.”
“I don’t see it right now. I think you do have to go municipality by municipality. You can’t see it as a one-size-fits-all thing. But I don’t think it is necessary right now,” Sobrino said.
The AAFAF chief, who played a leading role in forging the GDB consensual agreement in his past role as GDB president, said he is very confident that the GDB’s debt restructuring under Title VI will “overcome any obstacles.”
Sobrino said the deal was substantially reworked to address concerns by some municipalities, and he said he sees it as “very hard” for GO bondholders and the unsecured creditors committee to show standing to challenge the deal.