Assured Guaranty Letter Regarding the Annual Report of the Financial Oversight & Management Board for PR

August 21, 2017

Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd., sent the following letter on August 21, 2017, to Chairman Carrión in response to the first Annual Report of the Financial Oversight & Management Board’s assessment of the progress made to date in addressing the Puerto Rico financial crisis.

José B. Carrión III
Jacob Javits Federal Bldg., 26 Federal Plaza
Room 2-128
New York, NY 10278

Re:  Oversight Board Annual Report

Dear Chairman Carrión,

We have read the first Annual Report of the Financial Oversight & Management Board for Puerto Rico (the “Oversight Board”), and are compelled to respond to the Annual Report’s assessment of the progress made to date in addressing the Puerto Rico financial crisis.

Assured has participated in Puerto Rico’s capital markets for decades, providing insurance policies to lower the island’s cost of financing on bonds issued by the Commonwealth and its public corporations. We have likewise participated in municipal and infrastructure markets throughout the United States and globally, and have worked out numerous distressed situations and bankruptcies.  Based on this experience, it is Assured’s view that a number of the Oversight Board’s actions have resulted in setbacks rather than progress towards achieving the Oversight Board’s mandates.  Below please find a sample of conclusions in the Annual Report with which we differ.

The Annual Report states “[t]he Oversight Board has made substantial progress in its first year toward fulfilling its statutory mandates of helping Puerto Rico to achieve fiscal responsibility, regain access to capital markets, restructure its outstanding debt, and return to economic growth.”  In fact, the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) cites only two “purposes” for the Oversight Board, namely “to achieve fiscal responsibility and access to the capital markets.” (Title I, Sec. 101 (a)).  These exclusive goals are reiterated in the general introduction to the requirements for a Fiscal Plan (Title II, Sec. 201 (b) (1)).  PROMESA also lists a number of requirements for any fiscal plan to qualify for Oversight Board certification, notably the requirement to “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreement of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act.” (Title II, Sec. 201 (b) (1) (N)) – a requirement that the Oversight Board has steadfastly failed to address.

The Annual Report cites the certification of a ten-year fiscal plan and FY’18 budget for the Commonwealth and its instrumentalities, including component units PREPA, PRASA, and HTA as evidence of substantial progress.[1]  We submit, however, that, notwithstanding our initial hopes for PROMESA and the role of the Oversight Board, certification of fiscal plans by the Oversight Board has not ensured that such plans are accurate, sound, reasonable, or even lawful.. 

More specifically, the fiscal plans certified by the Oversight Board collectively:

  • Fail to differentiate between essential and non-essential services;
  • Incorporate unrealistic assumptions on economic growth, in order to manufacture dire financial projections that reinforce a crisis-narrative (and which have already been outpaced by the Commonwealth’s publicized actual collections, cash reserves, and even Medicaid allocations);
  • Grossly underestimate the federal government’s commitment to the welfare of Puerto Rico, as evidenced by an assumption of no renewed federal healthcare funding;
  • Pad the fiscal plan expenses with an unexplained ‘expense reconciliation adjustment,’ or, in plain-speak, a +$600 million per year unallocated cost overrun fund that defeats the purpose of budgetary restraint and government accountability;
  • Recategorize and/or lump-together material budget line-items under overly-broad categories with little to no accompanying explanation, with the effect of obscuring year-over-year changes in spending;
  • Fail to update budgets and fiscal plans to account for recent revenue outperformance;
  • Fail to provide adequate transparency into the data and assumptions supporting the fiscal plans and budgets; and
  • Ignore the relative rights, priorities, liens and pledges securing bonded debt issued by discrete issuers in favor of a consolidated plan that runs counter to the Puerto Rico Constitution’s priority of payments and misappropriates pledged collateral and special revenues legally belonging to creditors.

Furthermore, the Oversight Board has declared that fiscal plans, once certified, are immune from third-party challenges, scrutiny or negotiation.  Information critical to diligence of the fiscal plans and their underlying assumptions by creditors has been denied or occasionally offered in exchange for concessions.[2] 

In light of this flawed dynamic, certification of deficient fiscal plans seems intended to pressure creditors to make concessions against their interests, but instead has led to a barrage of litigation and a breakdown in discussions, all counterproductive to achieving the goals of PROMESA, or any consensual resolution of disputes. The Annual Report measures progress by the speed in which fiscal plans have been certified and Title III proceedings commenced, while in fact these fiscal plans have been certified without prudent review, accounting and scrutiny, not to mention input from creditors and other constituents, as contemplated by PROMESA.

