Puerto Rico Bondholders Fighting to Know What Island Spends

(Bloomberg) -- Puerto Rico’s effort to persuade bondholders to forgive a big chunk of its $74 billion of debt has been stalled by a major stumbling block: The government’s murky finances have left neither side entirely certain about how much it can afford to pay.

The most recent annual financial statements are for 2014. Computer systems spanning dozens of departments don’t talk to each other. Independent agencies either can’t, or won’t, provide details about how they use taxpayer funds. Even the island’s fiscal recovery plan sets aside an extra $600 million a year to cover expenses that the government may not know about.

At a court hearing this month, bondholders complained that Puerto Rico was withholding key information during negotiations and urged a federal judge to force the U.S. territory to turn it over.

“If you are going to settle with the creditors you need to know how much money is available,” said Gustavo Velez, president of Inteligencia Economica Inc., an economic consulting firm based in Puerto Rico. “It’s crucial to have that information.”

On Thursday, a federal judge sided with general-obligation bondholders, including Aurelius Capital Management LP and Monarch Alternative Capital LP, who have complained for months that the government and a federal oversight board have not given them enough access to basic spending information. The board and the government had argued that they don’t have some of the information being demanded and that other data was being withheld because commonwealth officials say creditors don’t have a right to it.

The agencies and bondholders have 10 days to file a joint proposal on what types of information they both agree can be turned over. The judge will then hold hearings to decide which documents, if any, can be withheld

The lack of reliable information has intensified the litigation surrounding Puerto Rico’s record-setting bankruptcy, which has already led to clashes between owners of various types of bonds over who has the biggest claim to the government’s cash. The territory’s financial strains have been made even more acute by the devastation brought by Hurricane Maria, forcing officials to redraw its turnaround plan to take account of the toll.

The bondholders are demanding information from both the government of Puerto Rico and the federal oversight board, which share responsibility for producing and implementing a plan that will end Puerto Rico’s budget shortfalls. The oversight board has the additional burden of turning that fiscal plan into a debt-adjustment proposal that must be approved by a federal judge so the commonwealth can reduce its bond and pension liabilities.

But the oversight board shares some of the frustration of creditors.

“Not having a clear sense of where things are relative to accounts payable -- and the continued issue of delays in payments -- at the same time that we are looking at what’s happening economically in Puerto Rico, and at the same time that you have significant balances, is frustrating,” Ana Matosantos, a member of the federal board that’s overseeing the island’s finances, told officials from Puerto Rico’s Fiscal Agency and Financial Advisory Authority during the panel’s last public meeting on Dec. 5.

One problem is that some departments still manually record information such as payments to vendors and suppliers. As a result, such expenses this year are as much as $250 million more than the $500 million that’s already been logged, fiscal agency officials told the oversight board at the meeting.

Many of the government computer systems also use different software programs, making it difficult to analyze broader spending patterns. And when computers systems have been upgraded, the results have been mixed. The University of Puerto Rico spent $80 million on an Oracle Corp. database that didn’t work, according to a review by the government comptroller, Yesmin Valdivieso.

To fix the problem, the fiscal plan proposes spending money on new information technology systems and reforming the government’s financial reporting processes, the board said in an emailed statement.

“The establishment and design of a new accounting, payroll, budget forecasting and control, and financial and fiscal oversight information system for the commonwealth is also needed,” the statement said.

As long as creditors don’t have access to the kind of data they think they need, it will be harder to get a deal in mediation and the expensive litigation fight will continue, said retired bankruptcy Judge Richard Schmidt.

“Bad information leads to a bad deal, and creditors know this,” Schmidt said. “You really need to know what the facts are. How can you know if you’re making a good deal?”

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