Monday, September 5, 2016

Selling Energy Tax Credits to Alaska Permanent Fund

An Alaskan political blogger contacted me for insight into Governor Walker's advisors pitching unfunded energy tax credits to the Alaska Permanent Fund board.  I wrote:

The energy tax credits are a distressed investment for those who hold them.  The state caused them to be distressed investments by not funding their payment.  Public pensions, sovereign wealth funds and private equity firms like to buy distressed assets, especially those with a clear path to a government treasury.  

What's odd is the courting between the governor who stopped payment (through his advisors)  and the Permanent fund, basically an Alaskan public wealth fund.  If the Permanent Fund buys the lion's share of these tax credits then the governor will have knowledge of the price the PF paid.  That makes it easier for him to fund them at a rate where the PF fund makes a significant profit but less than the tax credits full value.  Governor Walker looks like a winner, making Alaskan citizens money and "saving" on the current obligation on the state's books.  It appears he wants the Permanent fund to get an easy win, possibly helping him recover from ill will for holding the distribution to the public at $1,000 per Alaskan.

I can't find any information on the current value of these tax credits.  Thus they are a Level 2 or Level 3 investment with little to no price discovery.  Let's say the Permanent Fund buys the tax credits for 50 cents on the dollar and the governor later approves their payment at 75 cents on the dollar.  The Permanent Fund would get a 50% profit and the governor could say he struck a deal that  helped every Alaskan while saving nearly $200 million by not paying the full face value of the tax credits. 

If the governor can convince the Permanent Fund to partially bail out the state's $775 million tax credit obligation, what will he try next?  
More research took me to Alaska Dispatch News, whose publisher is married to David Rubenstein, Carlyle Group co-founder.  Carlyle invests Permanent Fund money with the aim of providing big returns.  Mrs. Rubenstein's paper offered:

"Talking to the board could help raise the profile and market value of the tax credits, potentially stoking interest among other sovereign funds or pension funds that are looking for better investments than the low government bond yields currently available, Richards said."
This makes me wonder who currently owns the tax credits and if the strategy is to get those folks a win before the PF.  Have private equity funds already snapped up tax credits at fire sale prices?  Is Richards, as the governor's advisor, helping the PEU boys make their next fortune in Alaska?
Everything is so opaque regarding the resale/current value of the tax credits. Both government and PEU firms know how to navigate behind the scenes to their profit/political advantage.  That's likely what's going on here. 

Alaskan Native tax losses helped make David Rubenstein and his clients wealthy:

In 1984, a law was passed allowing native corporations in Alaska—that is, Eskimo owned companies created by Congress to manage native lands—to sell their losses to businesses looking for tax write-offs. The Marriott executives, working with David Rubenstein at Shaw Pittman, discovered the Eskimo clause and vigorously bought the losses to offset gains. The adventure has become known in some quarters as the Great Eskimo Tax Scam.
Has any PEU been vigorously buying Governor Walker's distressed investments?  Have any done so on behalf of the Permanent Fund? 

It's a familiar game.