Home' Trinidad and Tobago Guardian : December 10th 2015 Contents BG20 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 10 • 2015
Puerto Rico may have dodged a
bullet when it avoided default
last week, but its decision to
commandeer revenue that was
supposed to meet future debt
payments will invite creditor
pushback and possibly lawsuits.
Creditors have long criticised Puerto Rico's
spending habits, and may have the ammunition
to bring those complaints to court now that
the Caribbean island plans to divert funds to
cover constitutionally-guaranteed debt and
essential government services.
The US territory, which owes creditors US$72
billion, last Tuesday avoided defaulting on a
US$355 million payment. But it owes another
such payment on January 1, which can only
be made if revenue that was earmarked to
repay and service other debt owed by various
government agencies is repurposed, Governor
Alejandro Garcia Padilla said.
The island said it also needs to use that rev-
enue to keep some key services operating,
though it has not specified which ones. Many
creditors said these so-called clawbacks are
premature, and question whether they will be
used on truly essential services.
The government hasn't been specific about
the revenue that will be grabbed. Bonds vul-
nerable to the switch include US$4.6 billion
at Puerto Rico's highway authority (HTA),
US$1.9 billion at its infrastructure authority
(PRIFA), and additional debt at a public trans-
portation authority and convention centre
authority, according to an executive order
signed by Garcia Padilla.
One creditor source with exposure at the
affected agencies said a lawsuit was possible,
insisting that clawbacks were being misused
under Puerto Rico's laws and constitution.
"They haven't met the requirements to permit
a clawback under the constitution ... you can
assume we're looking at all the different
avenues," said the source.
Two other sources said that, while lawsuits
are an option, they were more inclined to wait
to preserve their negotiating ability.
"There is a very high probability of protracted
litigation," said Ted Hampton, vice president
at Moody's Investors Service. "It's a bit like
a race or some kind of competition - people
are waiting to jump in when the whistle blows."
Hampton said he expected creditors would
at least consider legal action over the claw-
Puerto Rican officials have themselves
acknowledged the potential for lawsuits. Justice
Secretary Cesar Miranda said last week that
the clawbacks could open the door to litigation
because they "could be interpreted as a tech-
nical default, in the way that we retain money
destined to eventually pay a debt when due."
Creditors' frustration is likely to only increase
in the next few weeks. For example, the island
by December 20 owes US$120 million in
Christmas bonuses for public sector workers,
which are a constitutional requirement in
Puerto Rico. Paying them at the expense of
bonds would likely irk creditors, yet skipping
them would outrage labour unions.
Exactly how the diverted cash is spent will
invite investor scrutiny.
A 1980 law in Puerto Rico dictates that any
clawbacks should be used first to pay consti-
tutionally backed debt, and then to fund essen-
tial services. Puerto Rican officials suggested
they plan to use them for both purposes at
"There is little question that (the clawbacks)
are a patent attempt to revise the provisions
of the constitution, legislation and contracts
without justification or required process," said
Nader Tavakoli, interim president and chief
executive officer of Ambac Financial , which
insures about US$1.1 billion principal of bonds
at the affected agencies.
A lawsuit could also challenge the type of
services being funded, especially if they include
what creditors may claim are discretionary
items like Christmas bonuses.
Still, creditors wary of litigation say they
want to be careful not to hurt progress in
ongoing talks with the island on a consensual
debt restructuring agreement. "We implore
the governor to get back to the negotiating
table toward consensual solutions, which are
achievable," Tavakoli added.
Puerto Rico has said it wants to structure
a universal exchange offer, or "superbond,"
for creditors across many different debt classes.
Litigation would make that process more dif-
ficult, said several creditor sources, threatening
the anticipated high ratings of new debt that
could attract creditors to an exchange offer in
the first place.
If creditors can help the island to make its
January payment without clawbacks, litigation
may be avoided. Its next major maturity date
is in May, when US$422.8 million is owed on
senior Government Development Bank notes,
according to a source familiar with the situ-
ation. That allows more time to talk, free from
the pressure of looming defaults.
Few people place great store in the ability of
negotiators to reach a meaningful deal during
the conference on climate change that began in
Paris this week. One problem is that some politi-
cians refuse to admit that the problem is real.
Those who work in the financial markets,
however, have to take the issue seriously. Ever
since being hit by losses from Hurricane Andrew
in 1992, insurance companies have been modeling
climate risks. Bank of America Merrill Lynch
recently weighed in with a 332-page report on
its economic and financial impact.
A changing climate, and the eventual efforts
of governments---however reluctant---to deal
with it, could have a big impact on investors'
Companies that produce or use large amounts
of fossil fuels will face higher taxes and regulatory
burdens. Some energy producers may find it
impossible to exploit their known reserves and
will be left with "stranded assets," deposits of
oil and coal that have to be left in the ground.
Other industries could be affected by the eco-
nomic damage caused by more extreme weather,
including storms, floods, heatwaves and droughts.
"Investors have to worry about a material and
unexpected loss of capital," said Ewen Cameron
Watt, chief investment strategist at Blackrock,
a fund-management group.
Moody's, a rating agency, has tried to quantify
the impact for bond markets. It puts three indus-
tries---deregulated power generation, coal mining
and coal terminals---at "immediate and elevated"
risk from climate change. Between them these
sectors have US$512 billion in rated debt. Another
eight sectors, including carmakers, miners and
oil refiners, with US$1.5 trillion of rated debt,
have "emerging, elevated" risk. A further 18,
with US$7 trillion of debt, face risks in the medi-
um term, defined as more than five years ahead.
That leaves the vast majority of the corpo-
rate-bond market, encompassing US$59 trillion
of rated debt, in the low-risk category.
Broadly speaking, investors who are concerned
about the issue follow three approaches. The
first is an outright boycott of the dirtiest indus-
tries. The latest example is Allianz, a German
insurance group, which has announced that it
no longer will invest in companies that "derive
more than 30 per cent of revenue from coal
mining or generate over 30 per cent of their
energy from coal." The result will be a divestment
of US$238 million in the shares of coal groups.
Allianz will continue to hold its US$4.13 billion
of bonds in such companies, but won't buy any
more. More than 400 investment institutions
have made similar commitments, according to
350.org, a green lobby group.
The second approach is to maintain stakes in
carbon-producing firms but to try to engage
with their management in an attempt to change
their behaviour. Research by Blackrock shows
that companies that have reduced their carbon
intensity, defined as emissions divided by sales,
have outperformed the market since March 2012,
when proper data on corporate emissions first
began to be collected.
A third approach is to skew portfolios toward
the companies that will do well from others'
attempts to curb carbon emissions. Some low-
energy technologies already have had success.
For example, light-emitting-diode bulbs consume
less than 15 per cent of the energy of incandescent
bulbs. They had only one per cent of the lighting
market in 2010. This year their market share is
28 per cent, and Goldman Sachs forecasts that
it will be 95 per cent by 2025.
Then there is renewable energy. So far it gen-
erates only a small proportion of global power,
but Bank of America Merrill Lynch says that,
globally, wind and solar power made up nearly
half of the additional energy-generating capacity
installed in 2014 and may comprise between 70
per cent and 80 per cent of new capacity between
now and 2030.
There is little evidence that following these
strategies has had a big positive impact on returns
so far. Standard & Poor's has identified the 100
highest and lowest emitters in its index of 1,200
global stocks. The highest emitters have done
marginally better since 1999. That reflects the
strong performance of energy companies during
the period of rising commodity prices. In recent
years, however, as oil prices have dropped, the
low emitters have caught up.
Puerto Rico risks
creditor ire by
using up bond
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