Case: LTS Doc#:2-1 Filed:05/31/17 Entered:05/31/17 17:55:53 Affidavit Page 1 of 11

Transcription

1 Affidavit Page 1 of 11 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO In re: PROMESA THE FINANCIAL OVERSIGHT AND Title III MANAGEMENT BOARD FOR PUERTO RICO, as representative of No. 17 BK 3283-LTS THE COMMONWEALTH OF PUERTO RICO, Debtor. In re: PROMESA THE FINANCIAL OVERSIGHT AND Title III MANAGEMENT BOARD FOR PUERTO RICO, as representative of No. 17 BK 1686-LTS PUERTO RICO HIGHWAYS & TRANSPORTATION AUTHORITY, Debtor. Peaje Investments LLC, Adversary Proceeding Plaintiff, No against- Puerto Rico Highways & Transportation Authority, Hon. Carlos Contreras Aponte, The Commonwealth of Puerto Rico, Hon. Ricardo Rosselló, Hon. Raúl Maldonado Gautier, Hon. José Iván Marrero Rosado, Puerto Rico Fiscal Agency and Financial Advisory Authority, Hon. Gerardo Portela Franco, Defendants. AFFIDAVIT OF THOMAS STANFORD IN SUPPORT OF MOTION OF PEAJE INVESTMENTS LLC (A FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION, AND (B FOR RELIEF FROM STAY OR, ALTERNATIVELY, ADEQUATE PROTECTION

2 Affidavit Page 2 of 11 I, Thomas Stanford, declare under penalty of perjury under the laws of the United States, that the following is true and correct: 1. I submit this affidavit in support of the (I Motion of Peaje Investments LLC (A for Temporary Restraining Order and Preliminary Injunction, and (B for Relief from Stay or, Alternatively, Adequate Protection; and (II Memorandum of Law in Support Thereof (the Motion. 1 By the Motion, Plaintiff seeks a temporary restraining order and a preliminary injunction requiring Defendants Puerto Rico Highways & Transportation Authority ( HTA and its Executive Director, Hon. Carlos Contreras Aponte (the Executive Director, to resume depositing certain Toll Revenues in which Plaintiff holds a lien and that serve as the source of payment for Plaintiff s bonds with the fiscal agent (the Fiscal Agent for those bonds as required under the governing resolution. As corollary relief, Plaintiff seeks an order prohibiting Defendants the Commonwealth of Puerto Rico and its Governor, currently the Hon. Ricardo Rosselló, the Puerto Rico Fiscal Agency and Financial Advisory Authority and its Executive Director, currently the Hon. Gerardo Portela Franco, and Hon. Raúl Maldonado Gautier and Hon. José Iván Marrero Rosado, who are Commonwealth officials, from interfering with the execution of that temporary restraining order and preliminary injunction. Finally, while Plaintiff submits that the bankruptcy stays are inapplicable in this matter, to the extent that such stays are applicable, the Motion seeks, out of an abundance of caution, relief from the bankruptcy stays, or, in the alternative, adequate protection of Plaintiff s interest in its collateral. 2. My firm RPA Advisors, LLC was retained by Plaintiff in September In April 2017, I became primarily responsible for my firm s engagement in this matter. Since that date, I have been providing services to Plaintiff as an expert in restructurings and secured lender 1 Each capitalized term used but not defined herein shall have the meaning ascribed to it in the Motion. 2

