Caribbean Business - January 14, 2016 by Latin Media House, LLC

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THURSDAY, JANUARY 14, 2016 | VOL. 1 EDITION 9

U.S. Congress X-Rays Prepa Debt Restructuring

Capeco Civil Suit Slated to Begin

Another Early Retirement Bill Aims to Trim Budget

The Supremes Weigh-in on Sánchez Valle Case

Hearings Showcase Complexity of Negotiations

Shipping Company Files Third-Party Complaint

Measure Targets Close to 1,000 Public Workers

Status Issues Underpin ‘Double Jeopardy’ Question

PAGE

COVER STORY

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TOP STORY

Bacó: Bernier an Agent of Change for Puerto Rico Sees Room for Economic Development Under Commonwealth Status

The Year Ahead

Alberto Bacó, who as secretary of Economic Development & Commerce is the top governphqw# rĿ # # fldo# lq# fkdujh# ri# Sxhuwr# Rico’s economic development, said David Bernier has a series of txdolwlhv#wkdw#vhw#klp#dsduw#dv#wkh# jxehuqdwruldo# fdqglgdwh# iru# wkh# Srsxodu#Ghprfudwlf#Sduw|#+SGS,#lq# the coming elections in November 2016.

phqw#deryh#Ľ#vfdo#lvvxhv/#glgqġw#jr# into the reasons he believes García Sdglood# idlohg# lq# klv# dwwhpsw# wr# implement projects to strengthen Sxhuwr#Ulfrġv#hfrqrp|#dqg#Ľ#qdqfhv1 ģL# wklqn# Ehuqlhu# kdv# glļ#huhqw# txdolwlhv/# xqltxh# txdolwlhv/Ĥ# EdfÕ# said. “He is self-made [and] has dozd|v#dfklhyhg#frqvhqvxv1Ĥ Bacó believes that since several administrations have experiment-

In an interview with Caribbean Exvlqhvv/# EdfÕ# kljkoljkwhg# wkdw# contrary to Gov. Alejandro García Sdglood/# Ehuqlhu# kdv# rwkhu# txdol0 wlhv# vxfk# dv# klv# delolw|# wr# olvwhq/# vhdufk# iru# dqg# dfklhyh# frqvhqvxv# rq#pdq|#lvvxhv1 Bacó, who has the intention of sending all candidates for governor a list of seven points that place the island’s economic develop-

ed with ways that haven’t yielded dq|# uhvxowv/# Ehuqlhu# vkrxog# eh# given the space to see what he can achieve. ģZkdw#L#vhh#lv#wkdw#kh#vxuurxqgv# himself with good people and that he listens, and those are very good txdolwlhv/Ĥ#vdlg#EdfÕ/#zlwkrxw#jrlqj# into details.

García Padilla Advisers Bogged Down in Debt-Packed 2016 The new year will mark a sigqlĽ#fdqwo|# vkdphixo# plohvwrqh# iru Sxhuwr#Ulfr1 The new calendar year that began 14 days ago marks the ninth year rxw#ri#43#wkdw#Sxhuwr#Ulfr#kdv#h{sh0 rienced stagnation or no economic growth. Sadly, there’s nothing on wkh# krul}rq# wkdw# frxog# wuljjhu# dw# ohdvw# d# plog# hfrqrplf# wxuqdurxqg lq#wkh#iruhvhhdeoh#ixwxuh1 On the contrary, the island’s linjhulqj# Ľ#vfdo# fkdoohqjhv/# shqglqj# debt obligations, the rise in the interest rates by the Federal Reserve, uhfrug# rxwpljudwlrq# dqg# srsxod0 tion loss, and the implementation

ri# dq# 4418(# ydoxh0dgghg# wd{/# ru YDWğzklfk#lqfoxghv#dq#lqfuhdvh#wr# wkh#7(#exvlqhvv0wr0exvlqhvv#+E5E, wd{#wr#4318(ğzloo#frqwlqxh#wr#vwdoo any prospects of economic growth for the island in 2016 and beyond. NEGATIVE TREND CONTINUES A real positive-growth rate of 31<(# lq# Ľ#vfdo# 5345# lqwhuuxswhg Ľ#yh0frqvhfxwlyh# |hduv# ri# qhjdwlyh# jurzwk# lq# Sxhuwr# Ulfrġv# jurvv# qd0 wlrqdo# surgxfw# +JQS,1# Dffruglqj# wr# wkh# Sxhuwr# Ulfr# Sodqqlqj# Erdugġv 2014 Economic Statistical Appendix +wkh#prvw##uhfhqw#hglwlrq#dydlodeoh,/# wkh#lvodqgġv#JQS/#lq#uhdo#whupv/#gh0

fuhdvhg# 415(# gxulqj# 533:/# 51<(# lq# 533;/#61;(#+533<,/#619(#+5343,#dqg# 41:(#+5344,1 “Contrary to the widely held perception, this data indicates that the recession that started in 2006 kdvqġw# odvwhg# iru# qlqh0frqvhfxwlyh years. On the contrary, the 2006 refhvvlrq#hqghg#dw#vrph#srlqw#gxulqj 2012, with the economy exhibiting positive, albeit weak, economic jurzwk#iru#d#|hdu/Ĥ#Fduorv#D1#FroÕq# gh# Dupdv/# hfrqrplvw# )# Ľ#qdqfh surihvvru# lq# Xqlyhuvlw|# ri# Sxhuwr# Ulfrġv# +XSU,# Vfkrro# ri# Exvlqhvv/ h{sodlqhg#wr#Fduleehdq#Exvlqhvv1 BY JOSÉ CARMONA PAGE 14-17

BY ISMAEL TORRES CONTINUES ON PAGE 4

THURSDAY, JANUARY 14, 2016

Editorial

Contents PICTURE OF THE WEEK PAGE20

The Year Ahead 2016

Stories with this logo showcase the year ahead.

Advertising ...........................................................................................................46 Advertising Calendar............................................................................................46 Autos .............................................................................................................. 44-45 Banking.......................................................................................................... 10-11 Column.................................................................................................................18 Economy ......................................................................................................... 12-13 Editorial .................................................................................................................2 Energy ............................................................................................................ 30-31 Front Page ...................................................................................................... 14-17 Government .................................................................................................... 21-23 Latin American Affairs ................................................................................... 28-29 Lead Stories ....................................................................................................... 6-8 Politics .................................................................................................................26 Poll .......................................................................................................................19 Technology...................................................................................................... 32-33 Top Story.............................................................................................................1, 4 Tourism ................................................................................................................27

FINANCIAL DATA: Stock Comment ....................................................................................................12 Winners & Losers..................................................................................................12

SPECIAL FEATURES: 12 Days of Xmas (Published in print by popular demand.) ............................ 35-41 Car Review ..................................................................................................... 42-43 caribbeanbusiness.pr Volume 1, No. 9 • Thursday, January 14, 2016 PO Box 12130, San Juan PR 00914-0130 CARIBBEAN BUSINESS ® (USPS 313150) is published weekly, except the first two weeks of January, by Latin Media House, LLC, 1700 Ave. Fernández Juncos, San Juan, P.R. 00909-2938. Subscription rates: $45 a year + $4.73 state tax +.45 municipality tax = $50.18; $58 for two years + $6.09 state tax +.87 municipality tax = $64.96; $108 a year for foreign + applicable tax and shipping & handling. Customer Service/Subscription telephone: (787)728-8280, toll free 1-844-723-2351. Fax: (787)728-0195. Circulation Department telephone: (787)728-7670. General telephone: (787)728-3000. Fax: (787)268-1626. Periodicals postage paid at San Juan PR 00936-9998. Postmaster: Send address changes to CARIBBEAN BUSINESS, PO Box 12130, San Juan PR 00914-0130, (ISSN 0194-8326). Entire contents: Copyright ©2016 by Latin Media House, LLC

The Tumultuous Year Ahead Not one week into the new year and the first cannon blasts have already been fired in the epic battle for the restructuring of Puerto Rico’s $70 billion debt. The first salvo—a warning shot—came just before midnight on Jan. 7 in a complaint for injunctive relief filed by bond insurance Companies Ambac Assurance Corp. and Assured Guaranty. The lawsuit is but a first legal maneuver that seeks an injunction against the “clawback” that Gov. Alejandro García Padilla set in motion through an executive order signed on Nov. 30, 2015. The lawsuit alleges that the clawback, a mechanism that taps into revenue streams that were originally destined for other debt, violates the Fifth Amendment of the U.S. Constitution. Although the complaint recognizes that the clawback doesn’t violate Puerto Rico’s constitution, which was enabled by Act 600 in 1952, the plaintiﬀs allege the commonwealth government illegally resorted to the move without exhausting every possible option on the fiscal level. The governor’s executive order comes on the heels of a string of events from a playbook that could be titled, “How to Wreck Negotiations.” First came the petition for a writ of cerciorari by the U.S. Supreme Court in the case of the Debt Compliance & Recovery Act, which had been deemed unenforceable by the First Circuit Court of Appeals in Boston. A writ of cerciorari would order a lower court to hand over its record of the case. The financial community found it somewhat oﬀputting that the petition came on the same day that Puerto Rico was going to market with a bond deal for the Puerto Rico Aqueduct & Sewer Authority—there’s nothing like insisting on bankruptcy to kill your access to capital markets. Then came the string of actions leading up to this winter of discontent—Gov. Alejandro García Padilla’s presentation

before the National Press Club in Washington, D.C., where he boldly stated that he would probably have no choice but to default on about $1 billion due on Jan. 4. The governor’s saber rattling comes oﬀ as charlatan rhetoric because Puerto Rico allegedly paid 96% of its debt, leaving nearly $35 million unpaid. The governor claims to have drawn a line in the sand on behalf of the people of Puerto Rico. The García Padilla administration’s faux default served only to further diminish Puerto Rico’s credibility. Sources in creditor camps insist that the symbolic shortfall is but the latest provocation by Puerto Rico’s restructuring brigades in a strategy that intends to bait creditors into a fight that will lead to massive litigation, ultimately forcing Congress to act on Puerto Rico’s behalf. The press release issued by La Fortaleza on the heels of the lawsuit seemingly aﬃrmed what the creditors denounce. Straight to the chase, Garcia Padilla alleged that this action would provoke an “uncertain scenario for all parties... Just as we had repeatedly warned, the commonwealth was sued last night by two Wall Street insurers. This action will prompt creditors to race to court to get the commonwealth to meet its payments even though we do not possess a legal framework to resolve this impending litigation crisis,” the governor said. “Unfortunately, Congress, which responds to Wall Street lobbyists, has ignored the crisis in Puerto Rico and, in turn, has preferred that the island’s 3.5 million American citizens and its creditors slide into chaos,” he added. A strategy that counts on Congress to act on Puerto Rico’s behalf in extending Chapter 9 bankruptcy protections to the commonwealth is very risky. Several sources on Capitol Hill have told Caribbean Business that it isn’t likely the island will be obtaining any help during an election year. 䡲

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THURSDAY, JANUARY 14, 2016

Top Story Bacó

Continued from cover

Bacó shares the political vision of former Gov. Rafael Hernández Colón, who is one of the most dedicated scholars of the commonwealth status, who proposes that Puerto Rico’s central government should be focused on getting Congress to approve legislation and regulations that give Puerto Rico the adequate mechanisms to move its economic development forward. Bacó said that many statehood supporters also sustain this idea because they don’t believe the notion that Puerto Rico should be “brought to its knees” for the federal government to grant statehood to the island. He added that the message in dealing with members of Congress has to be that it is convenient for the federal government to bring once again to the U.S. the billions of dollars that have been invested in projects in Ireland and Singapore.

GOVERNOR UNABLE TO UNITE SECTORS IN THE PDP Just as Bernier and García Padilla said last week in their own way before the directive bodies of the PDP, Bacó said that Bernier has to look for ways to avoid socalled internal segments of his party from preventing him from carrying out what he thinks ought to be done. “García Padilla’s administration, of which I am a member, for some reason that I don’t know about, couldn’t unite certain sectors in the party,” Bacó said. “History will tell us the reason why this couldn’t be achieved,” he added, without elaborating further. Bacó’s vision of searching for congressional changes that support the economic development of Puerto Rico, without the need of plebiscites or referendums, is contrary to the position of the sovereignty wing in the PDP, which believe that modifications to the commonwealth status have to be carried out within the framework that Puerto

Pridco chief says internal divisions in the PDP have hampered García Padilla’s work

Bacó shares the political vision of former Gov. Rafael Hernández Colón, who proposes that Puerto Rico should be pushing for Congress to approve legislation that gives Puerto Rico the mechanisms to move its economic development forward. Rico’s political sovereignty doesn’t lie with Congress, as it currently does. The sovereignty wing also believes that other modifications to the commonwealth status should be made that would aﬀect issues such as foreign relations. Bernier subscribes to the traditional view of commonwealth, along

the lines of Hernández Colón, but he is open to exploring the sovereignty wing’s proposals. Still, Bacó reiterated his view that the governor that takes over in 2017 will have to change the economic paradigm of Puerto Rico to get Congress to give Puerto Rico mechanisms for its economic development.

This would include setting aside the idea of creating an infrastructure based on loans, that later on would have to be paid and “which have taken us to the financial situation we are in,” he said. The first to raise the issue of García Padilla’s leadership problems in the PDP and his administration was PDP Rep. José Báez (Precinct 4, San Juan) who announced he wouldn’t seek reelection in 2016 because he didn’t want to waste time in a party that lacks unity. He said that within the PDP, there are people such as San Juan Mayor Carmen Yulín Cruz and representatives Luis Vega Ramos, Luis Raúl Torres and Manuel Natal who aren’t committed to the PDP’s program. When Bernier assumed the leadership of the party last week before the PDP’s Government Board, he alluded to this issue and called for unity and discipline in the party’s decisions. García Padilla, who stepped down as PDP president and announced recently that he isn’t

seeking re-election, was clearer on the issue and said that his administration’s initiatives where boycotted from within the party, such as the proposed tax reform, which was fundamental in the administration’s plan for addressing the government’s delicate fiscal situation. After much debate and controversy, tax reform was approved in the Senate, but not in the House of Representatives, when six legislators, headed by Vega Ramos, and supported by several mayors, including Yulín Cruz, Carolina Mayor José A. Aponte Dalmau and Caguas Mayor Willy Miranda Torres, stymied the approval of the legislation. However, Bacó said that he sees in Bernier a good opportunity to retake the PDP’s projects and change Puerto Rico’s economic paradigm toward building mechanisms that promote the island’s economic growth over the eﬀorts that perpetuate carrying out public works based on loans. 䡲

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THURSDAY, JANUARY 14, 2016 Calls repeated for Congress to allow Puerto Rico access to Chapter 9

Lead

creditors, as it would help bring Prepa’s creditors onboard the restructuring deal it recently struck with holders of 70% of its $9 billion debt. “Access to a restructuring regime would allow Prepa to implement

Sustainability and chairman of Aireko; Jorge San Miguel, chair of Environmental Law, Energy & Land Use at law firm Ferraiuoli; Jaime Sanabria, co-president & general manager for finance & administration at EcoEléctrica; and

In addition to high energy costs, Prepa’s base rate—which hasn’t been revised in decades—fails to capture its operating and debt-service costs, according to Donahue. “The ‘rate deficit’ between existing rates and the rates Prepa would need to charge to cover operational costs, including debt service over the next three years, is approximately 7.8 cents per kWh [kilowatthour],” she stated. Closing this deficit is critical

the restructuring contemplated by the RSA [restructuring support agreement], without so many contingencies and open issues. In fact, the RSA contemplates implementing the restructuring transactions by using the federal Bankruptcy Code or a proceeding pursuant to Puerto Rico’s local restructuring law, if either becomes available to Prepa,” she stated in her testimony. In addition to Donahue, witnesses at the hearing included: Josen Rossi, president of the Puerto Rico Institute of Competitiveness &

