Congress has scheduled yet another hearing on the debt crisis slowly destroying the lives of millions of American citizens living in Puerto Rico. If this results in prompt legislative action, we should applaud the exercise of strong, even if belated, leadership. If this results only in more platitudes on a vague need for “structural reform,” then we should notch another failure of our congressional representatives to solve actual problems where real people suffer. Nor will the Obama administration escape unscathed if nothing happens; it is not helpless, so “Blame Congress” won’t work.
Congress’s inability to act on this burgeoning crisis is especially surprising given the near- unanimous and bipartisan chorus of scholars, disinterested investment professionals, and politicians who have advocated such simple changes as amending the Bankruptcy Code. Heavy hitters ranging from Sen. Bernie Sanders (I-Vt.) to Grover Norquist and Newt Gingrich all agree that bankruptcy reform, such as the Puerto Rico Chapter 9 Uniformity Act currently pending, needs swift passage.
One bizarre exception to this emerging consensus is former Sen. Judd Gregg (R-N.H.), who in this very journal opposed bankruptcy reform. Admitting that Puerto Rico’s problems have been long in the making, his contrary proposal appears to be, literally, a “time machine.” More earthly technology, such as the bankruptcy reforms already pending in Congress or jointly proposed by the Treasury Department, HHS and the NEC, are more compelling.
Gregg’s opposition boils down to three assumptions, each flawed. First, he claims retirees and pension investors would be hurt by allowing Puerto Rican entities chapter 9 relief. Leaving aside the premise that tax-exempt retirement accounts would be invested in tax-exempt municipal bonds, there is no reason to assume investors, let alone the sophisticated hedge funds who are truly driving bankruptcy reform opposition, were mistaken into thinking the bankruptcy laws are un-amendable. Any risk of legislative change is already well priced into the market.
Second, Gregg claims making chapter 9 available for the territory of Puerto Rico will “domino” to other states, and that contagion will bring about the end of the bond markets. He references Detroit as the beginning of this “catastrophe[e].” The simple error is not recognizing the administration’s proposal would draw the line at federal territories, over which the Congress has special control, so the dominos stop there. The second error is the unsubstantiated hysteria of market collapse. In fact, the available data on Detroit suggest a post-bankruptcy ability to borrow on market terms beyond its credit manager’s wildest dreams. If Detroit’s credit access was “destroyed” by debt restructuring, it sure recovered quickly.
The final objection is that bankruptcy would leave bondholders “wholly unprotected” while a court somehow “slashed” debt. This is the most important mistake because it fundamentally misunderstands bankruptcy law. What bankruptcy does is allow a majority of creditors who support a sensible debt restructuring plan to bind holdouts who try to block a voluntary workout. And if there is no consensual solution, when Puerto Rico eventually defaults, the inevitable consequence will be service failure and humanitarian crisis. Make no mistake: Puerto Rico is on the path to Greece. And guess what? Eventually Greece had to be bailed out. This is the reason true conservatives like Grover Norquist and Newt Gingrich are so intent on bankruptcy reform: it is wishful thinking to think the financial problem will go away, so the pressure on a public bailout in the absence of a deal will only increase inexorably with time.
So what can be done as a truly bipartisan solution to Puerto Rico? The key with any workout is to force stakeholders to come to the table. As long as bondholders think they have a Get-Out-of- Bankruptcy-Free card, they will not negotiate seriously. This is not a liberal-conservative issue, this is a bankruptcy issue. Indeed, in Detroit, the labor unions were forced to come to the table and negotiate concessions, and a deal – painful, but necessary – was eventually worked out. The hedge funds holding Puerto Rican debt should be subjected to no less sacrifice.
Getting these investors to negotiate a realistic repayment plan will require two things. First, Congress should amend the Bankruptcy Code to cover Puerto Rico (administration proposal) or even just the municipalities (pending legislation). Second, the executive branch should step in forcefully. Right now, Treasury appears to be patting itself on the back for having written a strongly worded letter to Congress to amend the bankruptcy laws. That’s not good enough. Treasury should be using its powers to force parties to the table. For example, it could use the Exchange Stability Fund to underwrite new bonds that result from a voluntary exchange in a workout, but denying such backstopping to holdouts. It could use its stature to investigate the allegations that some of the bond debt is illegally issued and hence not entitled to full payment. In other words, it needs to make creditors fear congressional inaction, not aspire toward it. That will only happen with a credibly frothy Treasury demonstrating that the only thing worse than bankruptcy reform will be no bankruptcy reform and a furious administration stepping in to use all its powers to prevent looming crisis for millions of U.S. citizens.