3 Affidavit Page 3 of 11 recoveries, with particular reference to toll roads. Qualifications 3. I am a Managing Director of RPA Advisors, LLC, a financial advisory and restructuring firm. I specialize in providing financial and turnaround advisory services to both companies and creditors, and have consulted on strategic planning, business plan analysis, secured lender recoveries, liquidity management, cash flow analysis, enterprise valuation, cost reduction, restructuring, divestiture analysis, financings, mergers and acquisitions, and risk management. 4. I have significant experience in restructurings of toll roads and the operators thereof. My representative engagements include advising creditor groups in connection with the restructurings and chapter 11 cases of Indiana Toll Road and SH 130 Concession Company (a/k/a Texas State Highway 130. In addition to my toll road experience, I have advised creditors and other parties in connection with bankruptcies, out-of-court restructurings, and other assignments involving companies in a variety of industries. 5. Prior to RPA Advisors, I was a Managing Director at Capstone Advisory Group, a restructuring and turnaround consulting firm. My professional experience also includes holding a Senior Manager position at Fort Dearborn Partners, a turnaround consulting firm, and fulfilling various financial roles at Abbott Laboratories. I began my career at PricewaterhouseCoopers, LLP (formerly Coopers & Lybrand, LLP, where I served a diverse client base ranging from middle-market manufacturing companies to Fortune 500 corporations. 6. I hold a Masters of Management (MBA degree in Management & Strategy, Marketing, and Health Services Management from Northwestern University s J.L. Kellogg Graduate School of Management and a Bachelor of Business Administration in Accounting from 3

4 Affidavit Page 4 of 11 the University of Notre Dame. I have also obtained a CPA certification. others: Information Relied Upon 7. In connection with my work I have reviewed the following documents, among a. Official Statement for an offering of the HTA Bonds; b. 68 and 98 Resolutions governing the HTA Bonds; c. PROMESA; d. the audited financial statement of HTA for fiscal years 2014 and 2013; e. draft audited financial statement of HTA for fiscal years 2015 and 2014; f. the Transportation Improvement Plan (TIP Fiscal Year , dated July 2016; g. the Commonwealth Fiscal Plan, dated March 13, 2017; h. the HTA Fiscal Plan approved and certified by the Oversight Board on April 28, 2017, as amended; i. the Puerto Rico Highway Transportation Authority Five-Year Forecast, dated May 20, 2015; j. the pleadings filed in Peaje Investments LLC v. García-Padilla, 3:16-cv FAB (D.P.R., in connection with Plaintiff s prior request to lift the now-expired interim stay under PROMESA; k. Plaintiff s Verified Complaint, the exhibits attached thereto, and the Motion; l. Bloomberg trading activity on the HTA Bonds; m. the testimony of witnesses who appeared at the September 2016 hearing before U.S. District Judge Francisco Besosa in Brigade, 3:16-cv (FAB, et al. (D.P.R.; n. the Puerto Rico 2040 Islandwide Long Range Transportation Plan, dated September 2013; o. the Desirability and Convenience Study for Toll Roads of the Puerto Rico 4

5 Affidavit Page 5 of 11 Highways and Transportation Authority, dated June 2010; p. letter to Governor Rosselló, Senator Rivera Schatz, and Speaker Méndez Núñez from José B. Carrión, Chair of the Oversight Board, dated May 2, 2017; q. Resolution #3 Adopted at the Seventh Public Meeting of the Financial Oversight and Management Board Held on April 28, 2017 in New York, New York; r. Report on Federal Financial Assistance Programs (Draft, dated October 20, 2016; and s. Commonwealth of Puerto Rico Financial Information and Operating Data Report, dated December 18, Since my involvement, I have also conferred with the members of my team regarding the matter. The opinions expressed in this affidavit, however, are my own. Opinion 9. Plaintiff is the beneficial owner of $65 million in uninsured bonds issued by Defendant HTA pursuant to Act No and a binding municipal resolution of HTA adopted in 1968 (the bonds issued thereunder, collectively, the 1968 Bonds. The 1968 Bonds owned by Plaintiff presently consist of approximately $30.2 million in Series AA Bonds, $12.0 million in Series CC Bonds, and $22.8 million in Series CC Capital Appreciation Bonds. The 1968 Bonds, among other things, are secured by a pledge of and lien on certain tolls and other charges derived from HTA s operation of highways PR-20, PR-52, and PR-53, along with certain other traffic facilities (collectively, the Toll Revenues. 2 Pursuant to Act. No and a separate resolution adopted in 1998, HTA has issued certain other bonds (collectively, the 1998 Bonds, and together with the 1968 Bonds, the Bonds, which are secured by a separate 2 In addition to the Toll Revenues, the 1968 Bonds are secured by a lien on the gross receipts of certain excise taxes and vehicle license fees allocated by the Commonwealth to HTA under Puerto Rico statute. The analysis contained herein is limited to the Toll Revenues and does not include any other collateral. 5