Puerto Rico Manufacturers Association Chairman Carlos Rivera. While Prepa, a “fiscal and managerial disaster” according to Lamborn, remained the focal point of the hearing’s debate, the island’s high energy costs as well as the obsolete, ineﬃcient and environmentally unfriendly energy infrastructure were other issues extensively discussed. Failing to deal with these important issues urgently would prevent Puerto Rico from having an environment conducive to much-needed economic development.

for the utility to get back on solid footing, and the plan is to have all stakeholders sharing the burden of accomplishing this, Donahue added. “The high cost of energy for households and businesses is an obstacle for economic development and promotes outmigration, so [potential federal] legislation could include disposition to make energy in the territory cheaper,” said Resident Commissioner Pedro Pierluisi, who was invited to act as ranking member of the subcommittee’s hearing. Pierluisi recommended several initiatives,

Light Shed Again on Puerto Rico’s Energy Woes at Latest Congressional Hearing BY LUIS J. VALENTÍN l.valentin@cb.pr

High energy costs, an ominous infrastructure and the troubled Puerto Rico Electric Power Authority (Prepa) are among a host of energyrelated challenges affecting the island that were discussed this week by the U.S. House Energy & Mineral Resources Subcommittee during an oversight hearing held Tuesday, Jan. 12. Right oﬀ the bat, subcommittee chairman Rep. Doug Lamborn (RCo.) said, “this isn’t a hearing about Chapter 9,” in reference to the federal U.S. Bankruptcy Code section that would allow Puerto Rico’s public corporations to restructure their debts. The Alejandro García Padilla administration has been lobbying hard on Capitol Hill to secure access to the federal statute. However, Lamborn’s disclosure didn’t stop some of the participants from highlighting the need to provide Puerto Rico’s public corporations, including Prepa, with access to Chapter 9. For instance, Prepa Chief Restructuring Officer Lisa Donahue, who testified at the hearing, noted how securing access to Chapter 9 would allow the utility to complete its restructuring process with its

both locally and at the federal level, that could help in lowering energy costs on the island, while recognized there is broad consensus in Puerto Rico over the need to bring private sector players to invest in capital improvement projects that would improve the overall energy service. “There is a real crisis that if it isn’t addressed, will continue to get worse. Our call to Congress continues to be the same since Day 1; we need a mechanism to restructure our debts in an orderly manner. Whether this hearing will contribute to this eﬀort remains to be seen. We hope it does,” Public Aﬀairs Secretary Jesús Manuel Ortiz said Monday. La Fortaleza wasn’t invited to participate in the Jan. 12 oversight hearing, according to Ortiz. “It is necessary to draw the federal forum’s attention to Prepa’s situation and that it becomes a priority for the U.S. Department of Energy,” said Senate President Eduardo Bhatia, who attended the hearing in

Washington, D.C. The lower chamber’s energy subcommittee will be holding another Puerto Rico-related hearing on Jan. 26, “to discuss the possibility of creating a financial oversight board for the island,” Bloomberg reported, citing a spokesman for Democrats on the panel. The commonwealth government is relying on congressional action, particularly over Chapter 9 access, during the first semester of the new year, as it tries to avoid additional defaults amid a debt-service schedule that becomes steeper during the summer. The commonwealth faces more than $1.5 billion in payments July 1, the first day of fiscal 2017. House Speaker Paul Ryan (RWis.) is banking on delivering a solution to the Puerto Rico issue before the end of March. While other congressional committees are expected to follow suit in scheduling hearings to address the island’s fiscal and economic crisis, no other hearing has yet been confirmed. 䡲

“The RSA contemplates …using the federal Bankruptcy Code or a proceeding pursuant to Puerto Rico’s local restructuring law, if either becomes available to Prepa.” —Prepa Chief Restructuring Oﬃcer Lisa Donahue

THURSDAY, JANUARY 14, 2016

Lead

Limited-liability proceedings set to start in Capeco case

After Delays, Capeco Civil Suit Slated to Start This Year BY EVA LLORÉNS VÉLEZ

The civil lawsuit for damages that resulted from the 2009 explosion at the Caribbean Petroleum Corp. (Capeco) is set to start Feb. 1 in federal court as a limitation of liability (LOL) proceeding that will be decided by a judge and not a jury. On Oct. 23, 2009, an explosion and fire occurred at the Gulf Oil Facility in Bayamón that was owned and operated by Capeco. The explosion occurred while the vessel M/T Cape Bruny—which was owned and chartered, respectively, by Cape Bruny Tankschiﬀarts GmbH & Co. KG and Cape Bruny Shipping Co. (collectively, “Cape Bruny”)—was discharging its cargo of unleaded gasoline into storage tanks at the facility, according to court documents. One or more of the tanks overflowed, and

the spilled fuel found a source of ignition, causing the explosion. The explosion and subsequent fire created a large plume of smoke and spread hazardous materials across Bayamón, San Juan and other neighboring municipalities. Federal Judge Francisco Besosa agreed to the limitation of liability proceeding because, under general admiralty law, a vessel owner is entitled to limit liability after a maritime incident or casualty to the post-casualty value of the vessel and the pending freight, provided the circumstances causing the damage were outside the owner’s privity and knowledge, according to court documents. The start of the trial was delayed because of Capeco’s bankruptcy filing and a stay requested by co-defendants Cape Bruny Tankschiﬀarts GmbH & Co. KG and Cape

Bruny Shipping Co. During the immediate aftermath of the explosion, numerous lawsuits were filed in federal court, including nine putative class actions, 10 “nonclass massjoinder” actions and two “individual” actions, court documents say. On April 22, 2010, Cape Bruny, which had been named as a defendant in several of the lawsuits, filed a complaint for exoneration from or limitation of liability. The 21 lawsuits and LOL action were consolidated before the court for the purpose of docket management. On Aug. 16, 2010, the court stayed all claims against Capeco in the consolidated actions after Capeco filed for bankruptcy. On Oct. 25, 2010, the court extended this stay to all litigation in the consolidated cases. The court modified the stay for the limited purpose of determining whether it had subject-

Burned Capeco fuel-storage tank in Bayamón

matter jurisdiction over the LOL action. On Jan. 15, 2014, the court vacated the bankruptcy stay. The stay for all claims against Cape Bruny outside the LOL action, however, remained in place. On March 28, 2014, Cape Bruny, as the petitioner for the limitation of liability, filed a thirdparty complaint in the LOL action. Cape Bruny alleges the explosion “may have been caused in whole or in part by the acts, omissions or culpable conduct” of the third-party defendants, court documents say.

Cape Bruny says the explosion “may have been caused in whole or in part by the acts, omissions or culpable conduct” of third-party defendants.

THURSDAY, JANUARY 14, 2016 Summary of latest early retirement bill for public workers

Lead Legislature to Work on Early Retirement for Government Employees Legislation Focuses on Workers With More Than 25 Years of Service who Have Less Than six Years Before Retirement BY EVA LLORÉNS VÉLEZ

During its only session in 2016, the Puerto Rico Legislature will work on an early retirement bill for public workers who have six years or less left before retirement and more than 25 years of public service in an eﬀort to cut costs as the government grapples with a debt of about $70 billion. 447 WORKERS House Labor Aﬀairs & Public Service Retirement System Chairman Jesús Santa (PDPCaguas) said House Bill 2757, the Law to Encourage the Retirement of Eligible Public Servants, should benefit from 600 to 1,000

public employees who comply with most of the requirements to retire from government but haven’t done so. These employees are known as “447 workers” because they began their careers in public service when the 1951 public service retirement act was still in place. Act 447 allows

public servants to retire with a pension that is 75% of their salary after 30 years of service. Retirement laws for public servants have been changed three times— in 1990, 2000 and in 2013—for new workers entering the system. During the past legislative session, lawmakers passeda“preretirement”

“These workers were the most aﬀected by the fiscal crisis and to give them 50% isn’t fair.” —Ada González, spokeswoman for the 447 Retirement Movement

House Labor Aﬀairs & Public Service Retirement System Chairman Jesús Santa.

law that allows workers with 20 years of experience in government to retire with a pension that is 60% of their salaries. About 16,000 workers qualify to retire under the new statute. Costs for this preretirement program, which became law in December, are being financed by the agencies and not the commonwealth retirement system itself. These agencies will continue to pay up until the workers are oﬃcially eligible for retirement and can be taken over by the system. However, “447 workers” also called upon the Legislature to devise a mechanism that would allow them to retire early since most of them are at least 55 years of age. These workers can retire at age 61, after 30 years of service. HB 2757 will allow these “447 workers” to

retire with 50% of their salary. They will be paid through annuities in a defined-benefits plan. The workers will also receive a $100 contribution to buy medical insurance and keep other accumulated benefits. Santa said the commonwealth Retirement System shouldn’t be affected because the money to finance retirement for “447 workers” will be paid up by the agencies or municipalities as in the “preretirement law.” HB 2757 OBJECTED Ada González, spokeswoman for the 447 Retirement Movement, objected to the bill, contending the 447 workers should be able to retire with at least 65% of their salary and not 50%. “These workers were the most aﬀected by the fiscal crisis, and to give them 50% isn’t fair,” she said.

She said these workers should be allowed until the end of March to apply for the retirement window because that is when all of them will have 25 years of service. She also said the contribution to the healthcare plan should be $250. Santa said the proposed Law to Encourage the Retirement of Eligible Public Servants will be voluntary for all eligible workers. “We are trying to save money,” he said. Oﬃce of Management & Budget Director Luis Cruz Batista said the legislation should take into account the impact on agencies and how much it will cost the pension system since most of these workers will be moved into the commonwealth Retirement System sooner than expected, once they are oﬃcially eligible for retirement. 䡲

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THURSDAY, JANUARY 14, 2016

Banking/Finance

P.R.’s banks facing high operational, regulatory costs

2016 Will be a Difficult Year for P.R. Banks

The Year Ahead 2016

Fiscal Woes, Interest-Rate Hike to Dampen Island’s Banking Scenario BY JOSÉ L. CARMONA j.carmona@cb.pr

While 2015 was a good year for banks’ profitability, Rafael Blanco— the island’s commissioner of Financial Institutions and local bank regulator—said 2016 will be a challenging one for Puerto Rico’s banks. “The year 2015 allowed banks to prepare for what I consider to be a diﬃcult 2016. [It will be] a diﬃcult year because it begins with the government’s dire fiscal situation, which remains unresolved through congressional action, and will have to wait until first-quarter 2016 to see if it can be improved,” Blanco told Caribbean Business. The Puerto Rico government, Blanco added, remains under the pressure of debt-service payments that are due in the coming months. “The months of January, February and March have significant payments due, with the March payment being the smallest one among these. Then, in May, there is a large debt-service payment to the Government Development Bank of $413 million. So we have this scenario, which doesn’t help the local economy improve during the first months of the year,” Blanco commented.

Rafael Blanco, commissioner of Puerto Rico Financial Institutions

INTEREST-RATE HIKE DOESN’T HELP While last month’s first interest-rate hike, of 25 basis points, by the Federal Reserve since 2008, is a small one, Blanco noted it doesn’t help the economic situation. “It isn’t something, on its own, that will cause a lot of damage because it’s a minimal increase. However, we need to be vigilant about how many of these small interestrate increases there will be throughout the year,” Blanco said. “Certainly it isn’t something that benefits us. It’s an additional challenge we need to address in terms of costs of funds, how it translates as additional costs to consumers and how it could limit their financing options.” Given the challenging scenario for 2016, Blanco said what is needed during the next few months is for the island to begin to address its fiscal issues. “Not to resolve them,

but at least begin to create trust in the economy because what we have here is a lot of uncertainty, and that is prosperity’s worst enemy,” Blanco pointed out. “Uncertainty scares capital away, and no one makes big investments when there’s uncertainty in terms of tax treatment, fiscal laws and diﬃculties getting businesses established.” A best-case scenario is for the White House and U.S. Congress to provide

Puerto Rico a mechanism that allows some direction in terms of how to attend to its fiscal and debt problems, the local bank regulator pointed out. “As long as the island’s economy doesn’t rebound, local banks won’t be able to do much because banks are financial intermediaries and will follow the economy’s direction,” Blanco said. “If the economy doesn’t rebound, demand for banking services—loans especially—won’t yield much.” If the local economy continues to contract, there could be additional bank consolidations because supply is currently higher than demand, Blanco explained. 䡲

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caribbeanbusiness.pr Volume 1, No. 9 Thursday, January 14, 2016 Publisher Miguel A. Ferrer

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THURSDAY, JANUARY 14, 2016

Banks’ balance sheets strong enough to weather ﬁscal storm

Banking/Finance

KBW: Despite Crisis, Puerto Rico Economy Holding on Lower oil Prices Helping to Buoy Consumer Activity BY JOSÉ L. CARMONA j.carmona@cb.pr

Following their 14th annual Puerto Rico field trip last month, financial analysts from Keefe, Bruyette & Woods (KBW) left their meetings believing local banks’ balance sheets were more than strong enough to weather through the direct and indirect impacts from the government’s fiscal storm. KBW financial analysts Brian Klock and Glen Manna, along with

some investment clients, visited with the top management in local banks Popular Inc., First BanCorp and OFG Bancorp, as well as executives from payments processor Evertec Inc., during their recent field trip. Given the island’s challenging fiscal situation, Klock and Manna said that while touching on a number of topics, a potential government shutdown has been a major concern for investors.