But bringing parties to the table is only one part of the puzzle. The other part is to restore confidence in the borrower. And on that point, Gregg is dead right: there needs to be meaningful financial oversight and transparency. With a debtor with such a sorry financial track record as Puerto Rico, that probably requires an “external” component, the same way an external oversight board was part of the so-far-successful Detroit restructuring. The board need not be a permanent fixture; it can sunset itself out of existence with certain benchmarks, but it needs to assure that the past practices of budgetary disaster will never recur.
Yes, there’s more: Medicaid, EITC, and so on. But a bipartisan solution’s foundation is bankruptcy reform (tough for hedge funds) and external oversight (tough for local politicians). Let’s hope our leaders figure that out in time to prevent needless suffering.
Pottow is John Philip Dawson Collegiate Professor of Law, University of Michigan Law School.
Prices of Puerto Rico bonds suggest that investors are circumspect when its comes to possible progress in a debt exchange of the island’s securities and focusing on whether the commonwealth makes good on $711 million of principal and interest payments coming due.
“They’re waiting to see what the commonwealth does from here,” said Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer. “They really want Puerto Rico to show some good will by paying bonds over the next six weeks.”
Commonwealth general obligations maturing July 2035, the most-actively traded uninsured Puerto Rico bond in the past three months by volume, changed hands Monday at an average of 71.3 cents on the dollar, compared with 71.7 cents on Friday, data compiled by Bloomberg show. The bonds yield about 11.8 percent on average.
The Caribbean island and advisers to bondholders and hedge funds that invest in Puerto Rico securities met in New York last week. Advisers for the commonwealth gave some details of a potential universal debt-exchange where investors holding Puerto Rico bonds with different repayment pledges trade in their debt for a single new bond with stronger securities.
Timely bond payments on Dec. 1 and Jan. 1 may boost debt prices, offering a way for investors to reduce their Puerto Rico exposure, Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics, wrote in a report Monday.
“Bond prices would reasonably rally, providing what could be the most attractive exit point for investors before defaults and/or restructuring in 2016,” Fabian wrote.
Investors are choosing to hold their existing securities to see if Puerto Rico’s Government Development Bank will pay $354 million due Dec. 1, with $267 million of that guaranteed by the commonwealth. An additional $357 million of general-obligation interest is due Jan. 1.
Puerto Rico and its agencies owe $70 billion. Officials are seeking to reduce that debt load by delaying principal payments or asking investors to take a loss in a debt exchange. The island’s economy has failed to grow since 2006.
Hanson cited competing claims, no exit strategy for hedge funds, local law and lack of consensus on workout as reasons for investors to be wary. Last week’s meeting involved investors holding about 15 percent of the island’s debt, Hanson estimated.
Fear that Puerto Rico will default on some of its bonds builds as a major debt service deadline edges closer.
Money managers, value investors, and analysts are all eyeing Dec. 1, when $355 million of notes issued by the Government Development Bank come due, as a litmus test of sorts, to see if the island is willing to make difficult decisions to avoid default on some of its most senior and constitutionally protected bonds.
The GDB, which is Puerto Rico's financing arm, recently released an update on its finance that showed the bank's net liquidity was approximately $875 million as of Sept. 30. The statement also disclosed that the bank's cash resources "may be depleted before the end of the calendar year 2015 in the absence of market access, other financing alternatives (including agreements with GDB's creditors) or emergency liquidity measures."
Moody's Investors Service believes that Puerto Rico will likely default on at least a portion of its debt obligations in the coming weeks, which would be the second default by Puerto Rico to date.
"The GDB has less incentive to make a payment of $81.4 million om debt service on non-general obligation-backed debt, as the payment pledge does not benefit from constitutional protections," Moody's said in a note issued last week. "However, given the already severe and growing liquidity challenges facing the commonwealth, it may be forced to default also on the $273.3 million of GDB notes that are backed by the commonwealth's general obligation (GO) guarantee."
Puerto Rico has insufficient funds to meet all of its maturing obligations, which amount to more than $1 billion, due in the next few weeks, and will have to decide which debts to pay, and on which debts to default.