The Annual Report states that “the Oversight Board and its advisors have held numerous constructive meetings, mediation sessions and presentations with creditors to restructure the debt of the Commonwealth and its various covered entities….”  Assured, as one of the largest creditors in the aggregate, has not found any meetings to date on debt restructuring to be constructive, and has instead witnessed the Oversight Board’s refusal to proceed with the sole voluntary agreement deemed certified by PROMESA (the PREPA Restructuring Support Agreement (“RSA”)).  An express precondition under PROMESA to a Title III filing is that the Commonwealth and creditors engage in “good faith” debt restructuring negotiations.  We find it reprehensible that the Oversight Board purported to address this prerequisite by requesting perfunctory meetings with creditors mere weeks, or in some cases days, prior to those entities’ Title III filings, making proposals with no effort to negotiate, and with full knowledge that such proposals were not commercially reasonable and would be categorically rejected by creditors.

Where the PREPA RSA was exhaustively negotiated over the course of multiple years, it is beyond reason to expect that true, good faith negotiations in respect of ~$60 billion of financial debt encompassing multiple issuers could occur on the eve of already planned Title III filings—even if those proposals had been constructive.  Creditors are willing to commence real negotiations, so long as those negotiations are predicated on fiscal plans that comply with PROMESA, and are accompanied by the opportunity to perform meaningful diligence and contribute to the development of the respective fiscal plans. 

The Annual Report highlights the importance of regaining access to the capital markets if the Commonwealth is to grow and reinvest.  Long-term stakeholders in Puerto Rico such as Assured and the people of Puerto Rico, including local investors, business owners, employees and pensioners, have a vested interest, not an academic or political one, in seeing the island return to financial responsibility, stability, and lawful order.  The current course charted by the Oversight Board will not restore market access.  Indeed, by challenging or disregarding the rule of law at every opportunity, the Oversight Board is destroying the prospect of future capital market access.  The Oversight Board has advocated that all Puerto Rico entities are subordinated to the social needs and entitlement programs of the Commonwealth, notwithstanding the Constitutional, contractual and other legal protections specifically established that prevent that outcome so that marginal credits, like the Commonwealth and its public corporations, can access capital markets at reasonable interest rates. 


We support initiatives undertaken by the Commonwealth and the Oversight Board designed to address the root causes of Puerto Rico’s economic challenges.  Deregulation, tax reform, privatization of appropriate government operations, and third-party partnerships are steps in the right direction, and we acknowledge the government and Oversight Board’s role in pursuing those measures.  We implore the Oversight Board to seek real progress with its creditors through constructive and collaborative negotiations on the basis of well-conceived and supportable fiscal plans, rather than unrealistic, illegal, and opaque fiscal plans that improperly impair creditors’ rights. 

We urge the Oversight Board to heed our concerns, and believe it is not too late to reverse course and make progress toward achieving the two goals of PROMESA: fiscal responsibility and capital market access.  As always, we remain ready and willing to support Puerto Rico’s reformation and revitalization.           

Very truly yours,


Dominic J. Frederico,
President & Chief Executive Officer

Financial Management and Oversight Board Members
Hon. Ricardo Rosselló Nevares


[1] Assured has over $5.27 billion of gross par exposure to Puerto Rico issuers covered by PROMESA.

[2] With respect to the 1,700 files the Annual Report claims have been uploaded to various data rooms, a great number of these files either (i) relate to PREPA’s operations, rather than the broader Commonwealth’s financial position, and were provided to PREPA creditors by that entity’s advisors prior to the appointment of the Oversight Board and development of any fiscal plans, (ii) are already of public record, or (iii) relate to information that is largely immaterial, rather than directly respond to creditor requests.  With respect to the information pertinent to the development of certified fiscal plans and other matters that are of great importance to creditors, the Oversight Board has refused multiple creditor requests.  We find sorely lacking the detailed financial and operating information, as well as access to government officials and their advisors that a reasonable investor would expect to receive before agreeing to any restructuring.

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