The main takeaways from their meetings were: There is a general expectation the government will run out of money sometime over the next six months, and a default on a portion of its debt is likely; the U.S. Congress has a better understanding of both the nature and urgency of the crisis, but any assistance from the mainland U.S. is unlikely; and passage of legislation approving the restructuring of the Puerto Rico Electric

ATM System Failure Raises Questions About Banking Security Evertec Silent on What Caused ATM Breakdown during Evening Hours BY DENNIS COSTA d.costa@cb.pr

Puerto Rico’s main automated-teller machine (ATM) system, dubbed “A Toda Hora” (ATH), went down late afternoon on Saturday, Jan. 9. During a period that started at about 4:30 p.m. and lasting some three hours, ATH customers were unable to access their accounts on ATM terminals or carry out purchases with ATM

cards at various points of sale (POS) around the island. The situation rapidly caused outraged comments on social media and an oﬃcial response from Evertec, the San Juan-based transaction-processing company in charge of the ATH system. Through a short statement, Alan Cohen, chief communications & marketing oﬃcer for Evertec, said the company was able

to re-establish service in most areas within the first couple of hours of the malfunction. “We apologize for the inconvenience that this failure brought to our clients and the general public,” Cohen said. “We will continue monitoring our systems and processes to ensure the best service to our customers.” Cohen didn’t specify the nature of the malfunction that brought

Power Authority (Prepa) is an imperative. “We came away from our meetings last month with a feeling that the governor [Alejandro García Padilla] will look to avoid a government shutdown, which places greater risk of a default, in our view,” the KBW analysts said in their equity research report. “While the headline risk of a potential default is a concern, we believe the direct impact on the banks would be manageable in the near term,” the duo added. Although the bank executives that Klock and Manna met during their field trip acknowledged the Puerto Rico government is in a crisis, they seemed more optimistic about the state of the island’s economy, the

KBW financial analysts said. “Low oil prices are helping buoy consumer activity and commercial activity is increasing moderately,” Klock and Manna indicated. “While we admit the fiscal situation in Puerto Rico remains an uncertainty for the shares of all the banks in the near term and will likely keep capital returns for the banks on hold until more clarity is known, we came away from our meetings with more conviction about how well-positioned all three

the ATH system down, and calls by Caribbean Business requesting additional information on the matter went unanswered as of press time. Evertec’s silence on the

request an investigation into the potential vulnerabilities in the ATH system and actions that could be carried out to prevent another collapse in the system. The

A widespread failure of a complete ATM system is by no means unprecedented. issue has partly brought about rampant speculation as to the cause of the problem, with theories ranging from a simple computer glitch to an outright cyberattack. The incident also prompted New Progressive Party (NPP) Rep. Ángel Muñoz Suárez to

NPP lawmaker told local media outlets that he also wants to probe the possibility of opening the local market to other companies. Evertec, a public company that began as part of Popular Inc. in 1988 and was spun oﬀ in April 2004, is by far the largest ATM and POS operator

banks are to weather through this near-term headwind.” For the longer term, both Klock and Manna believe Popular and First BanCorp will be able to deploy and return their high level of excess capital. The KBW analysts reiterated their Outperform (Buy) rating on those two shares. “We maintain our Perform (Hold) rating on OFG, as we expect the shares to continue to trade at a discount to tangible book value given macro concerns, but that discount should begin to narrow as milestones such as expectations for term-out of the Prepa loan and continued repayment of the municipal debt are reached,” Klock and Manna said. 䡲

on the island, and in recent years has developed a significant presence in various Latin American markets, processing about two billion transactions annually. A widespread failure of a complete ATM system is by no means unprecedented. For instance, Royal Bank of Scotland’s ATM system experienced a similar malfunction in December 2013. For about three hours, customers couldn’t withdraw cash or pay with their debit cards, with bank oﬃcials saying the problem was due to a computer glitch. Then, in early 2014, clients of Lloyds Banking Group in the United Kingdom faced similar inconveniences after an alleged server failure. 䡲

T H U R S D AY, J A N U A RY 1 4 , 2 0 1 6

WINNERS & LOSERS WEEKLY PERFORMANCE OF PUERTO RICO STOCKS

Sin Comillas is a Spanish-language digital media website that specializes in business news in such areas as economics, banking, planning and tourism. Sin Comillas was founded in 2010 by economist and journalist Luisa García Pelatti.

WINNERS FOR THE WEEK 52-wk

PRICE

STOCK

SYMBOL LOW

52-wk

HIGH

12/31

1/8

CHANGE

LOSERS FOR THE WEEK 52-wk

PRICE

STOCK

SYMBOL LOW

52-wk

HIGH

12/31

1/8

CHANGE

Popular Inc.

BPOP

25,80

35,83

28,34

25,84

-2,50

17,34

27,07

23,91

22,07

-1,84

Triple-S Management Corp. GTS Evertec Inc.

EVTC

14,93

23,12

16,74

15,47

-1,27

OFG Bancorp

OFG

6,25

17,83

7,32

6,30

-1,02

First BanCorp

FBP

2,97

6,76

3,25

2,99

-0,26

Public-Debt Audit Committee to Hold First Meeting Next Week

Weekly Comment on Puerto Rico Stocks Despite a stronger-than-expected U.S. jobs-growth report for December, the Standard & Poor’s (S&P) 500 Index and Dow Jones Industrial Average posted their worst ﬁve-day start to a year on record last Friday, on continued concerns a slowdown in China could damage the global economy. At the end of trading last Friday, the Dow fell 1.02%, the S&P 500 lost 1.08% and the Nasdaq Composite dropped 0.98%. The weekly declines on the S&P and the Dow were the largest since September 2011, and the largest on record to mark the start of a year. Data released by the U.S. Bureau of Labor Statics showed U.S. nonfarm payrolls increased by 292,000 in December and the jobless rate held steady at 5%. In addition, U.S. payrolls for October and November were revised to show 50,000 more jobs created than previ-

Puerto Rico Senate President Eduardo Bhatia called for the first meeting next Tuesday, Jan. 19, of the Public Debt Audit Committee. The committee will examine and evaluate the hiring, refinancing and/or renegotiating process of Puerto Rico’s public debt, the origin and destination of resources, as well as the performance of programs financed with internal or external debt. The first meeting was originally set for December but was cancelled. The Public-Debt Audit Committee was created through Act 97 of 2015 in July, and has to render reports of its performance every six months. The commission has to define the methodology conduct the audit of Puerto Rico’s $70 billion debt as ordered by law, create a database that allows for all manner of analysis regarding the indebtedness process and set up an information transparency system for the investigative, auditing and future indebtedness processes.

ously reported. Oil prices fell for a fifth day last Friday. Fears of a slowdown in China and the global economy kept spooking investors last week, creating a turbulent start to the trading year. For the week, the Dow fell 6.2% to 16,346.45. The S&P 500 lost 6% to 1,922.03, while the Nasdaq Composite Index dropped 7.3% to 4,643.63. On the local front, the Government Development Bank’s Puerto Rico Stock Index (PRSI) posted a heavy loss during its first week of the year, spearheaded by last week’s massive stock selloff. For the week, the PRSI lost 150.86, or 8.62%, to close at 1,598.79, with all components in the red for the five-day period. Leading last week’s nongainers was OFG Bancorp, which erased $1.02, or 13.93%, to close at $6.30. It was followed by Popular Inc., which skidded $2.50, or 8.82%, to close at $25.84. Shares of First BanCorp fell 26 cents, or 8%, to close at $2.99. Triple-S Management Corp. edged down $1.84, or 7.70%, to close at $22.07. Shares of Evertec Inc. lost $1.27, or 7.59%, to close at $15.47.

Besides Bhatia, the committee’s members are P.R. House Speaker Jaime Perelló; Senate majority spokesperson Aníbal José Torres; Senate Minority Leader Larry Seilhamer, Puerto Rican Independence Party Sen. María de Lourdes Santiago; House Majority Leader Charlie Hernández, House Minority Leader Jenniffer González; Government Development Bank President & Chairwoman Melba Acosta; Statistics Institute Executive Mario Marazzi; economist José Alameda; lawyer & CPA Juan Lorenzo Martínez; Puerto Rico Syndicate of Workers President Roberto Pagán; FirstBank President Aurelio Alemán; Irma Hilario Arroyo representating the Caguas Savings & Loan Cooperative; and P.R. Chamber of Commerce President Frank Medina. These appointments were made last November by the heads of both legislative bodies, in compliance with the disposition of law that states that if the governor didn’t complete the appointments within 10 days after the law went into effect, by mutual agreement the heads of the Legislature would carry them out. “The country and its fiscal situation are at a critical moment whereby determined action has to be taken regarding the debt. In this process, transparency is indispensable for all parts, especially for the people of Puerto Rico. That is the spirit of the creation of the Public-Debt Audit Committee through Act 97 of 2015, and it is my commitment that action is taken to carry out the duties described in that law,” Bhatia said. BY SIN COMILLAS STAFF

BY JOSÉ L. CARMONA SENIOR REPORTER, BANKING/FINANCE CARIBBEAN BUSINESS

THURSDAY, JANUARY 14, 2016

Purchase Manufacturing Index Increased by the end of 2015 The Purchase Manufacturing Index (PMI) in Puerto Rico reached up to 51.1 in November. If the index remains higher than a score of 50, it suggests an expansion in manufacturing in comparison with the previous month, while if it is below that number it suggests a contraction in that sector.

Gas prices close 2015 at their lowest in six years For drivers who saw their gasoline spending reduced significantly, 2015 was a good year. The average price for gas in Puerto Rico closed at 65.95 cents per liter, 23.41 cents less than in 2014, which represents a 26% decrease in price. The fall in gas prices is a direct consequence of the fall in the price of a barrel of oil, which in recent days reached $32.20 per barrel. Cheaper oil prices benefit Puerto Rico, which is highly dependent on crude oil, but the island’s fiscal crisis isn’t allowing the benefits of cheaper oil to be reflected in the economy. It is estimated that for each $10 reduction in the price of a barrel of oil, the Puerto Rico economy would receive an incentive of some $750 million.

All of the PMI’s components were also above the level of 50 in September, except for the employment subindex. The PMI has been above the level of 50 during 44 of the past 67 months. The index isn’t adjusted by seasons, so seasonal ﬂuctuations, such as holidays, may aﬀect it. The P.R. Statistics Institute develops this indicator, which is sponsored by the Industrial Competitiveness Institute of the Puerto Rico Manufacturers Association and Scotiabank. The PMI is based on answers periodically sent to purchase professionals and executives from the largest companies in the manufacturing sector.

The price of gas at the consumer level was 60.09 cents in December 2015, almost 14 cents less than for the same month in 2014. Throughout 2015, the price of gas has ﬂuctuated between 58.94 cents per liter in January to 76.20 cents in July, according to the monthly survey carried out by the Puerto Rico Consumer Aﬀairs Department. Prices reached their highest level in 2012, when they averaged 92.52 cents per liter. Later on, prices fell to 90.90 cents per liter in 2013 and 65.95 cents per liter in 2015. BY LUISA GARCÍA PELATTI

BY LUISA GARCÍA PELATTI

U.S. economy creates 2.65 million jobs in 2015

During the month of December, the U.S. economy created 292,000 new jobs, exceeding analysts’ expectations, while the nationwide unemployment rate remained at 5%. The U.S economy created a total of 2.65 million jobs for the whole of 2015.

The U.S. Department of Labor revised the increase in job-creation numbers for the month of October, the best month for 2015, reporting 307,000 new jobs. The last three months of 2015 saw the creation of 284,000 new jobs, the best increase registered in a year. Meanwhile, average hourly earnings decreased slightly in December, settling at an average of $25.24 nationwide, although hourly earnings have increased 2.5% during the past 12 months. The general optimism regarding the strength of the labor market contributed to the Federal Reserve’s decision in mid-December to increase the reference interest rates for the ﬁrst time in almost a decade. Another four interest-rate hikes are expected throughout 2016. The U.S. unemployment rate since October has remained at 5%, the lowest since the beginning of the ﬁnancial crisis in 2008. BY SIN COMILLAS STAFF

THURSDAY, JANUARY 14, 2016 FRONT PAGE

A Look Ahead to 2016 Fiscal Woes, new Taxes Will Continue to Drag Down Puerto Rico’s Prospects for Economic Growth

BY JOSÉ L. CARMONA j.carmona@cb.pr

he new year will mark a significantly shameful milestone for Puerto Rico. The new calendar year that began 14 days ago marks the ninth year

out of 10 that Puerto Rico has experienced stagnation or no economic growth. Sadly, there’s nothing on the horizon that could trigger at least a mild economic turnaround in the foreseeable future. On the contrary, the island’s lingering fiscal

challenges, pending debt obligations, the rise in interest rates by the Federal Reserve, record migration and population loss, and the implementation of a 11.5% value-added tax, or VAT—which includes an increase to the 4% business-to-business

(B2B) tax to 10.5%—will continue to stall any prospects of economic growth for the island in 2016 and beyond.

NEGATIVE TREND

CONTINUES A real positive-growth rate of 0.9% in fiscal 2012 interrupted

five-consecutive years of negative growth in Puerto Rico’s gross national product (GNP). According to the Puerto Rico Planning Board’s 2014 Economic Statistical Appendix (the most recent edition available), the island’s GNP, in real terms, decreased 1.2%

during 2007, 2.9% in 2008, 3.8% (2009), 3.6% (2010) and 1.7% (2011). “Contrary to the widely held perception, this data indicates that the recession that started in 2006 hasn’t lasted for nine-consecutive Continues on next page

FRONT PAGE THURSDAY, JANUARY 14, 2016

More than 200,000 people are estimated to have left the island between 2010 and 2014, which is a 10% drop. This has created dire consequences for the government’s tax revenues since fewer people are paying taxes.

Continues from previous page

years. On the contrary, the 2006 recession ended at some point during 2012, with the economy exhibiting positive, albeit weak, economic growth for a year,” Carlos A. Colón de Armas,

economist & finance professor in University of Puerto Rico’s (UPR) School of Business, explained to Caribbean Business. Following Fiscal 2012’s blip, De Armas said the island returned to negative growth in Fiscal 2013 (-0.2%) and Fiscal

2014 (-0.9%). “In its economic outlook, the Puerto Rico Planning Board projected the island’s economy would contract 0.9% in Fiscal 2015, which ended June 30, 2015. However, no new data has been published by the agency on Puerto Rico’s GNP,” De Armas added. As we look toward the future, De Armas said a lot would depend on what finally happens regarding two major threats hanging over the head of Puerto Rico’s economy. “On the one hand, Puerto Rico continues to lose population. On the other hand, the approach that the government has taken to resolve its fiscal situation will likely have a negative impact on future investment on the island, which augurs negatively for our future prospects,” the UPR professor said. “If the population trend can be reversed, and if the government significantly changes course in its fiscal strategy, Puerto Rico’s economy can be on the mend. Otherwise, we will continue to slide down the abyss, with no end in sight.”

NUMBERS DON’T LIE According to the latest U.S. Census Bureau population estimates released last month, as

of July 1, 2015, Puerto Rico had an estimated population of 3.5 million, a decline of 60,706 people, or 1.7%, from a year earlier. More than 200,000 people are estimated to have left the island between 2010 and 2014, which is a 10% drop. This has created dire consequences for the government’s tax revenues since fewer people are paying taxes. Meanwhile, the Government Development Bank’s latest Economic Activity Index (GDBEAI) fell 0.5% year over year in November, driven by drops in cement sales and gasoline consumption, the GDB said last month. The GDB claims its EAI is closely correlated with overall economic performance measured as GNP. Nonfarm payroll employment increased 0.5% year over year in November, while electric-power generation dipped 0.5%, the GDB said. According to data compiled by the Studies & Statistics Division of the Puerto Rico Labor Statistics Bureau, employment in the San Juan, Carolina and Caguas municipalities increased by 14,300 jobs in November 2015 versus the same month in 2014. Last month, the Federal Reserve raised interest rates 25 basis

points—the first increase since June 2006— and although it is a modest boost, more rate hikes could be forthcoming in the months ahead. However, given the very fragile situation of the island’s economy and government finances along with a lack of access to capital markets, an increase in interest rates—even a small one—isn’t a welcome event for Puerto Rico.

RISKY PROPOSITION For José Joaquín Villamil, chairman & CEO of Estudios Técnicos Inc., making economic projections for 2016, when it is unclear what will happen barely 14 days after the start of the year, is a risky proposition. “There are, of course, some clear trend lines that suggest that in calendar 2016, the economy of Puerto Rico will once again contract by about 2.4%. What is most important when looking at 2016, however, is identifying the issues that are constraining a return to economic growth any time soon,” Villamil said. In Villamil’s view, the drivers of this continued contraction include lower public and private spending—which Estudios Técnicos projected will contract by roughly

2.0% and 6.0%, respectively—continued reduction in investment in construction and only modest growth in exports. “Obviously, the uncertainty generated by the fiscal situation and the impact of the new taxes also influence economic performance. This is particularly true of the 10.5% B2B tax on services and other purchases that goes into eﬀect April 1,” Villamil indicated. The Estudios Técnicos executive pointed out that what is typically missing in the annual forecasts is the concern for framing these shortterm estimates within longer-term trends. These factors, in the case of Puerto Rico, are major concerns since the economy isn’t expected to grow until 2020, Villamil warned. “A clearly drafted and inclusive vision of where we want to be five, 10 and 20 years down the road is sorely needed, since it provides the framework for short-, medium- and long-term strategies,” Villamil said. “Intuition and ad hoc measures can be fatal in times like the present.” This situation, he noted, may seem utopian given the urgency of dealing with the government’s immediate Continues on page 16

THURSDAY, JANUARY 14, 2016 FRONT PAGE

Continues from page 15

PREPA DEAL A

problems, but time flies, Villamil indicated. “The economy has already been in a negative spiral for 15 years and has been underperforming for 40,” he added.