"Everyone can speculate, but if you look at the market, it believes that the GO bonds due in January will get paid," said Vaseleios Sfyris, managing partner of First Southern Securities, a broker-dealer that owns and advises clients with financial interests in Puerto Rico muni bonds.
Deal still faces hurdles
In addition to the GDB's woes, Puerto Rico debt watchers are also eyeing the ongoing negotiations between Puerto Rico's Electric Power Authority and a key group of its creditors, the monoline insurers — MBIA, Assured Guaranty and Syncora.
Following extensive negotiations, a deal to restructure the approximate $8.2 billion in PREPA's outstanding debt, was finalized on Nov. 5 between the government-owned electricity provider and three of its creditor groups — PREPA's fuel line lenders, the Government Development Bank for Puerto Rico, and the Ad Hoc Group, which holds more than 35 percent of PREPA's outstanding power revenue and refunding bonds.
Under the terms of the agreement, holders of PREPA's paper will take a 15 percent haircut on the principal of their existing bonds in exchange for new notes with better terms.
However, the agreement is contingent on the buy-in from the monoline insurers, and requires the Puerto Rican legislature to pass the PREPA Revitalization Act, which was unveiled by Gov. Alejandro Garcia Padilla earlier this month.
With a Friday deadline looming for both consents, some experts believe the focus should not be on the dates, but rather on probability of whether the deal will get finalized.
"The Revitalization Act will pass at some point (so) the focus on a specific date for any legislative vote, or any other issue is not important," MKM Partners analyst Harry Fong said in a note issued Monday. "There is no 'drop dead' date for anything, even a debt service payment. The key item in the insurers' willingness to continue to hold discussions with PREPA (and Puerto Rico in general) is their belief that a resolution of the financial crisis is possible."
Veteran investor Ted Palatucci, a partner at Andres Capital and former managing director of Merrill Lynch's municipal bond division, believes the ultimate solution for Puerto Rico's crisis lies in Washington, D.C.
"This problem is so big and there's so many interested parties that the referee is going to have to have a very big whistle," said Palatucci, who has closely followed Puerto Rico's debt situation for more than 30 years. "It's very hard to see what other alternative solution is going to work without an intervention by the U.S. government."
Palatucci, who is also a portfolio manager at Andres Capital, which launched in June and now has close to $700 million in assets under management, thinks the best solution now to help Puerto Rico dig out from under its massive $70 billion debt load is to give the island access to bankruptcy restructuring.
The next opportunity for Puerto Rico's top officials to plead their case for access to Chapter 9 will be December, when the U.S. Senate Judiciary Committee — which has jurisdiction over bankruptcy policy — will hold a hearing to discuss what's currently being done about Puerto Rico's fiscal problems and consider what options are available to help the U.S. territory get itself out of the present situation.
Reporter Molly Hooper sits down with The Hill Editor-in-Chief Bob Cusack after The Hill's event on Puerto Rico’s fiscal future, sponsored by The Capitol Forum.
With Puerto Rico’s continuing fiscal strains, some commentators have suggested that one avenue to give Puerto Rico breathing room would be the purchase of Puerto Rican municipal debt as part of Open Market Operations by the Federal Reserve. The most prominent proponent of this plan is Rensselaer Tech Economics Professor Arturo Estrella. His proposal can be found here. The governance of Open Market Operations, which is the buying and selling of securities by the Federal Reserve System, is found in Section 14 of the Federal Reserve Act.
A threshold question is: does the debt of Puerto Rico qualify as allowable investments? There are essentially three categories of allowable purchases under Section 14: state/local government debt in the continental United States, foreign government (or agency) debt; and U.S. Treasury or agency debt. Professor Estrella spends considerable effort arguing that Puerto Rico is within the definition of “continental” United States and hence qualifies. Unfortunately, his efforts are in vain as the Federal Reserve Act in Section 1 defines the “continental United States” to mean “the States of the United States and the District of Columbia” which obviously excludes territories like Puerto Rico.
How does Professor Estrella attempt to overcome the very clear language of the Federal Reserve Act? He argues that “the preponderance of regulatory language in Federal Reserve regulations shows that Puerto Rico is treated in the same way as a state…” The good professor offers plenty of examples, such as the Truth in Lending Act, carried out by the Fed’s Regulation Z. What he fails to mention is that the cited regulations are not carried out pursuant to the Federal Reserve Act. For instance, the Truth in Lending Act actually defines Puerto Rico as a state, which explains why Regulation Z as implemented does so. Congress regularly chooses different definitions of the same words for different statutes, and it does so intentionally. That, however, does not allow an agency to pick and choose. The definitions contained in a statute govern the regulations promulgated under that statute only.
