164
range of obligations, and
(b) Title VI,
which provides for a
largely out-of-court process through which
modifications to financial debt
can be accepted by a supermajority of creditors
and bind holdouts.
Since 2017, Puerto Rico and several
of its instrumentalities have availed themselves
of the debt restructuring mechanisms of Titles
III and VI of PROMESA. The Puerto Rico government emerged from Title III of PROMESA in March 2022. Several instrumentalities,
including Government
Development Bank for
Puerto Rico,
the Puerto
Rico Sales
Tax
Financing Corporation, and
the Puerto
Rico
Highways
and
Transportation
Authority,
have
also
completed
debt
restructurings
under
Titles
III
or
VI
of
PROMESA.
While
the
majority
of
the
debt
has
already
been
restructured,
some
PR
Government
Entities
still
face
significant
fiscal
challenges.
For
example, the
Puerto Rico
Electric Power
Authority is
still in
the process
of restructuring
its debts
under Title
III of
PROMESA and
other PR Government
Entities, such as
the Puerto Rico
Industrial Development Company,
have defaulted on
their bonds but
have
not commenced debt restructuring proceedings under
PROMESA.
Puerto Rico’s fiscal and economic challenges have
also adversely impacted its municipalities. Budgetary subsidies to municipalities
have
gradually
declined
in
recent
years
and
are
scheduled
to
be
ultimately
eliminated
by
fiscal
year
2025
as
part
of
the
fiscal
measures
required
by
the
Oversight
Board.
According
to
the
latest
Puerto
Rico
fiscal
plan
certified
by
the
Oversight
Board,
municipalities
have
made
little
to
no
progress
towards
implementing
the
fiscal
discipline
required
to
reduce
reliance
on
these
budgetary appropriations and this
lack of fiscal
management may threaten the
ability of certain
municipalities to provide
necessary
services, such as health, sanitation, public safety
and emergency services to their residents, forcing them
to prioritize expenditures.
Municipalities
are
subject
to
PROMESA
and,
at
the
Oversight
Board’s
request,
are
required
to
submit
fiscal
plans
and
annual
budgets
to
the
Oversight
Board
for
its
review
and
approval.
They
are
also
required to
seek
Oversight
Board
approval
to
issue,
guarantee
or
modify
their
debts
and
to
enter
into
contracts
with an
aggregate
value
of
$10
million
or
more.
With
the
Oversight
Board’s approval, municipalities are also eligible to avail themselves of the debt restructuring processes provided by PROMESA. To
date, however, no municipality has been subject to any such debt
restructuring process.
Exposure of the Corporation
The credit
quality of BPPR’s
loan portfolio
reflects, among other
things, the
general economic conditions
in Puerto
Rico and
other
adverse conditions affecting Puerto
Rico consumers and businesses.
Deterioration in the Puerto
Rico economy has resulted
in the
past, and could
result in the future,
in higher delinquencies, greater
charge-offs and increased losses,
which could materially affect
our financial condition and results of operations.
At June
30, 2023,
the Corporation’s
direct exposure
to
PR Government
Entities totaled
$380 million,
of
which $351
million were
outstanding, compared
to
$374 million
at
December 31,
2022, of
which $327
million
were outstanding.
A
deterioration in
Puerto
Rico’s fiscal and
economic situation could adversely
affect the value
of our Puerto
Rico government obligations, resulting
in losses
to
us.
Of
the
amount
outstanding,
$325
million
consists
of
loans
and
$26
million
are
securities
($302
million
and
$25
million,
respectively,
at December
31, 2022).
All of
the Corporation’s
direct exposure
outstanding at
June 30,
2023 were
obligations from
various
Puerto
Rico
municipalities.
In
most
cases,
these
were
“general
obligations”
of
a
municipality,
to
which
the
applicable
municipality
has
pledged its
good
faith, credit
and unlimited
taxing power,
or
“special obligations”
of
a municipality,
to
which the
applicable municipality has pledged basic property
tax or sales tax
revenues. At June 30, 2023,
74% of the Corporation’s exposure
to
municipal
loans
and
securities
was
concentrated
in
the
municipalities
of
San
Juan,
Guaynabo,
Carolina
and
Caguas.
For
additional discussion of the Corporation’s direct exposure to the Puerto
Rico government and its instrumentalities and municipalities,
refer to Note 21 – Commitments and Contingencies
to the Consolidated Financial Statements.
In addition,
at June
30, 2023,
the Corporation had
$240 million
in loans
insured or
securities issued by
Puerto Rico
governmental
entities, but for
which the principal source
of repayment is
non-governmental ($251 million at December 31, 2022).
These included
$199 million in
residential mortgage loans insured
by the Puerto
Rico Housing Finance Authority
(“HFA”), a
PR Government Entity
(December 31, 2022 - $209 million). These mortgage loans are secured by first mortgages on Puerto
Rico residential properties and
the
HFA
insurance
covers
losses
in
the
event
of
a
borrower
default
and
upon
the
satisfaction
of
certain
other
conditions.
The
Corporation also had at June 30, 2023, $40 million in bonds issued by HFA which are secured by second mortgage loans on Puerto
Rico residential properties, and for which
HFA also provides insurance
to cover losses in the
event of a borrower default,
and upon
the satisfaction of certain
other conditions (December 31, 2022
- $42 million). In
the event that the
mortgage loans insured by
HFA
and
held
by
the
Corporation directly
or
those
serving
as
collateral for
the
HFA
bonds
default and
the
collateral
is
insufficient
to
satisfy the outstanding balance of these loans, HFA’s ability to honor its insurance will depend, among other factors, on the financial BPPR’s commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers or have
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