FISCAL WOES DRAGGING ECONOMY Local economist Heidie Calero, president of H. Calero Consulting Group (HCCG), sees Puerto Rico at a crossroads between growth and stagnation. After nine years out of 10 in recession, she insists there are no vigorous signs the worst is over. “The fiscal situation continues to be a challenge. Unless government perks up, and we need between $11 billion and $12 billion in investments annually, growth won’t be restored,” Calero warned. To her, Puerto Rico’s crisis is one of credibility and not just a government-liquidity crunch. “To restore our credibility with investors, financiers and Congress, among others, we need to fulfill our obligation to service the government-obligation [GO] bonds and any other constitutionally guaranteed debt, even if it takes enormous sacrifices in terms of government services and jobs,” Calero insisted. HCCG’s forecasts the local economy will contract 3.3% in 2016 and 2.7% in 2017. Unemployment, she projected, will remain high at 13.9% in 2016 and 13.2% in 2017. “Inflation could be moderate if oil prices remain low and we can eﬀectively address the cost of electricity, with inflation at 1.5% in

“On the one hand, Puerto Rico continues to lose population. On the other hand, the approach that the government has taken to resolve its fiscal situation will likely have a negative impact on future investment on the island.” —Carlos A. Colón de Armas, economist & finance professor in University of Puerto Rico’s School of Business

2016 and 1.3% in 2017,” Calero indicated. “All in all, Puerto Rico has so many growth opportunities, if we could only focus on a fiveyear growth plan with participation in publicprivate partnerships for infrastructure.” It isn’t enough to go to Congress to beg, Calero stressed, adding

Puerto Rico needs to stand proudly and lift itself up again by its bootstraps. “We did it before…why not now,” she added. Although 2015 ended without a well-defined framework for renegotiating the public debt, Juan Lara, chief economist at Advantage Business Consulting

“Inflation could be moderate if oil prices remain low and we can eﬀectively address the cost of electricity, with inflation at 1.5% in 2016 and 1.3% in 2017.” —Heidie Calero, president of H. Calero Consulting Group

and economic professor at the UPR, said there is now a clear understanding that the debt-service burden in its present form isn’t sustainable and must be reshaped. “That’s a major step in the right direction, and we should see more decisive action to reschedule debt in 2016. Taking control of the fiscal picture is essential, lest we end up with a Washington-imposed control board that could complicate matters more than it would

help,” Lara indicated. Even though the García Padilla administration’s growthinducing initiatives have paid oﬀ in areas such as tourism, aerospace and exports of services, Lara believes much more of that needs to be done. “More of that is needed to create a sustainable momentum in new economic directions, which is the only real long-term solution for the fiscal, financial and economic challenges we continue to face,” Lara said.

POSITIVE An agreement reached late last year between the Puerto Rico Electric Power Authority (Prepa) and two of its three monoline insurers is a significant step forward in the electric utility’s restructuring, which could serve as a blueprint for other government-debt restructurings. The agreement is also a positive for local banks with Prepa exposure, investment bank Keefe, Bruyette & Woods (KBW) said in its latest North America equity research report. “The next step in the process should be for the governor [Alejandro García Padilla] to call a special session of the Legislature to pass the Prepa Revitalization Act, which is also required under the restructuring agreement,” KBW’s Brian Klock and Glen Manna said in their latest equity report. Out of the three Prepa monolines—MBIA’s National Public Finance Guarantee Corp., Syncora Guarantee Inc. and Assured Guaranty Corp.—only Syncora remains out of the deal. In all, the restructuring accord now includes holders of 70% of Prepa’s roughly $9 billion debt. A group of Prepa bondholders, fuel-line lenders and the GDB had previously agreed to restructuring terms with Prepa. Local banks with Prepa exposure include OFG Bancorp (OFG, $200 million), First BanCorp (FBP, $75 million) and Popular Inc. (BPOP, $75 million). The KBW financial Continues on page 17

FRONT PAGE THURSDAY, JANUARY 14, 2016

“There are, of course, some clear trend lines that suggest that in calendar 2016, the economy of Puerto Rico will once again contract by about 2.4%.” — José Joaquín Villamil, chairman & CEO of Estudios Técnicos Inc.

Continues from page 16

analysts pointed out that getting the monoline insurers on board with the restructuring was required by the preliminary restructuring agreement released last month. “Another major step in putting the restructuring agreement in force is the enactment of the Prepa Revitalization Act by the Puerto Rico Legislature. The governor has yet to call a special session of that body to address the bill,” the

KBW equity research report said. While implementation of the restructuring plan still requires passage of the Prepa Revitalization Act, Klock and Manna indicated they believed an agreement with the creditors brings the Prepa situation one step closer to resolution.

BIG DEBT PAYMENTS

LOOMING While the local government so far has employed the clawback mechanism—tapping into a revenue stream destined to cover the

“That’s a major step in the right direction, and we should see more decisive action to reschedule debt in 2016. Taking control of the fiscal picture is essential, lest we end up with a Washington-imposed control board that could complicate matters more than it would help.” —Juan Lara, chief economist at Advantage Business Consulting

payment of other debt—to make some debt payments that were due Dec. 1, 2015 and Jan. 1, 2016, it faces several other large debt payments, especially one for more than $1 billion in the summer that could force it to default. Meanwhile, the government is placing its

hopes on congressional action—mainly granting Puerto Rico access to Chapter 9 bankruptcy protection (or the U.S. Supreme Court’s decision in March on the constitutional merits of the local Puerto Rico Public Corporation Debt Compliance & Recovery Act)—to prevent such default.䡲

Puerto Rico Gross National Product (GNP) At Constant Prices 2007-2016 Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% GNP -1.2 -2.8 -3.8 -3.6 -1.7 0.9 -0.2 -0.9 p -0.9 p -2.4 f

p=Projection f=Forecast Source: Puerto Rico Planning Board

THURSDAY, JANUARY 14, 2016

Column By Cate Long PARTNER, PUERTO RICO CLEARINGHOUSE

and previously maintained liquidity with massive short-term borrowings. Access to short-term borrowing ended when García Padilla declared all debts unpayable last June.

DEBT CLASS

Puerto Rico’s Bare Cupboards On Jan. 6, 2016, Puerto Rico’s 44-yearold governor, Alejandro García Padilla, met with local media in Utuado. The governor told the assembled reporters that he had paid down Puerto Rico’s debt from $72 billion to $69 billion without firing any public employees. García Padilla also castigated creditrating agency Standard & Poor’s (S&P) for creating a false story that blamed his administration for lack of audited financials. One week prior on Dec. 30, 2015, García Padilla held a press conference at the governor’s palace and announced that the government would pay most of its debts due on Jan. 1. The government had suﬃcient cash in the Treasury and various bond reserve funds that could be used to meet the payments. The government also announced that it had diverted $164 million of revenues assigned to several classes of debt to the more legally secure general-obligation bonds. The long threatened “clawback” of debt service on weaker bonds had begun. The Puerto Rico government scoured every nook and cranny to repay bondholders while insisting that the island faced a “humanitarian crisis.” This crisis language was echoed by U.S. Treasury Secretary Jack Lew and Treasury adviser Antonio Weiss. Unsaid was that Puerto Rico had relied for decades on repaying its debts by issuing new debt. The Commonwealth, cut oﬀ from market access, unhooked itself from its morphine drip and faced the hard reality of its unbalanced budgets. Prior to the Christmas recess, the U.S. Congress deliberated on helping Puerto Rico. After intense lobbying by Gov. García Padilla and numerous

Democratic lawmakers, Congress decided to add $90 million a year for commonwealth hospitals under the Medicare plan and give the U.S. Treasury new authority to assist with information systems. House Speaker Paul Ryan promised that House committees would complete a plan to assist Puerto Rico by March 31, 2016. Meanwhile U.S. Senate chairmen Orrin Hatch, Chuck Grassley and Lisa Murkowski filed legislation that would give Puerto Rico $3 billion in aid, impose a federal control board and commission various studies on the Commonwealth’s pension systems and other government functions. GOVERNMENT LIQUIDITY The payment of 11 of the 13 debt classes due on Jan. 1 clearly signaled that Puerto Rico wouldn’t suffer a “death spiral” as no government services were reduced. Public services including police, healthcare and education continued to be provided to citizens and few government services were diminished. The government found sufficient cash to pay government salaries and an additional $120 million to pay Christmas bonuses to public employees. In late December, the University of Puerto Rico (UPR) announced that it had halted payments to outside vendors until mid-January to have sufficient cash to make payroll. It is unclear if UPR had exceeded its budget or the Puerto Rico Treasury was executing a cash management strategy with only one public entity. Information about the true cash position of the Puerto Rico government is nearly impossible to obtain. The Puerto Rico government paid management consulting firm, Conway MacKenzie, $5 million to project their cash position. Conway’s August report projected that the central government would have a December negative balance of $200 million. The Puerto Rico government has had a long-term problem accurately projecting its expenses and revenues

General obligation

DEBT-SERVICE PAYMENTS To make January debt payments totaling $901 million, Puerto Rico drew funds from various sources. Here is how each class of debt was paid:

AMOUNT DUE (MILLIONS $) $331

SOURCE OF PAYMENT Cash from the General Fund & clawbacks* Electricity fees** Water and sewer charges Fuel, cigarette & license fees Hotel occupancy taxes Rum and corporate income taxes Ad valorem property tax & appropriations

Prepa (electric utility) Prasa (water utility) Highways Transp Authority Convention Center Industrial Development Co Municipal Financing Auth

$176 $ 99 $118 $ 10 $ 13 $ 1

University of P.R. Govt Development Bank

$ 2 $ 10

System revenues Proceeds from its lending activity

Public Buildings Authority Employee Retirement Syst

$ 91 $ 14

Infrastructure Financing Auth

$ 35

Public Finance Corp.

$ 1

Lease revenues from public agencies Paid from employer contributions to system Defaulted; Rum taxes collected by fed govt Defaulted; Appropriations from General Fund

* Puerto Rico Government Development bank (GDB) stated that it had applied “available revenues” to pay $331 million in general-obligation debt, including $164 million of revenues from the Highways & Transportation Authority (HTA), the Puerto Rico Infrastructure Financing Authority (Prifa) and the Convention Center District Authority (CCDA). This represents a diversion of funds, not a draw from debt-service reserves. Bond insurers Ambac and FGIC [Financial Guaranty Insurance Co.] objected to the diversion of $94 million in Prifa rum-tax revenues. Bond insurance subsidiaries of Assured Guaranty Ltd. (NYSE: AGO) and Ambac Financial Group ﬁled suit Jan. 7, 2016, in federal court, challenging the constitutionality of the revenue clawback instituted by the Commonwealth. Assured Guaranty has stated it believes the clawback of revenues pledged to bond issues violates the U.S. Constitution by illegally interfering with Assured Guaranty’s contractual rights. ** Prepa hasn’t disclosed the source of funds used to make its $176 million Jan. 1 debt-service payment. The electric utility had sufﬁcient operating cash and restricted deposits to make this payment. The use of these funds wouldn’t likely constitute an event of default. Prepa’s July 1, 2015, $414 million debt payment was funded with cash from Prepa’s General Fund and debt-service reserve accounts. Prepa didn’t disclose the use of debt-service reserve funds until July 20, 2015, although securities regulations require disclosure within 10 days of the event. Additionally on Dec. 29, 2015, Prepa executed a bond purchase agreement with Assured Guaranty, National Public Finance and the Ad Hoc Bondholder Group to sell $110 million in bonds maturing July 2019 at 10% annual interest. This sale provided funds to repay $130 million of bonds issued to the same group on July 1, 2015, at an interest rate of 12% that matured on Jan. 1, 2016. In the intervening months, Prepa repaid $20 million of the July 1, 2015, bonds.

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THURSDAY, JANUARY 14, 2016

Those with higher incomes and young adults buying homes

Poll

Only 1% of Puerto Rico Residents Have Purchased a Home During Past Year BY ROSARIO FAJARDO r.fajardo@cb.pr

One of the hardest-hit industries during Puerto Rico’s nearly 10-yearlong recession has been the home construction and mortgage loans industry. The value of homeconstruction activity has decreased from $2.217 billion in fiscal year 2006 to $547 million in fiscal 2014, according to Planning Board statistics. Within this category, the biggest drops have been in home-construction activity in urbanizations and apartment buildings. Similarly, mortgageloan originations during calendar-year 2015 stand at half of what they were during 2006, according to December 2015 figures from the Financial Institutions Commissioner’s Oﬃce

(OCIF by its Spanish acronym). With this backdrop, Gaither International asked adult respondents in Puerto Rico if they had purchased a home during the past year. The results showed that less than 1% of the adult population had purchased a home during the previous year. About 68% of the island’s 3.5 million population are ages 25 and older, according to 2015 Census figures. This would translate to about 2.38 million adults, of whom 1%, or 23,800 people, would have been recent homebuyers. Gaither said the latest results have been consistent with similar polls for the past couple of years. Since 2012, the percentage of adults who have purchased a home in Puerto Rico has never been over 1%.

Poll results show that women are more likely than men to have purchased a home, as they account for 57% of those who did, indicated Armando Sánchez, vice president of syndicated studies at Gaither International. Age-group analysis shows the age bracket that over-indexes with homebuyers is 25 to 34 year olds, meaning this demographic group is highly represented compared with other age brackets. These young adults account for only 17% of the general adult population on the island, but they constitute nearly 30% of those who have recently purchased homes. Not surprisingly, respondents in the “Middle” and “High” Lifestyle Tiers, which correspond to socioeconomic indicators, were

significantly more likely to have purchased a home in the past year. Adults in these two lifestyle categories comprise nearly two-thirds of adult homebuyers. “Numbers also suggest there are two regions that have shown stronger home purchasing than the rest,” Sánchez said. “These are the Caguas and Mayagüez census regions. Between the two regions, they account for 30% of Puerto

Rico’s population, but they account for 48% of the home-buying population.” Mortgage originations in Puerto Rico have increased from 5,821 in third quarter 2014 to 6,723 for the same period in 2015, which are the highest numbers since 2013, according to OCIF data. The average value of originated mortgages was $146,980, or 0.1% less than for the same period in 2014, when the

average was $147,176. The results are from Gaither International’s Media Brand Profiles tracking survey, which interviews more than 80 people daily from among a representative sample of Puerto Rico’s population ages 12 and older. 䡲

Polling is conducted by Gaither International and results are reported exclusively by CARIBBEAN BUSINESS.