Estrella also argues that since the Fed treats Puerto Rico as part of the New York Federal Reserve District, then it must be a state since Section 2 of the Federal Reserve Act established a procedure of allocating states to reserve bank districts. The essence of Estrella’s argument is that since the Fed treats Puerto Rico as a state in some contexts, then it must be classified as a state for purposes of Section 14. Such a view implies that an agency, like the Fed, can simply rewrite statutes at its whim. Such a view is, of course, incorrect. Only Congress can write statutes and while agencies can “fill in the blanks,” they cannot rewrite clear statutory language.
Interestingly enough, Professor Estrella also argues that Puerto Rico might qualify as a “foreign government,” since the International Banking Act of 1978 defines, for its purposes, Puerto Rican banks as “foreign banks,” although it does not include Puerto Rico under its definition of “foreign country.” One can debate the contradictory nature of the definitions of the 1978 Act, but they clearly do not apply to Section 14 of the Federal Reserve Act. Lastly, I believe it is obvious–and I do not know of anyone who has argued the contrary–that Puerto Rico is not part of the federal government or one of its agencies.
In summary, any plain reading of the Federal Reserve Act, along with the traditional practices of statutory interpretation, would conclude that the Federal Reserve cannot purchase Puerto Rican government debt as part of open market operations.
Even if the Fed were allowed to do so, would buying debt fix Puerto Rico’s problems?
Let us assume, for the sake of argument, that Puerto Rico qualifies as part of the continental United States. Section 14(2) limits any municipal purchases to maturities of less than six months at the time of purchase. While I have not been able to find a distribution of maturities for Puerto Rican debt, reports appear to indicate much longer maturities. Perhaps longer debt could be swapped out for six month, but such might leave Puerto Rico even more vulnerable as it would have to come to market far more often. Just as Bear Stearn’s reliance on overnight debt was part of its undoing, shortening the maturity of Puerto Rico would likely make a bad situation worse.
Perhaps most binding of all is that Section 14 is dependent upon “anticipation of the collection of taxes or in anticipation of the receipt of assured revenues…” In plain English, that means that lending is limited to debt that the Fed has determined there is revenue forthcoming. As Puerto Rico’s governor stated that the debt “could not be paid,” it is hard to see how the Fed could stay within the clear language and intent of Section 14 while purchasing Puerto Rico’s debt.
Let me be clear: I do not have answers to Puerto Rico’s debt crisis. What I do know, however, is that having the Federal Reserve purchase Puerto Rico’s debt as part of open market operations is not legal. And if it was, it would likely be unworkable.
MBIA Inc.’s exposure to the Puerto Rico Highways & Transportation Authority was cut by $155 million because the agency bought back debt, the second bond insurer in a week to disclose reduced risk to the island before key payments are due to investors over the next two months.
The highway agency purchased debt insured by MBIA’s National Public Finance Guarantee Corp. and canceled it on Nov. 13, according to a report on the company’s website that was updated Monday. The authority did the same thing with $228.5 million of bonds backed by Ambac Assurance Corp., that company confirmed last week.
That eases some of the losses the insurers face from a building fiscal crisis that’s left the commonwealth struggling to pay its $70 billion of debt. Puerto Rico, which is rapidly draining its cash, has $467 million of principal and interest due Dec. 1 and $958 million owed on debt including general obligations on Jan. 1.
Puerto Rico can divert petroleum and gasoline taxes that fund its highway-agency debt to pay its general obligations, which are constitutionally protected.
Puerto Rico said in a May 7 quarterly report that it could resort to emergency measures to cover its debt bills, including taking “taxes or other revenues previously assigned by law to certain public corporations to secure their indebtedness.” Taxes on gasoline and petroleum products that Puerto Rico allocates to its highways agency for debt service are considered “available commonwealth resources” that must be used first to pay general obligations, according to bond documents.
That has made the chief executive officer of rival insurer Assured Guaranty Ltd. focused on the transportation authority, according to Mark Palmer at BTIG LLC, a brokerage firm.