6 Affidavit Page 6 of 11 stream of revenues. 10. The resolution governing Plaintiff s Bonds explicitly requires HTA to deposit the pledged revenues on a monthly basis into a collateral account maintained with the Fiscal Agent for those Bonds. Because the 1968 Bondholders benefit from a gross lien on the Toll Revenues, HTA must first deposit sufficient funds into the 1968 Bondholders collateral account to meet the debt service and reserve requirements under the governing resolutions before it can spend the funds elsewhere. The Bonds are limited-recourse obligations, meaning they are ordinarily payable solely from the pledged revenues. 11. I have reviewed the financial projections and assumptions in: (x the HTA Fiscal Plan certified by the Oversight Board on April 28, 2017, as amended; and (y the Commonwealth Fiscal Plan, dated March 13, In reaching the opinions set forth in this Affidavit, I have analyzed the financial projections and other information contained in these fiscal plans to determine what effect, if any, the plans might have on Plaintiff s Bonds. 12. Since May 2016, the Fiscal Agent has not received the required deposits of pledged revenues into the Bondholders collateral account due to the diversion of those revenues at the direction of HTA and its Executive Director. The collateral provided to the 1968 Bondholders under the governing resolutions and the sub-accounts established under the waterfall payment protocol outlined therein are being reduced each month that the Toll Revenues are diverted. In particular, because the pledged Toll Revenues are being diverted and not deposited with the Fiscal Agent, the debt service sub-account within that waterfall is not being funded on a monthly basis as required by the governing resolutions, and the reserve sub-account has been nearly depleted to make past debt service payments on Plaintiff s Bonds. As a result, the monies remaining on deposit in the 1968 Bondholders collateral account will be insufficient 6

7 Affidavit Page 7 of 11 to make the full required installment payment of principal and interest due on those Bonds in July It is clear from the HTA Fiscal Plan that HTA and its Executive Director intend to continue disregarding the 1968 Bondholders gross lien on the Toll Revenues. Among other things, the HTA Fiscal Plan indicates that HTA and its Executive Director no longer intend to pay the Toll Revenues to the Fiscal Agent, but instead intend to use those revenues first for all of HTA s operating expenses, including for the operation and maintenance of non-toll roads and other transportation systems such as Tren Urbano. This has the effect of fundamentally altering the nature of Plaintiff s Bonds by, among other things, destroying Plaintiff s lien rights and rendering Plaintiff effectively an unsecured creditor. 14. The fact that payments of debt service so far have been made to Plaintiff does not mean that there is no continuing injury. These payments, as noted, have been made only by depleting the debt service and reserve accounts, which are supposed to be maintained above threshold amounts under formulas set forth in the governing resolutions. HTA s and its Executive Director s ongoing dissipation of Plaintiff s collateral is obviously depriving Plaintiff of its source of payment. 15. I have reviewed and analyzed HTA s publicly available financial projections and historical operating results. I have estimated 3 the present value of the Toll Revenues in perpetuity in order to analyze the potential equity cushion for the 1968 Bondholders. I caution that the analysis summarized below is subject to certain assumptions and actually overstates the 1968 Bondholders collateral position. It is designed to describe a hypothetical collateral equity cushion assuming that all of such collateral value was immediately available to the Given that HTA has not provided detailed breakdowns of its Toll Revenues and expenses, I have estimated such revenues and expenses based on publicly available information. 7

8 Affidavit Page 8 of 11 Bondholders. The overstatement arises from a number of considerations. First, the analysis is based upon an assumption that the Toll Revenues will be applied to the payment of the 1968 Bonds in perpetuity and assumes that the revenues will grow annually by 1.5%. Second, the analysis assumes that all cash flows from the Toll Revenues are applied to the 1968 Bonds and that no distributions are made to the 1998 Bonds. Under the Bond documents, however, there are limitations on the amounts available to be paid on account of the 1968 Bonds in any given year and funds from the Toll Revenues may flow down to the 1998 Bonds under certain circumstances. Because the Bonds cannot be accelerated, payments that flow down to the 1998 Bonds will reduce the total amounts ultimately available for 1968 Bonds if there are missed payments in the future. Third, the Bondholders do not have the ability to foreclose on the underlying toll roads as a means to liquidate or control the source of the Toll Revenues. Collectively, these factors increase the riskiness of the revenue stream for the holders of the 1968 Bonds. Thus, in addition to indicating that the equity cushion analysis is overstated, these factors also illustrate the need for a relatively robust equity cushion to accommodate the riskiness of the collateral. With these caveats in place, my analysis is summarized below: 8