THURSDAY, JANUARY 14, 2016 Double jeopardy decision tied up in status issue

Law/Courts P.R. Status can Lead to ‘Double Jeopardy’ for Same Charges by Federal, Local Courts U.S. Supreme Court Must Decide ‘Ultimate Source’ of Commonwealth’s Authority to Prosecute BY EVA LLORÉNS VÉLEZ

The U.S. Supreme Court will have the difficult task of deciding if two men convicted of weapons violations by a federal court may be tried by Puerto Rico courts for the same offense, an eﬀort that requires redefining the island’s political status. The status question is important for determining the existence of “double jeopardy” (which states a person can’t be prosecuted twice for the same offense) because the top court must decide “the ultimate source” of the commonwealth’s authority to prosecute. If justices decide the local and federal courts derive their prosecutorial power from the same source, in this case Congress, they aren’t separate sovereigns and there is double jeopardy. If the justices determine the Justice Department derives its power to prosecute from the commonwealth Constitution and the federal court from Congress, then local officials can prosecute the two men because there is dual sovereignty and no double jeopardy. For years, Puerto Rico has been able to prosecute individuals

convicted in federal courts, but in this particular case, the matter reached the commonwealth Supreme Court, which reversed previous rulings that allowed the double prosecutions. While lawyers for the two men defend the Supreme Court decision that there is double jeopardy because Puerto Rico is subject to the plenary powers of Congress, the local Justice Department says Puerto Rico derives its power to prosecute from its 1952 Constitution and there is dual sovereignty. If the friends-ofthe-court briefs filed in the top court are an example of the U.S Supreme Court’s options, the justices may decide there is double jeopardy because Puerto Rico is a territory; rule that there is no double jeopardy; or decide there is double jeopardy for reasons unrelated to status. Puerto Rico Bar Association President Mark Anthony Bimbela said friends of the courts present their arguments in writing and aren’t allowed to speak unless the justices decide otherwise. U.S. Solicitor General Donald Verrilli, who wrote that there is double jeopardy because Puerto Rico is subject to

the plenary powers of Congress, was the only amicus curiae allowed to speak. Justices must first decide if they have the power to see the case. In its brief, the U.S. Virgin Islands Bar Association (VIBA) challenged the top court’s jurisdiction because the decision by the Puerto Rico Supreme Court wasn’t a final judgment but a partial one and only affected one of the counts against the two men, who were charged with multiple weapons violations. “Because the Supreme Court’s decision affected some but not all counts against the respondents, it wasn’t a final judgment,” VIBA said. VIBA says a decision made by the Supreme Court against the existence of double jeopardy will affect the U.S. Virgin Islands, too, because the territory doesn’t prosecute individuals convicted in its federal court. The friends-of-thecourt briefs include one from U.S. law Profs. Christina Duffy Ponsa and Sam Erman, who contend U.S. territorial history shows Puerto Rico can only have sovereignty as a state and not as a territory, thus

“It was admission into statehood rather than ratification of a constitution that marked the transition into separate sovereignty.” —U.S. Law Profs. Christina Duﬀy Ponsa and Sam Erman there is double jeopardy. “It was admission into statehood rather than ratification of a constitution that marked the transition into separate sovereignty. Indeed, Congress consistently treated approval of territorial constitutions and admission into statehood as two distinct acts to be accomplished through separate statutory language,” the professors said. The Miami Chapter of the Florida Association of Criminal Defense Lawyers put forward a diﬀerent solution to the case. The organization said that in light of the expanded federalization of crime, the top court should abandon the dual-sovereignty

doctrine altogether and “hold that the Double Jeopardy Clause of the Constitution bars a successive prosecution for the same crime, even if initiated by a diﬀerent prosecuting authority. In all events, recognizing Puerto Rico as a sovereign distinct from the federal government would be incompatible with a century of precedent from this court, and a century of actions by both the legislative and executive branches,” the group said. The Puerto Rico Bar Association urged the U.S. Supreme Court in its friend-of-the-court brief to overrule the Insular Cases, a series of rulings on U.S. territories from the late 19th and early 20th centuries,

because their “imperialist reasoning is no longer tenable, and aﬃrm that under the Constitution, U.S. citizens who live in the territories are entitled to the same civil rights as other U.S. citizens.... Whatever the scope of Puerto Rico’s authority under the Puerto Rico Federal Relations Act of 1950 and its progeny, a territory isn’t a separate sovereign from the U.S.,” the association said. The friends-of-thecourt briefs also include one filed by former governors, lawmakers and secretaries of justice and current elected officials of the New Progressive Party, saying they are double jeopardy because Puerto Rico is a territory. 䡲

THURSDAY, JANUARY 14, 2016

Treasury to spend nearly $80 million to create central accounting, VAT systems

Government

Government revenues to improve ‘very little’ in 2016 despite transition to VAT BY EVA LLORÉNS VÉLEZ

Even though a 10.5% value-added tax (VAT or IVA by its Spanish acronym) will be applied this year, starting April 1, to a wide range of goods and services as part of a sweeping plan to bring money to the government, Treasury Secretary Juan Zaragoza said he expects revenues to “improve very little.” Among changes that should help the government keep track of its revenues and expenditures is the planned creation of a computerized central government accounting system that will allow Treasury to have better oversight of the fiscal state of each agency. Many agencies now have separate computer accounting systems, which makes it diﬃcult for them to communicate. Through a contract with Microsoft, these changes are expected to cost $30 million to $40 million. As part of government arguments last year to change the sales & use tax (IVA by its Spanish acronym) to a valueadded tax, the VAT was to end up yielding about $1 billion for island coffers because it is more diﬃcult to avoid paying this tax through clever accounting practices. Zaragoza says he doesn’t plan to modify earlier projections that

reduced revenues by $500 million. Revenues tend to improve in the second half of the fiscal year because money from the consumption tax that was destined for the Sales Tax Financing Corp. (Cofina by its Spanish acronym) now goes to the general fund instead. The government also receives new revenues from taxes due April 15. Zaragoza, however, said he expects liquidity levels to remain unsustainable and couldn’t say for certain whether the government, which must pay some $3 billion in debt between now and June, will be able to make a $700 million general-obligation payment due this year. “The liquidity will be “less worse” than the first half [of the fiscal year] but we will be very tight,” he said. As the liquidity decreased last year, Gov. Alejandro García Padilla in November issued an executive order for Treasury to retain assigned revenues from the Highways & Transportation; Infrastructure Financing; Metropolitan Bus; and Integrated Transportation authorities; and Convention Center District to use to pay obligations, a mechanism known as a “clawback.” “Those mechanisms are transitory. We are buying time while we sit

down to negotiate debt, but as time goes by, we are running out of options. This year will be critical,” he said. “We need to be able to restructure.” On the other hand, Zaragoza said that once the VAT goes into eﬀect, consumers shouldn’t feel it because it has already been implemented by up to 90% of its capacity. After April, merchants will start collecting the VAT at each point in the process of production and the sale of goods, whenever value is added, instead of at the point of sale as is now the case. The Treasury secretary says the service created to collect the tax will have a certain degree of autonomy, but it will be under his supervision. The agency has already hired Gen Tax–Fast Enterprises to design and supply the software and information system that will be used for Puerto Rico’s VAT. The firm did the same work in New Zealand, the secretary said. The agency is expected to pay another $30 million to $40 million for this new system. “This is the most prestigious firm in this area,” Zaragoza said. Along with a cut in the number of tax-collection centers, or colecturías, another change Treasury is expected to make is to outsource

“We are buying time while we sit down to negotiate debt, but as time goes by, we are running out of options.” —Treasury Secretary Juan Zaragoza the service that informs taxpayers about how much money they owe in taxes. The Treasury Department will also continue to go after businesses that fail to remit the IVU to the agency. Zaragoza said he hasn’t received any of this money from the businesses that have been temporarily shuttered. Many have

filed for bankruptcy and the agency is going to challenge two of these bankruptcies. “These are people who aren’t paying the tax because they want to keep their lush lifestyles,” he said. Nonetheless, the publicity around these companies’ embargoes has encouraged other businesses to start filing the IVU money they owe,

and tax revenues have gone up. “The value that we get from doing this is intangible,” he said. Amid criticism that the agency is closing local businesses, Zaragoza said the people who complain about that are “the same ones who criticize the agency because it isn’t capturing the tax.”

THURSDAY, JANUARY 14, 2016 Commonwealth seeking timely, favorable congressional action, Supreme Court decisions to weather debt-crisis storm

Government Commonwealth Gov’t Faces Treacherous Debt-Service Gauntlet in 2016 Big Payments due in the Summer, as Puerto Rico Continues to Battle Fiscal, Economic Challenges BY LUIS J. VALENTÍN l.valentin@cb.pr

Another tough year lies ahead for the cashstrapped Puerto Rico government, as it grapples with a debt-service schedule that surpasses the $3 billion figure, dwindling revenues and the need for additional budget cuts across the board, among many other fiscal and economic challenges. With politics going into high gear in what is also an election year, the Alejandro García Padilla administration is desperately running out of fiscal maneuvers in trying to steer its troubled ship. The overall uncertainty surrounding the commonwealth’s fiscal affairs will remain at the forefront, while the island’s battered economy and population continue to fall. “I believe it is a year of lots of challenges, particularly over fiscal and economic matters. It is also a year to materialize the efforts that were initiated in 2015,” Public Affairs Secretary Jesús Manuel Ortiz told Caribbean Business. Among the government’s ongoing efforts entering 2016, he noted the Electric

Power Authority (Prepa) restructuring process, talks between the commonwealth and its creditors toward a consensual debt-restructuring deal and securing Congress to act and allow Puerto Rico access an orderly bankruptcy framework to restructure its debt. The García Padilla administration has run the gamut of lifeline fiscal measures, including delaying payments to government suppliers and refunds to Puerto Rico taxpayers, in a bid to stabilize its cash flow and keep operations afloat. Most recently, the governor ordered the redirecting, or “clawback,” of pledged revenues to pay commonwealth-guaranteed debt. These revenue sources were established to cover debt issued by certain public corporations, putting them on weak footing to continue servicing their debt in the near future. STEEPER DEBT-SERVICE CALENDAR Kicking oﬀ the New Year, the commonwealth government paid more than $850 million in debt service due across several credits.

The Year Ahead

missed $36 million payment—prompted two Puerto Rico bond insurers to sue the government in federal court, calling the clawbacks illegal and invalid under the U.S. Constitution. (See editorial on page 2). Judging by the current state of aﬀairs and lat-

about $400 million due Feb. 1, including the Government Development Bank (GDB), $29.2 million; Municipal Financing Authority, $15.1 million; and Sales Tax Financing Corp., $318.4 million. While the government is expected to meet the majority of the February payments, it is

kickoﬀ of fiscal 2017 on July 1, when more than $1.5 billion in payments are due across several of the commonwealth’s 18 diﬀerent debt issuers. Puerto Rico’s total public debt towers at roughly $70 billion, without taking into consideration about $40 billion in liabilities under its

est developments, many observers believe it is highly unlikely Puerto Rico would be able to meet this year’s debtservice calendar in full, while maintaining all government operations and services. On the agenda, more than $3 billion are due in debtservice payments across the commonwealth’s several issuers in 2016, with more than $1 billion owed before the end of the fiscal year on June 30. In just over two weeks, the commonwealth faces

expected to default once again on PFC bonds, this time on $22 million due Feb. 1. This would add up to the roughly $64 million that haven’t been paid to date on PFC obligations. As the summer approaches, the debt-service schedule becomes steeper. The financially battered GDB faces a whopping $422.8 million debt payment on May 1, a tough challenge to meet given the bank’s strained cash position. However, the real test may come with the

severely underfunded pension funds.

2016

However, it defaulted on about $36 million in interest due Jan. 4 on P.R. Infrastructure Financing Authority (Prifa) bonds—the second time Puerto Rico has done so during fiscal year 2016, after failing to meet nearly $58 million in debt obligations under the Public Financing Corp. (PFC) in August 2015. What’s more, the clawback mechanism— which contributed to the Prifa default since it tapped revenues that would have covered the

WAITING FOR CONGRESS The commonwealth is set to resume this month its lobbying efforts on Capitol Hill, which mainly center on securing access to Chapter 9 of the U.S. Bankruptcy Code. This would allow Puerto Rico to restructure more than $20 billion of public corporation debt. Continues on next page

THURSDAY, JANUARY 14, 2016

Government Having not acted on the debt crisis before the holiday break, Congress would seek to move on the Puerto Rico issue after reconvening in January, aiming to have a final solution before the end of March, House Speaker Paul Ryan (RWis.) has said. While congressional hearings are expected to be scheduled during the first part of the year to address the island’s fiscal and economic crisis, only the U.S. House Energy & Mineral Resources Subcommittee has done so with its recently held Jan. 12 hearing, when the energy challenges and opportunities facing Puerto Rico were discussed. (See related story on page 6). The García Padilla administration is banking on congressional action, particularly over Chapter 9 access, during the first quarter of 2016, as it tries to avoid additional defaults amid the steeper debt-service schedule that begins in the summer. It remains to be seen if the majority GOP lawmakers on Capitol Hill will support any measure aimed at allowing Puerto Rico to restructure its debt and cope with its debt crisis, and if such support, if granted, would be tied to enhanced federal oversight and control over the commonwealth’s aﬀairs. TALKS WITH CREDITORS ON HOLD? Last November, commonwealth advisers of-

have told Caribbean Business the administration has postponed previously scheduled meetings with representatives of some creditor groups.

Jesús Manuel Ortiz, Public Aﬀairs Secretary

ficially announced the government’s intention to put together a “superbond” deal, whereby Puerto Rico bondholders would exchange their existing commonwealth debt into a new, more secure paper. The idea underpinning the proposal is to restructure in, one fellow swoop, a large chunk of the island’s $70 billion debt. But although meetings between representatives of several creditor groups and commonwealth advisers took place late last year, talks have yet to be resumed as of presstime. Government officials, including GDB President & Chairwoman Melba Acosta, have recently said the administration’s fiscal team continues to seek the one-shot, consensual deal with its creditors, with talks potentially restarting this month. However, government officials have released no further information to this effect. Sources

U.S. SUPREME COURT DECISIONS LOOM Three cases at the federal top court include two actions over the validity of a locally enacted bankruptcy law—the Puerto Rico Public Corporations Debt Compliance & Recovery Act— that seeks a restructuring framework for the island’s public entities, and a criminal case centered on the issue of double jeopardy, which could revisit the issue of sovereignty regarding the commonwealth’s political relationship with the U.S. While oral arguments for the double-jeopardy case were held Jan. 13 (see related story on page 20), a similar hearing for the bankruptcyrelated cases is expected to take place by March, although the court has yet to schedule it. Decisions are expected to come down by the summer. For Justice Secretary César Miranda, the cases “pose very significant controversies that impact Puerto Rico and its institutions.” Some have argued that a favorable ruling for the commonwealth over the validity of the local bankruptcy law could turn into a game changer for the administration’s plans toward a debt-restructuring deal with its creditors.