At a bond-insurance panel that BTIG hosted Monday, Assured CEO Dominic Frederico indicated “the potential for the government to take irrational actions with regard to the debt made it a priority,” Palmer wrote Tuesday in a report. “While the Puerto Rico government would not be able to claw back revenue from tolls, its ability to do so from other revenues had made management concerned.”
Some uninsured Puerto Rico highway bonds maturing in 2028 traded Monday at an average of 19 cents on the dollar to yield 30 percent. That’s almost three times the yield on Puerto Rico’s most frequently traded general obligations.
Avenue Capital Group continues to buy municipal bonds from Puerto Rico, believing it would be difficult to lose money on the already distressed securities, its co-founder said on Tuesday.
“You’re able to buy that debt today at huge discounts when I think the news has already been priced in," Marc Lasry said at the Reuters Global Investment Outlook Summit in New York.
Avenue, which manages about $13 billion and is best known for investing in relatively risky loans of troubled companies and governments, is one of many private investment firms and hedge funds attempting to make money on the debt of the economically troubled island.
Puerto Rico defaulted on part of its obligations in August and has been trying to bring creditors to the table to agree to reductions on their debt. Funds could make large profits or losses depending on the price at which they bought into the debt and the ultimate level at which deals are struck.
Lasry did not specify details on the muni bonds Avenue is buying.
As of October, the firm owned Government Development Bank bonds and was part of group of creditors whose restructuring talks with the government failed, according to people familiar with the situation at the time.
"It’s hard to get hurt now in Puerto Rico," Lasry said. "It’s more of a timing risk. Could someone come in and play massive hardball? Yes, but that would sort of prolong the process. You can game-theory Puerto Rico.”
That game-theory includes understanding what options the government has and at what price creditors would cut a deal, Lasry said.
"The information is out there," he said. "I think how it gets resolved — the negotiation and the process and the games that people play — I think I know all the different things they can do."
For more summit stories, see
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(Reporting by Lawrence Delevingne; Additional reporting by Megan Davies; Editing by Lisa Von Ahn)
Read more at Reutershttp://www.reuters.com/article/2015/11/17/us-investing-lasry-puertorico-idUSKCN0T626N20151117#r2xiuhmAszeXmetD.99
Following the scandal of UBS selling bad bonds throughout Puerto Rico, it now appears an overall government default on bond obligations is underway. Read more here.
Currently, the U.S. territory owes $73 billion to its creditors. To make matters worse, the Puerto Rican treasury is in the red to the tune of $370 million, and has already spent another $400 million borrowed in order to keep its government in operation. Puerto Rico also faces a $355 million revenue shortfall for the current fiscal year. The Government Development Bank, which issues bonds, is expected to be insolvent before the New Year.
Puerto Rico needs to be put on life support and the way to do it is through bankruptcy, said former Detroit bankruptcy Judge Steven Rhodes.
Rhodes talked about the territory's fiscal and debt crisis in a telephone interview with The Bond Buyer. He also called for a central control person or board, preferably designated by the federal government, to spearhead the proceedings in place of the island's governor and legislature.
"It is very tough on the people on the island, it is very tough on existing politicians, but the closest analogy is that when an entity like Detroit or like Puerto Rico goes into bankruptcy, they are on life support," Rhodes said. "And extraordinary measures have to be taken to assure the survival of the patient."
He said Puerto Rico's struggles with unpayable bond debt and unfunded pension liabilities closely resemble those of Detroit, where Michigan Gov. Rick Snyder appointed Kevyn Orr to serve as an emergency manager for the city throughout the bankruptcy process.
"In Detroit, we contracted democracy to a significant extent. When it was over, we handed it back to [city officials] and told them it was their responsibility to make it work," Rhodes said. "That is what I advocate for Puerto Rico."
The commonwealth retained Rhodes in June as an advisor while it deals with its roughly $72 billion of debt. Rhodes, who retired as a bankruptcy judge in February, wants a bankruptcy regime that would apply to the entire commonwealth and not just its struggling public authorities as others have suggested.
But Puerto Rico's debt diverges considerably from that of Detroit, in that the territory has a large number of different debt-issuing entities and many different bond structures that combine to make the overall debt burden. A public authorities-only bankruptcy would exclude the commonwealth's large general obligation debt.
"In a very real, practical, and economic sense, all of the entities and their fates are intertwined," Rhodes said. "And so what Puerto Rico as an entity needs is a holistic solution to all of its debt and financial problems."