9 Affidavit Page 9 of Bonds - Collateral Coverage Analysis (in millions of USD Range of Values Estimated 1968 Annual Toll Revenues ( Annual discount rate (2 10.0% 11.0% 12.0% Growth Rate (3 1.5% 1.5% 1.5% Net Present Value of Toll Revenues in Perpetuity 1,233 1, Plus: Estimated Amounts in Reserve Fund ( Total Value of Toll Revenues and Cash Collateral 1,276 1,146 1,041 Face Value of 1968 Bonds ( Hypothetical Equity Cushion, Assuming No Distribution to 1998 Bonds and No Deduction from Gross Lien for Operating Expenses Maximum Annual Deduction Before Hypothetical Equity Cushion Depleted Assuming No Distribution to 1998 Bonds Under the Waterfall (37.7 (29.8 (21.9 Notes: (1 Based on the HTA Fiscal Plan s projection of Toll Revenues in FY2018, less estimated PR-66 revenues for that year based on the 2016 ratio of actual 1968 Revenues vs. PR-66 (the latter of which serve as collateral for the 1998 Bonds. (2 Analysis reflects application of a range of discount factors based upon the current market environment for similar assets. (3 Based on review of the HTA Fiscal Plan and the compound annual growth rate (CAGR for the 1968 Toll Roads. (4 Per the Commonwealth of Puerto Rico Financial Information and Operating Data Report, dated December 18, (5 Adjusted for estimated accrued interest through 5/31/ As noted, this analysis assumes that the 1968 Bondholders would have access to their collateral on a current basis in perpetuity. Of course, this is not the case given the HTA Fiscal Plan. But, making these assumptions, the 1968 Bondholders are oversecured in so far as the value of their collateral (on a gross lien basis is greater than the amount owing on their Bonds. Depending on the discount rate applied, the 1968 Bondholders have a potential equity cushion of $443 million, $313 million, or $208 million, assuming that the 1968 Bondholders maintain their gross lien and no distributions are made to the 1998 Bondholders under the 9

10 Affidavit Page 10 of 11 waterfall. If, however, the Court were to determine that the 1968 Bondholders collateral can be surcharged by more than $21.9 million per year, $29.8 million per year, or $37.7 million per year, depending on the discount rate used, then the surcharge will deplete the equity cushion and erode the value of the 1968 Bondholders collateral such that those Bondholders will no longer be oversecured and will not be paid in full. In such circumstances, every dollar that is not turned over today from the Toll Revenues will be one less dollar that the 1968 Bondholders ultimately receive. Consequently, if the 1968 Bondholders are paid nothing from their collateral for the foreseeable future (as HTA and its Executive Director currently propose, or the Court determines that the 1968 Bondholders collateral can be surcharged by more than $21.9 million per year, $29.8 million per year, or $37.7 million per year, depending on the discount rate used, Plaintiff lacks adequate protection of its interest in the collateral securing the payment of its Bonds. 17. Because HTA and its Executive Director currently propose to pay nothing to Plaintiff for the foreseeable future, the harm to Plaintiff occasioned by the ongoing diversion of its collateral is immediate and increases in severity as more Toll Revenues are diverted. That is because there is only a finite supply of Toll Revenues that can be collected during the life of the toll roads, and the Bonds themselves are, as noted, limited-recourse obligations. In light of the foregoing, the diversion of the Toll Revenues to date continues to deplete the 1968 Bondholders equity cushion in their collateral to the point that it will not be sufficient to protect their interests and to ensure payment in full on the Bonds. Every additional dollar of Toll Revenues diverted, therefore, increases the likelihood that there will not be sufficient funds to pay Plaintiff s Bonds in full. 10

11 Affidavit Page 11 of 11