DDEC develops program to match investors with medical marijuana entrepreneurs BY EVA LLORÉNS VÉLEZ B

reach $8 billion by 2018. The executive order requires the Health and Agriculture departments to draft regulations on the use of medicinal marijuana. The Agriculture Department is reportedly planning to grow the

with University of Puerto Rico. The Economic DevelBacó said the departo opment & Commerce ment’s role will be in the D Department (DDEC by area of promotion beit its Spanish acronym) cause medical marijuana h has launched a program is being regulated by to match entrepreneurs Health and Agriculture. w with investors interestThe secretary couldn’t e ed in medical marijuana say how many people b business opportunihave approached ti ties. DDEC to learn more “This is one of about the medical th the new projects marijuana business th that has the highopportunities. e est priority,” DDEC The Academic SciS Secretary Alberto ences of Puerto Rico, B Bacó told Caribbean a private corporation, B Business during an recently announced in interview attended that the National b by Assistant SecChamber of Comre retary Juan Carlos merce for Cannabis S Suárez. (NCCC) will hold a Gov. Alejandro convention Feb. 19 to G García Padilla signed promote the developa an executive order ment of this industry le legalizing medical on the island. m marijuana in May The announcement 2 2015 arguing that was made by the comst studies conducted pany’s vice president in the States had & licensed pharmad demonstrated the cist, John Reyes. th therapeutic value of “We are very th the plant. The expleased to be in a e ecutive order allows partnership with an m medical cannabis to organization of the b be used for certain size and prestige of co conditions, such as the NCCC, an entity g glaucoma, AIDS, midedicated to preparg graines, Alzheimer’s, —DDEC Secretary Alberto Bacó ing this nascent inm multiple sclerosis dustry, which is cena and Parkinson’s distered on the medie ease. cal development of Because the mecannabis. We are at d dicinal and recreational marijuana and hemp a juncture of changes in u use of marijuana is auplants in Dorado usPuerto Rico’s socioecoth thorized in at least 23 ing organic pesticides, nomic system, and the st states, Marijuana Busibecause the plants are NCCC oﬀers an additionn ness Daily estimates prone to plagues, as part al tool,” Reyes said in a m marijuana sales could of a research agreement statement.

“This is one of the new projects that has the highest priority.”

THURSDAY, JANUARY 14, 2016

Politics

Consensus needed to overcome ﬁscal crisis

Public Debt, Status Persist as Election Year Issues Candidates Tout Programs for Change in Face of Crisis BY ISMAEL TORRES

Puerto Rico’s public debt, its consequences for public administration and government services, and the island’s status relationship with the U.S. persist as the main issues this election year. As backdrop, the Popular Democratic Party (PDP) will aim to discuss these topics in an atmosphere of “unity and consensus.” At least that is what may be gleaned from statements by the PDP candidate for governor, David Bernier, who has said 2016 “is the year of unity, where consensus will set the guidelines of our party for the development of tools and solutions that take us on the right path for the good of all Puerto Ricans.” “But overall, it will be the year of the unity of the people. That unity will lead us to take our island out of the deep crisis in which it finds itself,” said Bernier in response to a request for comments regarding his political projections for this election year. “Puerto Rico is at a historic threshold of a profound change in its society. We stand before the moment of greatest opportunities for this generation of Puerto Ricans to create a new country full of possibilities,” he stressed.

Bernier didn’t elaborate about specifics on what could help bring Puerto Rico out of the government’s fiscal crisis, the problems generated in public administration and the performance of Gov. Alejandro García Padilla. Meanwhile, the resident commissioner and president of the New Progressive Party, Pedro Pierluisi said, “This is going to be a crucial year for Puerto Rico. Beyond the purely political dynamics of an election year, I am convinced our people have realized the hard way that the crisis we’re facing is very real and very serious. “People know that the times we’re living in demand the kind of experienced, mature, credibility-tested and results-proven leadership that I represent. Puerto Rico doesn’t need one more plan in a drawer somewhere. Puerto Rico needs someone with the wisdom to make good decisions and the expertise to implement them. So I’m completely confident I will prevail in the primary and, come November, that our people will vote overwhelmingly in favor of change by electing the New Progressive Party slate in an islandwide sweep,” Pierluisi said. Ricardo Rosselló, who

The Year Ahead

“There are many areas to work on, such as excessive government spending, combined with an inability to govern,” he said. Rosselló pointed out that his proposal looks to adjust the government so the fiscal burden isn’t placed on citizens and Puerto Rico’s productive sectors.

the colony and statehood, or if it will search for an option that allows us to compete with equal conditions as the rest of Latin America and the Caribbean.” Betting on the independence status option, Santiago added that “the unpayable public debt, corrosion of the government apparatus

(WPP), Prof. Rafael Bernabe, believes “the new year will require redoubled eﬀorts to demand aﬃrmative action on the renegotiation and congressional fronts…and resistance to new austerity measures that are both socially unfair and economically depressive, such as the proposed ‘labor reform.’”

2016

Some 2.3 million voters are expected to participate in the general elections in November.

along with Pierluisi is vying for the candidacy for governor for the NPP, said: “Puerto Rico is going through a very diﬃcult situation that has been aggravated by the erred decisions of this administration and, because of that, people will look for a diﬀerent alternative.” He said that in his case, he aims to provide that new direction along with his team, which he has been doing for the past three years.

For Sen. María de Lourdes Santiago, candidate for governor from the Puerto Rican Independence Party (PIP), who is a harsh critic of the financial measures adopted by the current administration, the year 2016 “will be a crucial year in which the country has to be ready to open its eyes, and ask itself if it really aspires to continue on the road toward a precipice, which is the only way oﬀered by the continuation of

always eager to serve privileged interests, the unquestionable inability of the commonwealth to address this critical situation (which has also contributed to unraveling the fantasy of statehood, whose only promise is to increase dependence), and the lack of institutional credibility from the PDP and NPP are favorable circumstances for the decolonization forces.” The candidate for the Working People’s Party

Bernabe added, “During 2016, an unsustainable public debt and the now decade-long economic stagnation will remain Puerto Rico’s most urgent problems.” Some 2.3 million voters are expected to participate in the general elections in November, for which the State Elections Commission estimates a budget of about $36 million will be needed. The vote count this year is expected to be completed electronically. 䡲

THURSDAY, JANUARY 14, 2016

San Juan will see world’s biggest cruiseships this year, while recently shuttered hotels may see new lease in life

Tourism

Puerto Rico Tourism Expected to Continue Gains in 2016 More and Bigger Ships, New Flight Routes, Ongoing Hotel Developments Slated to Continue as Tourism Surges BY DENNIS COSTA d.costa@cb.pr

Despite the economic and fiscal crisis that has battered Puerto Rico, the island’s tourism sector has bucked the downward trend for the most part, spurred primarily by a general upsurge in the global tourism industry, particularly in the Caribbean. Such a dynamic isn’t expected to diﬀer much during 2016, with several upcoming developments on the island that signal further gains in the segment. On the cruiseship front, eight new cruiseships are slated to arrive at local ports, among them Royal Caribbean’s Allure and Oasis of the Seas, currently the two biggest cruiseships in the world. Oasis will make its first stop on the island in March, and both ships will dock five times each throughout the summer season, Ingrid Rivera Rocafort, executive director of the Puerto Rico Tourism Co. (PRTC), told Caribbean Business. Other cruises new to Puerto Rico in 2016 include the Norwegian Gem, which will first arrive in late October and is scheduled for eight homeport stays

in San Juan; the Windstar Legend, one of the first cruises to make a scheduled stop at the island-municipality of Culebra; the Disney Wonder, which already began homeport stays

as the Oasis of the Seas was the expansion of Pier 3 in San Juan, which was completed in late 2014 following an $8.3 million investment. Although still in the design stage, the PRTC’s Rivera

other island cities such as Ponce and Mayagüez, Rivera added. When it comes to upcoming air routes, Iberia is slated to return to the Puerto Rico market in May with three weekly flights from Luis Muñoz Marín International Airport (call sign: SJU), which according to Rivera will generate some $21 million in economic impact. Meanwhile, Southwest Airlines is scheduled to increase its SJU-Houston route from a weekly to a daily during the summer season.

The island’s tourism sector has bucked the downward trend for the most part, spurred primarily by a general upsurge in the global tourism industry. The Year Ahead 2016

Royal Caribbean’s Allure of the Seas

earlier this month and is scheduled to make five more this year; the Costa Deliziosa, slated to make its first visit in early March; and the Carnival Vista, which will begin docking in San Juan next November. One big factor that allowed the arrival of mega-cruiseships such

believes a similar project to renovate nearby Pier 4, under the purview of the Puerto Rico Ports Authority, should start sometime this year. The PRTC, which serves as the government’s main promoter for Puerto Rico tourism, is also carrying out negotiations for cruises to dock at

The PRTC is also in talks with Norwegian Airlines, which last November kicked oﬀ direct flights connecting SJU to London-Gatwick, Stockholm, Oslo and Copenhagen. Although these frequencies are scheduled to end in early April, Rivera said they were confident they

will be able to convince the airline to resume the flights well into the year. Another important development in Puerto Rico aviation involves the upcoming Routes Americas event, scheduled for early February in San Juan. “It is the first time this event, which

is the main route development forum for the entire Americas region, will be held in Puerto Rico,” Rivera noted. Regarding hotels, Rivera revealed there will be a forthcoming announcement on the Radisson Ambassador Hotel, which closed in San Juan’s Condado neighborhood last April. “There is already a buyer in place who will develop and redesign the hotel for a later launch,” Rivera said. Also in the pipeline this year is an entertainment center complex in San Juan’s Convention Center District. The project, touted as being similar to Downtown Disney in Orlando, Fla., will boast a movie theater, restaurants, stores and nightclubs. Meanwhile, in Carolina’s Isla Verde tourism sector, the redevelopment of El San Juan Hotel will continue, as well as the ESJ Towers timeshare property and the opening of Vivo Beach Club in the old Tropimar Convention Center.

THURSDAY, JANUARY 14, 2016

Latin American Affairs Is the Latin American Left a Thing of the Past? BY JUAN A. HERNÁNDEZ

Latin America’s 21st century push toward its political reconstruction seems to have taken a step back after 2015, when several of its countries opted out of the leftist and centerleft governments that early in the century had ascended to power via democratic elections. After decades of civil wars, military dictatorships, nonrepresentative administrations, civil rights violations, and the theft and squandering of their national wealth, countries like Uruguay, Paraguay, Bolivia, Argentina, Chile, Peru, Colombia, Venezuela and others have decided to give a chance at governing to the very same socialist movements that their leaders had so vehemently persecuted for the last quarter of the 20th century. But “the socialist solution” seems to be a short-lived alternative for some of these countries. In Venezuela, for example, after the parliamentary elections last December, the opposition has claimed it marked the beginning of the end of “Chavismo” and the political left in Venezuela, after the late Hugo Chávez first ascended to the presidency in 1999. Of the 167 delegates for the National Assembly, the opposition’s Mesa

de Unidad Democrática (Democratic Union Platform, MUD) won 112 (what is called a qualified majority), thus allowing them to elect the new assembly president, in this case Henry Ramos Allup. Aﬀected by a severe economic crisis and shortages of basic commodities, Venezuelans finally favored the capitalist, and conservative, proposal of MUD two and a half years after Chávez’s death in 2013. That same year, they voted to elect a new president, with Nicolás Maduro narrowly winning the election in the wake of his predecessor. Venezuelans seemed to believe Maduro wasn’t up to par to continue Chávez’s legacy. A little more than two years later, voters decided against Chavismo. Something similar happened in Argentina, where Argentines decided a decade of the Kirchner dynasty was enough. Last November, Maricio Macri, from the centrist coalition Cambiemos (Let’s Change), won the presidency in a second-round runoﬀ election, after defeating Daniel Scioli, considered the heir of the outgoing Peronist president, Cristina Kirchner. Not necessarily a pure leftist, the Kirchner administration (including her late husband) leaned significantly left, promoting welfare programs and protectionist policies.

While Scioli’s campaign prioritized policies to help Argentina’s poorest, Macri has promised a break from Kirchner’s leftist economic policies and assured his administration would be more business-oriented. Macri capitalized on Argentina’s stagnant economy, limited access to bond markets and voters’ discontent. However, is Latin America going back to push forward? Both Argentina and Venezuela can be considered prominent cases, but they definitely aren’t setting a trend for the region. Other countries in Latin America had elections during 2014-15 without significant ideological adjustments taking place with the change in administration. Case in point, Uruguay. For the third-consecutive term, this South American country has elected the Frente Amplio (“Broad Front,” a coalition of left-wing parties) presidential candidate. In 2004, Tabaré Vázquez, a physician, was elected president. In 2009, José “Pepe” Mujica, a former guerrilla member, was elected president. And in 2014, Vázquez was elected again. In Chile, Michelle Bachelet, a socialist president, was re-elected for a second term (not consecutive) in oﬃce. In Bolivia, Evo Morales, from Movimiento al Socialismo (Movement for Socialism) is already into

For some analysts, the reasons for the change isn’t ideological, as most political gurus have consistently denounced, but economic. his third term in oﬃce. All these presidents have instituted strong policies favoring working-class and poor people, enacted strong protectionist legislation and

still have strong support from their respective constituents. If not a trend, then what has caused this shift to the right in the region?

For some analysts, the reasons for the change isn’t ideological, as most political gurus have consistently denounced, but economic. During the first decade of the 21st century, the so-called “21st Century Socialism” relied on strong national economies in Latin America to ideologically rally regional organizations, such as the Alianza Bolivariana para los Pueblos de Nuestra América (Bolivarian Alliance for the Peoples of our America, ALBA). Housing subsidies, welfare Continues on next page

THURSDAY, JANUARY 14, 2016

29 Argentina and Venezuela can be considered prominent cases, but they deﬁnitely aren’t setting a trend

The Year Ahead benefi fits and other fforms of sponsorship have relied on these economies to develop some incipient middle classes and small entrepreneurs. But the economic collapse, galloping inflation and shortages of many basic staples have, at least partially, eroded confidence among the voters in some of these countries (particularly Argentina and Venezuela). Still, a question persists. Has the “socialist solution” failed because socialism isn’t economically viable?

2016

There is no absolute answer to such a question, particularly in the era of globalized economies. In terms of the Latin American region, it could be said that a series of global conditions have come together to create a negative impact on some economies, if not all Latin American countries. China’s slowing economy—which looks to Latin America for food, oil and raw materials, record-low oil

prices and increasing national debt, among other conditions—has joined forces in some sort of “perfect storm” scenario to move voters to reconsider previous political alternatives in hopes of recapturing the good old days. More than figuring out whether Latin America will be able to go back to the future or not, what the new leadership needs to realize is how to diversify and develop new sustainable economies. 䡲

THURSDAY, JANUARY 14, 2016 Puerto Rican makes it big in videogame industry with release of latest Disney blockbuster

Technology Disney Infinity Videogame Boasts Puerto Rican at the Helm As Senior Director of Technology, José Villeta Manages All Aspects of Popular Toys-to-Life Adventure Game BY DENNIS COSTA d.costa@cb.pr

In mid-December, Disney Interactive Studios released the third version of its popular videogame Disney Infinity. Featuring characters from the high-grossing film “Star Wars: The Force Awakens,” Disney Infinity 3.0 has catapulted the franchise to the top of the lucrative “toys-to-life” segment, raking in more than $200 million in sales last fall, Fortune recently reported. As it turns out, a videogame-industry veteran hailing from San Juan has played a key role in the development of the videogame franchise. As senior director of technology for Disney Interactive, José Villeta oversees several aspects for the multiplatform game, which incorporates not only a sandbox-style adventure campaign, but also a lineup of real-life figurines, a level creator and a robust online component. “We are very excited about the game’s launch, partly because it represents plenty of firsts for the videogame industry,” Villeta told Caribbean Business. “The breadth and scope of the

game is unlike anything else that people have seen.” Toys-to-life games involve a computer action/ adventure game and physical figurines that interact with the videogame, mostly through a “portal” device, such as a platform, in which figures are placed. Apart from featuring a likeness of a particular character, each figurine also has special data encoded in its base; place a figurine in the corresponding portal device, and the figure is “brought to life” inside the videogame. Skylanders, published by Activision and released in late 2011, was the first successful game of this type, and as of early 2015, boasted some $3 billion in sales with more than 250 million toys sold, according to IGN Entertainment Inc. However, since launching its first game in August 2013, Disney Infinity has taken advantage of its various intellectual properties— which include characters from movies produced by Pixar Animation Studios, Marvel Entertainment LLC superheroes and, more recently, Star