He added that creditors, who have largely opposed a bankruptcy solution out of concern they would lose a significant amount on their investments, should actually welcome bankruptcy as a way to get independent judgments that: are in their best interests; are fair and equitable between them; do not unfairly discriminate between creditor classes, and; are actually feasible as Puerto Rico tries to fix its situation.
The structured process from bankruptcy is a better solution than the "one-off, year at a time" solutions creditors would pursue through lawsuits and negotiations in the atmosphere that exists now, he added.
The bankruptcy question for Puerto Rico is complex though because the Chapter 9 protections that federal law affords state municipalities and public entities do not apply on the island. Two bills pending in Congress would close that gap, but both would only apply the law to public authorities instead of the whole commonwealth.
The House and Senate bills have been stalled in the judiciary committees of their chambers by Republicans who say bankruptcy will not solve Puerto Rico's problems and that the island's government has not provided sufficient documentation of its finances. The proposal Rhodes supports has been labeled by anti-bankruptcy groups as "Super Chapter 9" that is equivalent to the federal government giving the commonwealth a bailout.
The Treasury Department also recently released a four-part plan on Puerto Rico, which calls for a federal control board and commonwealth-wide Chapter 9 protections. Rhodes said he generally supports that plan.
He said he recognizes Chapter 9 alone will not solve Puerto Rico's situation, and added the right approach includes a thorough analysis of the internal factors that led the island into its current fiscal issues. In every type of bankruptcy case, whether it is corporations, consumers, or municipalities, structural reforms have to be coupled with bankruptcy to help solve whatever problems got the debtor into insolvency in the first place, he said.
Puerto Rico's Gov. Alejandro García Padilla and a group of island officials created a fiscal growth plan for the island that the commonwealth's legislature is currently considering.
While Rhodes did not comment on the specifics of the plan, he said it is an example of the kind of steps Puerto Rico needs to think about to get back to where it wants to be.
"There has to be a complete top to bottom review of everything the island does, from water to electricity to tourism to manufacturing to shipping and see where efficiencies can be obtained and where the opportunities are and pursue them with vigor," Rhodes said.
"That is exactly what Detroit and its emergency manager did and it's working," he added, referring to the debt adjustment and revitalization plan Detroit pursued.
Also similarly to Detroit, Puerto Rico's leaders will have to balance paying back the debt and providing citizens with essential services, he said.
García Padilla has already said he will choose Puerto Ricans over the creditors if the choice presents itself.
Rhodes used the essential service needs to balance those competing interests as another argument for a bankruptcy solution.
"The advantage of bankruptcy is that people will still continue to get their police, their fire, their emergency medical, their roads, their educations, their power, their water, even though the defaults are taking place," he said.
As Puerto Rico inches closer to what García Padilla and others have told observers will ultimately be a series of defaults on its outstanding debt, Rhodes said lawmakers can still make a difference by passing bankruptcy legislation, even if it comes after the commonwealth has already started defaulting.
Puerto Rico is expected to default on some of its debt by Dec. 1. The likeliest payment to default is the $355 million obligation in notes the commonwealth's Government Development Bank has due on that date, according to a recent report by Moody's Investors Service.
"Does there come a time when bankruptcy can't help? I don't think so," Rhodes said. "The conventional wisdom is that the longer an entity that is insolvent waits to file bankruptcy, the more challenging and more expensive the bankruptcy becomes."
Puerto Rico has said the U.S. Supreme Court should consider an appeal seeking to revive legislation designed to allow the territory’s utilities to restructure $20 billion in debt, saying review is necessary even while legislation is pending in Congress because the crisis is "so acute."
The territory filed a reply brief on Nov. 9 responding to criticisms from the investment firms that successfully lobbied a district court and the First Circuit to invalidate Puerto Rico’s so-called Recovery Act, which would have established a restructuring regime for...
After defaulting on its debt earlier this year, Puerto Rico, already crippled by high rates of poverty and unemployment, faces a troubling economic future. But does it also face a health care crisis?
Jesse Roman, who was born in Puerto Rico and is now chair of medicine at the University of Louisville, believes it does. Roman writes in an essay published online in the Annals of the American Thoracic Society that “Puerto Rico appears to be spiraling into what some have characterized as the collapse of the island’s health care system.”
Roman points to recently published news reports that indicate:
• Medicare reimbursement rates in Puerto Rico are 70 percent less than in the 50 U.S. states.
