By Philipe Schoene Roura From Caribbean Business

Editor’s note: The following originally appeared in the March 14 – 20, 2019, issue of Caribbean Business.

The restructuring brigades at the helm of the Puerto Rico Fiscal Agency & Financial Advisory Authority (Aafaf by its Spanish acronym) are set to kick into overdrive their campaign to promote financing projects through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority (Afica by its Spanish acronym). It took a taste test to gauge appetite with the $9 million financing for the construction of a new technology center and library at Baldwin School in February to reaffirm their conviction.

“We could call Baldwin’s case a productive and successful experiment to answer the question: ‘Can we still do this?’ So, now, the next step is to see if we can do large projects,” explained Aafaf Executive Director Christian Sobrino, who is out promoting Afica financing to all who will listen. “Since financing Baldwin, we have undertaken a re-education on Afica, providing guidelines on Aafaf’s website, speaking with the media. In the pipeline right now—not yet approved—we have $300 million in projects being evaluated for financing.”

Sobrino explained that the financing of larger projects is destined for works in the tourism industry and education projects in the medical realm. Afica was created in 1977, through provisions of section 103 of the U.S. Internal Revenue Code (IRC), to provide private-sector projects with tax-exempt municipal bond financing—otherwise available for public works. Although Afica was initially created to finance industrial projects, amendments to bylaws extended access to capital for projects in the tourism industry, education and the realm of medicine. Time was, in the 1980s and 1990s, Afica financing was as high as $200 million annually.

With time, however, Afica lost its luster; between 1996 and 2000, $1.74 billion in Afica bonds were issued compared to $432 million issued during the next four years, according to a previous report by Caribbean Business. Industry insiders at the time said the higher costs of Afica financing compared to commercial banks caused the drop. Sobrino concurs.

“The word at the bank was that Afica was not as competitive at a time when commercial banks became extremely aggressive,” the Aafaf chief told Caribbean Business during a recent interview. “So, Afica, which provides competitive financing—long term—through outside lenders, lost its luster compared to eight or nine banks who were waging campaigns to see who could provide the most attractive financing.”

The Afica mechanism is used in the 50 states with the benefit of providing long-term financing and entering the tax-exempt market. “Essentially, you are providing entities market access without becoming publicly traded companies. And when you are talking about infrastructure works, in particular, you are able to cap out existing debt or finance new works,” Sobrino added. “So, now that the fierce competition between commercial banks is not there—we have far fewer commercial banks—the regulatory framework is more restrictive because of practices that led to consolidation. These factors have made Afica attractive once again, not only for companies but to their financial advisers, who are looking for financing options to help their clients turn out their projects.”

Conduit for economic activity

During its inception, Afica was used for industrial works. Later, the law was amended to include medical and tourism works, and education projects. Sobrino sees Afica as a conduit to create jobs and economic activity in a jurisdiction desperate for access to capital.

As the ex-officio representative for the Rosselló administration on the Financial Oversight & Management Board created by the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), Sobrino has spent a considerable amount of time arm wrestling with the O-Board over the issue of purview and debt restructuring. He says the primary objectives are to achieve fiscal responsibility and access to the capital markets.

“If you want to wear blinders and see things with a short-sighted vision, you think of the government,” he added. “But the mission is broader than that and it includes not only a return to market access, which is a statutory requirement, but a mission that Puerto Rico is a jurisdiction returning to market, not only through the public sector, but through the private sector as well.”

Sobrino stressed the importance of Metropistas’ (the private operator of PR5 & PR22 on behalf of the P.R. Highways & Transportation Authority) recent return to the market with some new notes. To that end, the foot soldiers at Aafaf contributed by providing evidence to the credit-ratings agencies that Puerto Rico’s government supports public-private partnerships as an essential part of public policy.

“So, they got their ratings and the notes sold extremely well. So, you can enter the market in two ways—debt or equity,” said Sobrino, who stressed the need for private equity. “So, you don’t just have the government; you have the private sector with projects that involve construction, tourism and education works, healthcare and manufacturing. It provides additional capital that contributes to the narrative we are building—a narrative based on success, not one based on bankruptcy.”

For more on this story go to: https://caribbeanbusiness.com/aafaf-afica/