Wars—to overtake Skylanders and other competitors, among them Lego Dimensions and Nintendo’s Amiibo, in the toys-to-life segment. Villeta’s role in the game’s development involves three main areas, starting with the figures themselves. “I have to make sure all the physi-

onto the figurine itself. “The more you play with a figurine, the more unique it becomes,” Villeta noted. The second aspect involves the game’s online community, including ensuring that multiplayer online games run properly. One key component of the game involves a level creator dubbed a “Toy Box.” Essentially, players can create their own games within Disney Infinity and upload their content to the global network for sharing, following a trend established by games such as Minecraft and Little Big Planet. By mid-December, Disney Infinity achieved

Disney Infinity 3.0 Starter Pack. Players can purchase additional figures and game discs, a huge feature of the ‘toys-to-life’ segment .

cal electronics work and interact properly with the videogame experience,” he said. Diﬀerent figures have diﬀerent abilities in the game, and players can further customize each character’s skill set by gaining experience points, similar to a role-playing game; the stats are then recorded

some 30 million Toy Box downloads worldwide, Villeta added. His third area of responsibility involves making sure the game runs flawlessly on several platforms, and ironing out any programming defects, commonly known as “bugs.” The game not only runs on

José Villeta, senior director of technology for Disney Interactive

videogame consoles such as Microsoft Xbox, Sony PlayStation and Nintendo in all current models, but also on PCs and mobile platforms such as iOS and Android. Villeta, who lives and works in Los Angeles, has lived stateside since 1986 when he enrolled at Massachusetts Institute of Technology (MIT). He was first employed in the aeronautics industry, at one point working for the National Aeronautics & Space Administration (NASA), but in 1994 he got bitten by the videogame bug and started his own game production company, Black Ops Entertainment, with a friend. The studio’s independent nature allowed Villeta to flex his creative muscles. “We started making games for the first PlayStation console, which allowed me to do plenty of things,” Villeta said. “For a street

basketball game, I was able to set a stage in [the San Juan neighborhood of] La Perla, and in a boxing game called Knockout Kings, I put [former Puerto Rican boxing champion] Tito Trinidad. I was really proud of that.” After 12 years at Black Ops, Villeta moved to THQ, a now-defunct videogame publisher, to work on licensed Pixar games, which eventually caught the attention of Disney Interactive. As part of his current responsibilities, he frequently travels to China, where the figures are manufactured, and meets regularly with the game’s main developers at Avalanche Studios, based in Salt Lake City. “The game has gotten so big that we’ve had to hire more developers in England, Texas, California and Vancouver, Canada,” Villeta said. “In all, there are about 500 people working on this title.” Villeta has also traveled to Puerto Rico to develop course curricula focusing on videogame programming and design, which are being taught at places such as Atlantic University College and Universidad del Sagrado Corazón. More recently, Villeta has participated in initiatives such the Hour of Code, which aims to teach programming to elementary school students. “People in Puerto Rico are getting more interested in learning about videogames and pursuing the field as a career path,” Villeta said. “It is a seed that is definitely growing.” 䡲

THURSDAY, JANUARY 14, 2016

VR devices such as the Oculus Rift could take center stage in tech industry this year

Technology

Virtual Reality, Home Automation Poised to Rule Tech in 2016

The Year Ahead 2016

iPhone 7 Among Most Highly Expected Devices due to Come Out This Year BY DENNIS COSTA d.costa@latinmediahouse.com

Plenty has already been talked about it, but 2016 may be the year in which virtual reality (VR) finally becomes the next big thing on the tech landscape. For instance, one of the most visible players in the burgeoning VR segment, Oculus, revealed pricing and details about the long-awaited consumer version of the company’s headset, the Oculus Rift, slated to be released to the public in March. However, the device’s $600 price tag, announced at the Consumer Electronics Show (CES) in Las Vegas, has drawn some criticism, especially since previous versions made for software developers had cost about half that amount. While the Oculus was once heralded as the device that would bring low-cost VR to the masses, it seems other gadgets have already beaten the upstart company— which was purchased by Facebook in early 2014 for $2 billion—to the punch. These lower-priced VR headsets range from Samsung’s $100 Gear VR to the Google Cardboard, which only costs $20. Part of the reason

they cost so little is that they serve as accessories for mounting high-end smartphones such as the Samsung Galaxy S6, which can then be used as a VR display capable of showing images in 360 degrees. On the contrary, the Oculus Rift is now marketed as a more premium device capable of delivering a more immersive VR experience, albeit one that requires a highpowered PC, which makes the cost barrier a little steep. Another factor is that Oculus soon won’t be alone in the new-fangled “premium VR” segment, with competitors such as HTC Vive and PlayStation VR scheduled to launch their respective oﬀerings sometime in the next six months. When it comes to smartphones, the iPhone 7 is among the exceedingly anticipated devices for 2016. Slated to come out sometime in the fall, the seventh iteration of the now-iconic touchscreen device promises to adopt several significant changes. For instance, rumors abound that Apple will incorporate an all-new design that will get rid of the Home button as well as the headphone jack. Another trend that manufacturers expect to become a bigger deal

this year concerns home automation, also known as “smart home.” In all, expect many upcoming home appliances to sport the “smart” moniker next to their name, boasting Wi-Fi connectivity and interaction with a smartphone. Several home-automation products already exist in the market, such as Philips Hue, which focuses on smart lighting; Belkin WeMo, which acts as a smart plug that allows you to turn appliances on and oﬀ through your smartphone; and voice-controlled personal assistant devices such as the Amazon Echo. The smart-home segment is currently hampered by a plethora of platforms—from the likes of Google, Apple, Amazon and others— which are incompatible with one another, but this year is slated to bring a more userfriendly, less fragmented environment that is ripe for market growth. Also expect the automation trend to continue expanding further into transportation, namely self-driving cars and delivery drones, although the inevitable regulatory hurdles should prevent the adoption of such technologies from advancing further than baby steps this year.

The Belkin WeMo, essentially a smart-power outlet, is the tip of the iceberg for the burgeoning home-automation segment, which is expected to make huge strides in 2016.

Samsung’s Gear VR (top) is one of the most noteworthy devices in the mobile VR segment, which could give more high-end VR oﬀerings such as the upcoming Oculus Rift (bottom) a run for their money.

THURSDAY, JANUARY 14, 2016

12 DAYS OF CHRISTMAS

By Philipe Schoene Roura, Juan A. Hernández, Dennis Costa, Luis J. Valentín, Rosario Fajardo and Ismael Torres

“On the First day of Christmas, the Three Kings Gave to me…” One Lame Duck in a Palm Tree… • “On the Second day of Christmas, Puerto Rico Gave to me...” Two Political Primaries... • “On the Third day of Christmas, the Government Gave to me…” Three Nasty Clawbacks • “On the Fourth day of Christmas, the Creditors Gave to me…” Four Seething Monolines (the big Cuatro) • “On the Fifth day of Christmas, the Three Kings Gave to me…” Five Loyal Dissidents... • “On the Sixth day of Christmas, the GOP Gave to me…” Six Republican Windbags (Plus one?) • “On the Seventh day of Christmas, the Government Gave to me…” Seven-Figure Advisers • “On the Eighth day of Christmas, the Creditors Gave to me…” Eight Prepa Extensions... • “On the Ninth Day of Christmas, the Federal Authorities Gave to me...” Nine Indictments... (at Least) • “On the 10th day of Christmas, the Three Kings Gave to me…” 10 Seats A-Shifting... • “On the 11th day of Christmas, Legislators Gave to me…” An 11.5% Sales tax… • “On the 12th day of Christmas, the Three Kings Gave to me…” 12 Months ‘til Exit... And a Lame Duck in a Palm Tree.

THURSDAY, JANUARY 14, 2016

12 DAYS

“On the First day of Christmas, the Three Kings Gave to me…”

One Lame Duck in a Palm Tree…

DAY

After a year of la crudita taxes 1(a), 1(b) and 1(c), sales-tax increase, overestimated revenues, retained tax returns and no Christmas bonuses, Gov. Alejandro García Padilla is ready to end the year on a high note.

fter a first term of political setbacks, misfires and the all too often occasional blunder, Gov. Alejandro García Padilla decided not to seek re-election, convinced that if he had opted to stay the course, he would have been responsible for single-handedly driving the island’s economy into the ground and converting several thousands of his own populares into PPT (Partido del Pueblo Trabajador) voters. So, after consulting with his battle-savvy political advisers—namely Víctor Suárez, Jorge Colberg and Jesús Manuel Ortiz, whose combined political expertise has been defined as “a riddle wrapped in a mystery inside an enigma”—García Padilla realized (probably sometime

last summer) that it would be best for both the economy and himself (not the Popular Democratic Party), to make the announcement in the middle of the Christmas shopping craze. Of course, as expected, critics would denounce the timing and the language he used. “What shopping craze? There was no Christmas bonus and even next year’s tax refunds are nowhere in sight,” some have said. Always anticipating, the governor’s advisers counseled him to play a deaf ear to them. “Do what you always do,” they said, “of course, there’s no bonus, but they would have maxed out their credit cards anyway.” But after a year of la crudita taxes 1(a), 1(b) and 1(c),

sales-tax increase, overestimated revenues, retained tax returns and no Christmas bonuses, García Padilla is ready to end the year on a high note. After careful analysis—even though he has said it was absolutely important to have it…a matter of life or death— he won’t call an extraordinary session of the Legislature to approve the restructuring bill for the Puerto Rico Electric Power Authority. Forget that we are in the middle of Christmas, that lawmakers are frantically trying to file their candidacies for re-election or that the bill may not be approved at all, first he was going to call the special session, now he’s not. Merry Christmas! 䡲

—JAH

“On the Second day of Christmas, Puerto Rico Gave to me...”

Two Political Primaries...

ust 24 hours after Gov. Alejandro García Padilla’s announcement that he wouldn’t seek re-election, ex-Secretary of State David Bernier came out of the cave and announced his gubernatorial candidacy for the Popular Democratic Party (PDP). The announcement had the practical eﬀect of canceling out other possible aspirations for governor in the PDP, such as the case with Senate President Eduardo Bhatia. “We have the ballot squared away in terms of the governorship. We still have the one for resident commissioner pending,” said PDP Sen. Aníbal José Torres. In the PDP, the names being mentioned for the Resident

Commissioner post include Sen. Ángel Rosa and ex-Rep. and ex-PDP President Héctor Ferrer. While the PDP primaries for this post will be interesting, most of the focus will be the New Progressive Party (NPP). Most observers are keeping their eyes on the NPP primaries, namely for La Fortaleza, with some political analysts saying that whoever wins these primaries will win the 2016 gubernatorial elections. Resident Commissioner Pedro Pierluisi and Ricardo Rosselló have made their candidacies for governor oﬃcial, while ex-Senate President Thomas Rivera Schatz is expected to make his announcement to run for

La Fortaleza in the coming days. For the Resident Commissioner race in the NPP, ex-House Speaker Jenniﬀer González has made her candidacy oﬃcial, while ex-San Juan Mayor Jorge Santini is considering aspiring to the post. Even ex-Gov. Carlos

Romero Barceló half-jokingly hinted at his availability for that position. At the end of the year, the political atmosphere in the NPP was uncertain because even though Pierluisi and Rosselló have turned their sights on the gubernatorial race, their troops have yet to be organized and they have yet to clash on positions regarding diﬀerent issues, particularly how they will move the statehood cause forward and how they will manage Puerto Rico’s massive $70 billion public debt. Make no mistake, the 2016 elections are going to be very interesting, to say the least. 䡲

—IT and RF

DAY

Most observers are keeping their eyes on the NPP primaries, namely for La Fortaleza, with some political analysts saying that whoever wins these primaries will win the 2016 gubernatorial elections.

THURSDAY, JANUARY 14, 2016

“On the Third day of Christmas, the Government Gave to me…”

Three Nasty Clawbacks...

hen the government of Puerto Rico was seeking a $2.95 billion bond deal earlier this year, a confluence of events impeded the deal, foremost among which was lack of investor confidence tied directly to nasty infighting between the Executive branch and the Legislature. Like some kidney stone coming down the pike, the obstruction impeded passing a hike to the petroleum products tax known as la crudita that was to have guaranteed the bond issue. Back and forth, the legislators went on the issue adding language to the measure that bondholders demanded to make certain the revenue stream could guarantee payment. They wanted automatic triggers—spikes

in the hike and interest-rate ceilings—to guarantee their investment. Even then, the capital markets were looking at the deal with skepticism because they knew the revenue stream could be subject to clawbacks. “The uncertainty extended in part to what they call clawbacks, which is money the government can use if there is a gap in the general fund to repay the constitutional debt,” Government Development Bank President & Chairwoman Melba Acosta told Caribbean Business during an interview in April as the debt crisis was ramping up. “They saw la crudita as something that was clawbackable, so the bond deal supported by la crudita had to be put on hold.”

This became a self-fulfilling Yuletide prophecy when Puerto Rico CFO Acosta announced they would be using clawbacks to tap into la crudita revenue streams to make debt-service payments due on Highways & Transportation Authority, Infrastructure Authority and Metropolitan Bus Authority debt, among others. The investment community is none too pleased. Leading the line of pouting creditors are monoline bond insurance companies that are on the hook for some $128 million due on Jan. 1, out of $302 million due for the Puerto Rico Electric Power Authority.

DAY

“From our perspective, the clawback is a patent attempt to revise the provisions of the constitution and contracts without justification or the required process,” say CEOs in the bond insurance realm. The rogue Gov. Alejandro García Padilla is probably saying, “Bah humbug, me vale.” 䡲

The rogue Gov. Alejandro García Padilla is probably saying, “Bah humbug, me vale.”

—PSR

“On the Fourth day of Christmas, the Creditors Gave to me…”

Four Seething Monolines (the big Cuatro)... DAY

What is the monolines’ take on the commonwealth’s restructuring? “Si no me dan de beber, lloro.”

f ever there is something so great about Puerto Rico’s never-ending Navidades , it must be our custom of parrandas —think of them as Christmas caroling on steroids. Here’s how it goes: a giant group of people descends upon your home armed with congas , cuatros , güiros and guitars yelling, “ Asalto ,” as in “Stick up!” Then they break into rousing aguinaldos , or Spanish Christmas carols. Some of the greatest hits are Si no me dan de beber, lloro (If you don’t give me a drink, I’m gonna cry) and Mi burrito sabanero (My Sabanear donkey, or

something to that effect), which has a great chorus that goes “Tuki tuki tuki tuki, tuki tuki tuki tá,” (like the red herring in financial printing). From house to house, everyone goes, partying, eating and drinking until the crack of dawn, and then it is all lamentation the next day with plenty of moral hangovers—that’s when you drink so much that you regret every excess you have enjoyed throughout your life. Something like the capital markets—first greed, then fear. Just ask the big four monoline bond insurers who are on the hook for nearly $16 billion

in exposure to commonwealth debt. The ones fearing the biggest pinch are Assured

Guaranty, the Municipal Bond Insurance Association Inc.’s National Public Finance Guarantee, Ambac Assurance, Syncora Guarantee, which have a wide spectrum of Puerto Rico debt. Ambac, which has some $4.2 billion of exposure on Puerto Rico debt, has to cover $11 million of the more than $100 million in Highways & Transportation Authority debt due on Jan. 1, 2016. What is the monolines’ take on the commonwealth’s restructuring? “ Si no me dan de beber, lloro.” 䡲

—PSR

THURSDAY, JANUARY 14, 2016

12 DAYS

“On the Fifth day of Christmas, the Three Kings Gave to me…”

Five Loyal Dissidents...