• Half of all the island’s residents depend on Medicaid, Medicaid and Medicare Advantage. Islanders eligible for Medicare are more than twice as likely to be enrolled in Medicare Advantage than their fellow citizens living in the states (60 to 80 percent compared to 31 percent). CMS’s planned 11 percent cut to Medicare Advantage will fall particularly hard on Puerto Rico.
• Because of a cap placed in 1968 on Medicaid spending in U.S. territories, Puerto Rico will receive $400 million less this year than it would if it were a state.
• Roman writes that the Puerto Rican health care system is further hurt because the Affordable Care Act as implemented in Puerto Rico did not require insurers to cover those with pre-existing conditions or impose an individual mandate to purchase insurance. As a result, many living on the island lack insurance.
“Without intervention, it has been estimated that Puerto Rico’s health care system will suffer the immediate loss of half a billion dollars, hospitals will lose $150 million, doctors will lose $115 million and pharmaceutical companies will lose $65 million….,” Roman writes, adding that there is “little hope” that the Puerto Rican government can close the gap.
Roman notes that last year, 361 (about 3.6 percent) of the physicians practicing in Puerto Rico emigrated, according to the Puerto Rican Medical Association. As a specialist in respiratory medicine and critical care, he is particularly concerned that there are only 102 specialists in these areas serving the needs of 3.5 million residents.
“Puerto Rican children living on the island show a higher prevalence of asthma than Puerto Rican children living in the South Bronx,” he writes. “Death rates [in Puerto Rico] for influenza and pneumonia are among the highest in the U.S.”
Roman notes in his essay that the Puerto Rican Healthcare Crisis Coalition proposes restoring Medical Advantage reimbursement rates, providing federal funds for local health insurance and asking the Centers for Medicare and Medicaid Services to “re-engineer” the Puerto Rican health care system’s “patchwork” of rules.
“Clearly this is a complex problem, but one that needs tackling soon before it spirals out of control,” he says. “While politics, race, and economics may cloud the issue, let’s remember that the health of Americans is at stake.”
Contact: Reporters can contact Dr. Roman at j.roman@lousville.edu (This email address is not for publication.)
The Annals of the American Thoracic Society (AnnalsATS) is an online international journal that delivers up-to-date and authoritative coverage of adult and pediatric pulmonary and respiratory sleep medicine and adult medical critical care. It is one of three journals published by the American Thoracic Society. The other two are the American Journal of Respiratory and Cell Biology and the American Journal of Respiratory and Critical Care Medicine, which has the highest impact factor in the field.
No, it’s not renowned “holdout” Paul Singer, who isn’t involved in the Island.
The main hurdle for Puerto Rico is Mark Brodsky, a former bankruptcy lawyer who in 2004 left Singer’s Elliott Management after 10 years to strike out on his own.
This week, Moody’s Investors Service said default is likely. While no official talks have been held, the island commonwealth has said it wants bondholders to take losses or exchange their debt for new bonds that pay a lower interest rate and carry a longer payout period.
So far, Brodsky is less than bowled over by the idea, several sources said.
“He’s digging in his heels and refusing to compromise,” said a person close to the informal discussions that have taken place among creditors.
Word to Puerto Rico officials: Get ready for a protracted fight.
When Brodsky teamed up with his ally Singer as investors in Argentine debt, it was Aurelius who was the most stubborn holdout — not Singer, who got most of the headlines, sources said.
In September, Brodsky was at it again — trying to block a restructuring deal between Ukraine and its bondholders, according to individuals involved in the talks, who said Brodsky ended up cutting a side deal to get paid back 100 cents on the dollar.
Over the next 16 days (and beyond), Aurelius is expected to be just as sharp a thorn in Puerto Rico’s side.
Aurelius owns a big chunk of Puerto Rico’s $12 billion in general obligation debt — part of its overall debt load.
The creditors have been meeting in recent weeks to try to find common ground on concessions they can agree on in upcoming negotiations with Puerto Rico.
But Aurelius hasn’t been in the creditor meetings, sources said. In fact, Aurelius’ posture is one of the reasons the so-called Ad Hoc Group of Puerto Rican creditors — to which it belonged — recently broke up after many of the funds realized that lobbying for full payment wasn’t going to work, these sources told The Post.
“It’s one thing to have a claim, and it’s another thing to expect to get that,” said one hedge fund manager regarding Aurelius’ take- no-prisoners attitude.