DAY

And to quote from Seinfeld lore’s infamous Soup Nazi, “no asopao for you!”

s he had repeatedly said, Gov. Alejandro García Padilla has had to deal not only with the New Progress Party opposition, but also with the “loyal insensitivity and irresponsibility” (his words) of some of his fellow Popular Democratic Party members, namely Reps. Luis Raúl Torres, Luis Vega Ramos, Manuel Natal, Luisa “Piti” Gándara and Ángel Matos. The “loyalist opposition,” as former Gov. Pedro Rosselló used to refer to such beloved characters during his term in oﬃce, has done everything within its power to “do the right thing,” sometimes even “with a little help from their friends” —the no less loyal mayors of San Juan, Comerío and San

Germán. When the dissidents were in da’House—including the late Carlos Vargas Ferrer, who is now in a higher realm due to his untimely passing —García Padilla was sure to have his hands full trying to explain why increasing the 7% sales & use tax to a 16% value-added tax (VAT) would be “a good thing” because most people would apparently not pay income taxes. What wasn’t to like?

The dissidents, with a little help from their friend, San Juan Mayor Carmen Yulín Cruz, said “the VAT is good for the government but bad for the people.” Everybody except the governor cheered for the dissidents. So, García Padilla ended up signing a diﬀerent bill that increased the sales tax anyway and kept income taxes in place. Of course, now that it is a well-known fact that

the government has no cash to reimburse taxpayers for overpaying on their taxes, we all realize things could have been diﬀerent. That is why none of the five dissidents should expect a Christmas card from La Fortaleza this year. And to quote from Seinfeld lore’s infamous Soup Nazi, “no asopao for you!” 䡲

—JAH

“On the Sixth day of Christmas, the GOP Gave to me…”

Six Republican Windbags (Plus one?)...

he Republican primary slate has been looking like an episode of “Game of Thrones,” with so many characters it’s sometimes diﬃcult to keep track of them—and perhaps the same amount of backstabbing. With the Republican-controlled Congress turning its back on Puerto Rico regarding any kind of bankruptcy protection or implementing a fiscal control board for the commonwealth, cynicism surrounding the 2016 U.S. presidential elections is arguably at an all-time high among Puerto Ricans. That said, a look at six of the main Republican hopefuls is in order, starting with Donald Trump, who has ruﬄed feathers with a brand of ham-fisted

populism worthy of “All the King’s Men.” With his remarks against women and Hispanics, Trump has earned the scorn of many, but perhaps his latest faux pas—a call to ban all Muslims from entering the U.S.—may prove to be his ultimate undoing. Speaking of disapproval, Ted Cruz is perhaps the only person the Republicans abhor more than Trump, with party statesmen such as John McCain and John Boehner saying they just don’t like the man. Then there’s

Marco Rubio, who in a seeming fit of cognitive dissonance, visited Puerto Rico in September looking for campaign donations, while simultaneously saying he disapproved of any moves to grant the island any bankruptcy protection. New Jersey Gov. Chris Christie hasn’t been able to move past allegations surrounding the George Washington Bridge scandal, in which oﬃcers reportedly colluded to close lanes and create traﬃc jams for political reasons. Despite his family

background, Jeb Bush has fared a bit better than most and has paid plenty of lip service to Latinos, yet his campaign has been anemic at best and his stock hasn’t risen much. Finally, there’s retired neurosurgeon Ben Carson, whose ultra-conservative remarks regarding abortion, gun control and gay rights have made critics question the necessary intelligence to become a brain surgeon. We have six windbags down, but there seems to be someone missing… Oh, that’s right, Carly Fiorina. True, she may have brought HP to the brink of bankruptcy, but we won’t hold that against her; for now. 䡲

—DC

DAY

The Republican primary slate has been looking like an episode of “Game of Thrones,” with so many characters it’s sometimes diﬃcult to keep track of them—and perhaps the same amount of backstabbing.

THURSDAY, JANUARY 14, 2016

“On the Seventh day of Christmas, the Government Gave to me…”

Seven-Figure Advisers...

n Rudolph and Ravitch; Dancer and Rhodes; Vixen and Millstein—Oh, what fun it is to ride on the commonwealth’s open sleigh. Although Gov. Alejandro García Padilla announced he wouldn’t be running for a second term, he abdicated the charge to which he was elected months ago in favor of very pricy bankruptcy lawyers and restructuring experts—many of whom make seven-figure salaries. And worth every penny. After all, it isn’t easy hosting a dog and pony show with former International Monetary Fund Managing Director Anne Krueger—no relation to Freddy—but downright scary in both her stern delivery and the message to some 300 creditors who gathered

at an investor conclave in New York last March. Just keeping a straight face during the sham conference to present Krueger’s disturbing caveat—“they just can’t pay you without suﬀering a slow death”—was worth a king’s ransom. You could just see those g out fidgety creditors breaking s of that Quiet in a chorus c: “We’re Riot classic: a Take It” or not Gonna l, The Who’s better still, em: “[We] rock anthem: won’t Get Fooled ut those inAgain.” But vestors satt there and ng. As we said, played along. onwealth’s the commonwealth’s ing restructuring brigades are worth millions.

Besides, what’s tens of millions of dollars to an island that is facing a debtservice payment schedule that climbs to $5 billion in 2016? Just look at the pedigree— Jim Millstein, chairman & CEO of Millstein & Co. is a former chief restructurg oﬃcer (CRO) ( ) for ing the U.S. Treasury, who, along with Puerto Rico Electric Power Authority (Prepa) CRO Lisa Donahue, Donahue stand to receive a hefty bonus in the seven-figure range if

they manage to successfully restructure Prepa’s debt. Then there’s Steven Rhodes, the bankruptcy judge who presided over the reorganization of debt in Detroit and scared the living bejeezus out of creditors as he whistled the tune “If I had a hammer, I’d hammer in the morning,” during their depositions. And last but not least, there’s Dick Ravitch, a former lieutenant governor of New York, who kicked oﬀ a press conference in La Fortaleza with the caveat, “I don’t work for anyone, I am here to help because I love Puerto Rico.” That is worth at least a glass of some homemade coquito. 䡲

—PSR

Jim Millstein

DAY

Dick Ravitch kicked oﬀ a press conference in La Fortaleza with the caveat, “I don’t work for anyone, I am here to help because I love Puerto Rico.” That is worth at least a glass of some homemade coquito.

“On the Eighth day of Christmas, the Creditors Gave to me…”

Eight Prepa Extensions...

DAY

The tune really goes “eight maids a-milking,” which is fine since they have been milking deadlines at the Puerto Rico Electric Power Authority (Prepa) all year long.

he tune really goes “eight maids a-milking,” which is fine since they have been milking deadlines at the Puerto Rico Electric Power Authority (Prepa) all year long. The utility’s restructuring maids were able to get eight extensions, and then some, to the forbearance agreements that have kept the utility and its creditors out of the courts. And just like Christmas in September, Prepa was finally able to reach deals with some of its creditor friends—a bondholder group, fuel-line lenders and the Government Development Bank—with a restructuring letter for Santa sent

to the North Pole back in November. The wish list includes a roughly $700 million reduction to the utility’s debt, modern privately run powerplants, the approval of the Prepa Revitalization Act and new debt, along with a new rate structure. To the tune of about $28 million, restructuring elves—and their advisers—have been working hard all year long to achieve every item on the list. But the Grinch hasn’t stopped trying to steal Prepa’s Christmas, and the utility still has to make amends with some insurer friends to remain on the good side of Santa’s Naughty or Nice

Lisa Donahue List. Zigzagging through negotiations with the clock about to hit the 18th deadline of the year, the utility was about to bring its bond

insurers onboard their Santa’s wish list—the restructuring support agreement. All insurers want for Christmas is less risk and to avoid a Prepa default, even if that means giving the utility short-term liquidity to keep it afloat. And despite all the fine print in the restructuring deal…“Oh, what fun it is to ride in a one horse open sleigh.” There is nothing like some suspense heading into Christmas Eve, and as Caribbean Business was going to bed, it seemed Prepa and its creditors would get themselves a happy new deal—at least for now. 䡲

—LJV

THURSDAY, JANUARY 14, 2016

12 DAYS

“On the Ninth day of Christmas, the Federal Authorities Gave to me...”

Nine More Indictments... (at least)

“

DAY

Up to now, this federal parrandón navideño has given at least nine people (and counting) their unwanted holiday gifts.

ú eres la causante de las penas mías, y yo me moriría si algún día dejo de amarte.” (You are the cause of all my sorrows, and I would die if one day I was to stop loving you.) This seems to be the traditional Christmas carol being hummed right now by some of the political leaders who are in the sights of federal authorities, linked to a government-corruption scheme regarding contracts with the Alejandro García Padilla administration. The sorrowful tone is headed by House Speaker Jaime Perelló, whose close collaborator, House Administrator Xavier González Calderón, has been accused, along with Anaudi Hernández Pérez, an entrepreneur and friend of

the governor. As part of these unwanted Christmas gifts, Perelló had to appear for a second time before a federal Grand Jury that is investigating the alleged scheme. Many are wondering if this holiday will present those accused several years in jail if it is proven in court that they were indeed part of a corruption scheme that yielded them thousands

of dollars in public funds. Up to now, this federal parrandón navideño has given at least nine people (and counting) their unwanted holiday gifts. While the feds are attached to the tradition of Santa Claus, it wouldn’t be surprising that Perelló and some of his other special assistants at the House, who are allegedly linked to this scandal, will

receive their gifts closer to Three Kings Day, at the beginning of next year. Curiously, the heat that is starting to be felt in Perelló’s kitchen is increasing fast, as the federal investigation continues to deepen regarding the alleged government corruption scheme, as many are wondering how much did Perelló know about a contract to provide telephone services to the House. The not-so-wished-for gifts from the feds aren’t limited to employees and former employees of the House, but also to high-level oﬃcials at the Puerto Rico Aqueduct & Sewer Authority, La Fortaleza and other government agencies. 䡲

—IT

“On the 10th day of Christmas, the Three Kings Gave to me…”

10 Seats A-Shifting...

ow that Gov. Alejandro García Padilla’s decision not to run for re-election has been announced, let the game begin! The musical chairs game, that is. Well, truth be told, David Bernier jumped the gun last October by beating everyone (namely Senate President Eduardo Bhatia and possibly San Juan Mayor Carmen Yulín Cruz Soto) to the best chair: the governor’s, or the so-called hot seat. Of course, we can’t be so naïve as not to know there was a kind of pitcher-catcher agreement there. And no sooner had the governor announced he wouldn’t run again, than Jorge Colberg (former secretary of Public

Aﬀairs and now the Popular Democratic Party’s secretary general) and Jesús Manuel Ortiz, who had been training along with Víctor Suárez (former chief of staﬀ, now secretary of State) for the game, made their moves. As in any line of scrimmage, everybody went against everybody, but Suárez seems to have gotten the short end of the stick when he was left alone to play with himself. The game now reaches the Legislative branch and even possibly the Judiciary. From La Fortaleza, Ortiz just announced he is eyeing an at-large seat of the possible six available

in the House of Representatives. Getting one of the atlarge seats is no easy feat, but with at least one representative setting his sights on a bench in the appellate court,

another threatened by a federal grand jury and a third one hanging by a thread for being the rookie dissident, Ortiz could be thinking he’s got a 50-50 chance. The remaining two seats are up for grabs as far as Ortiz is concerned. Meanwhile, in the Senate, and playing in stealth mode, Bhatia seems to be readying himself to exchange one presidential chair for a bench—Chief Justice Bhatia has a nice ring to it, doesn’t it? In the end, who will be left standing come las octavitas is still anyone’s guess. 䡲

—JAH

DAY

10 The game now reaches the Legislative branch and even possibly the Judiciary.

THURSDAY, JANUARY 14, 2016

“On the 11th day of Christmas, Legislators Gave to me…”

An 11.5% Sales tax…

ast July, the Puerto Rico Legislature increased the 7% sales & use tax (IVU by its Spanish acronym) to 11.5%, as part of a controversial tax-reform process the Alejandro García Padilla administration kicked oﬀ to shore up its rapidly depleting coﬀers. This is just one of about $2 billion in new taxes that the government has implemented during the past few years, and detailing all of them would take roughly the space of half this newspaper. And the story isn’t over yet, with the IVU scheduled to become a value-added tax (VAT) on April 1 of next year, of all days. When it comes to the 11.5% IVU, it delivers a special sting in consumers’ pockets,

especially since it’s visible on any receipt. Now, customers may think twice before splurging on that 65-inch flatscreen TV; they may be thinking: “Sure, 7% represents an additional expense, but hey, it’s just a little bit more. But 11.5? Well, I don’t know…” As a result, it has become increasingly tough for Puerto Rico’s business sector to hold up its end of the bargain in propping up the island’s economy and creating much-needed jobs. Further compounding the situation is a 4% business-to-business (B2B) tax that was implemented last October on all service-related transactions. The B2B tax is scheduled to increase to 10.5%, again next April 1.

The months between October and April have been particularly tough on businesses, akin to being on the receiving end of a Rhonda Rousey armbar. That’s because as long as the IVU remains in eﬀect,

businesses paying the 4% B2B tax can’t receive a corresponding credit in their income tax forms. Although the B2B will increase to 10.5% in April, it will be implemented under the newfangled VAT system, which should provide more transparency and allow for tax credits. The VAT system also intends to solve a longstanding problem with the IVU —namely, that it acts like a faulty sieve, with the island’s Treasury Department capturing about only half the revenues it should. It remains to be seen whether the government will be able to successfully implement so many tax changes in such a short time. 䡲

DAY

11 The months between October and April have been particularly tough on businesses, akin to being on the receiving end of a Rhonda Rousey armbar.

—DC

“On the 12th day of Christmas, the Three Kings Gave to me…”

12 Months ‘til Exit...

DAY

12 Populares know best—less is more and more is less—so, why ruin it? There are only 12 months left ‘til the final curtain.

fter a term in office full of challenges and not very unexpected difficulties met with faulty rationale, ineffective and subpar performance, Gov. Alejandro García Padilla decided to give the people of Puerto Rico the best Christmas gift any bankrupted administration could buy: He decided not to run for re-election, but not that he didn’t want to “with all his heart.” At the same time, he also gave us the not-so-secret gift No. 2: He will dedicate “all his time and all his energy to face the challenge of providing a future to our people,” as he has been doing for the past three years. While most people do appreciate García Padilla’s first

gift—including several thousand populares—gift No. 2 has many looking for the next white elephant gift-exchange party. It isn’t a matter of them wanting to be accused, God forbid, of being re-gifters, like some ungrateful character in Seinfeld lore, but indeed, there are some gifts whose

usefulness is far less than the cost of just having them. “You know Alejandro, you don’t need to keep on ‘giving’ to the people. Some people even think you have given too much,” said one of his close supporters, who is now a Bernier advocate. To the governor’s lovely

second gift, critics have said it will only cause more chaos, panic and disorder, not only among Puerto Rico’s creditors, but also among local residents as well. But populares know best—less is more and more is less—so, why ruin it? There are only 12 months left ‘til the final curtain. Now just imagine Luisito Vigoreaux hosting the traditional New Year’s bash and the orchestra playing the tunes of Auld Lang Syne. “Should old acquaintance be forgot, and never brought to mind? Should old acquaintance be forgot, and days 0’ lang syne?” The answer is: Yes! 䡲

—JAH

THURSDAY, JANUARY 14, 2016