In recent weeks, the Treasury Department has asked Congress to intervene by passing a bankruptcy law for Puerto Rico.
Such a change is unlikely to happen — at least not before the commonwealth runs out of money, sources said.
Unlike Singer’s $27 billion Elliott Management, which has also become a major activist player in the stock market, Aurelius is a much smaller fund that is solely focused on distressed debt.
That may be one reason for Brodsky’s intransigence, investors say.
He’s also having a bad year. Aurelius had lost 3 percent this year through October, according to investors.
Brodsky did not return calls for comment.
A member of a labor union shouts slogans while holding a Puerto Rico flag during a protest in San Juan.
Moody's Investors Service issued a short report stating that Puerto Rico (rated Caa3/negative outlook) is likely to default on some of its Dec. 1 debt service payments as its liquidity pressure grows.
Massachusetts Senator Elizabeth Warren touched down in Puerto Rico Thursday, her latest stop on a tour of governments with distressed economies, and reiterated her support for the US territory to use bankruptcy to solve its problems.
She met with top officials in the US territory who told her the country is struggling to meet the next payments on the $72 billion of debt the government has accumulated.
“It is not clear if Puerto Rico can make those payments,” Warren said in a brief phone interview before flying off the island. “The only solution is for everyone to come to the table and negotiate a long term plan for Puerto Rico.”
Some in Congress want to give the territory more flexibility to use bankruptcy powers, but many Republicans and lenders oppose such a plan, arguing it would amount to a bailout.
Last month the Massachusetts Senator visited Germany and Greece as part of six-day trip to Europe focused on economic issues, including discussions on the Greek debt crisis and Eurozone economic policy.
On that trip she said that the austerity measures being pushed by the European Union and the International Monetary Fund were making matters worse and proving “political backlash.”
In Puerto Rico Thursday, Warren also met leading academics and bankers came away with a similar impression.
“The Puerto Rican people have been asked to bear huge costs of this long running debt crisis and now it’s clear that even as they’ve done with less and less that Puerto Rico may still not be able to service its debts,” she said.
The ideological divide in most of the industrialized world breaks down roughly between conservative classical economics and liberal Keynesian macroeconomics. However, in Puerto Rico, a political abstraction called “colonialism” interferes with admitting to and rectifying profound but strictly local policy blunders.
Almost daily I seem to encounter another "colonialism" grand narrative to explain Puerto Rico’s $72.2 billion debt crisis. These “colonialism” arguments – with protean dynamics to suit the user – help to obscure disastrous local policy errors for which the U.S. territory, my home island, is solely responsible.
These errors include exempting 90 percent of the island's $104 billion GDP from taxation and imposing absurdly low tax rates on owners of high-value real property. Neither total sovereignty nor voting representation as a U.S. state would absolve us from other critical policy errors involving gross underspending (yes, underspending) in public services and the maintenance of the island’s notoriously stifling bureaucracy and punitive labor laws.
Regrettably, the "colonialism" arguments play well to the vast majority of my Puerto Rican family who view reality through the kaleidoscopic prism of the island's status-based politics. These status politics often trump any principled economic reasoning or objective data to explain or present solutions to the crisis.
The rare evidenced-based attempts at supporting the status arguments are of two main varieties: For the sovereignty seekers -- those wanting independence or more autonomy from the U.S. -- these are 1) The Jones Act (also known as the Merchant Marine Act of 1920) that requires U.S.-owned and operated vessels to carry goods between Puerto Rico and the U.S. mainland, 2) lack of monetary autonomy, and 3) lack of commercial treaty authority. For statehood seekers: 4) more public welfare benefits.
These arguments are dubious at best. Let’s take them in order:
The Jones Act: Hawaii is also burdened by the Jones Act, but it has one of the strongest economies in the U.S. On the other hand, the U.S. Virgin Islands are exempt from the Jones Act, but unemployment is as high as Puerto Rico's and consumer prices are even higher. As Puerto Rico’s sovereign next door neighbor, the Dominican Republic is not subject to the Jones Act, but its gasoline prices are almost double Puerto Rico's.
Monetary autonomy: The ability of Puerto Rico to print its own currency would not help because the island’s debt is payable in dollars. Also our long history of fiscal mismanagement bodes disaster for the stability and credibility of any future Puerto Rican currency.
Commercial treaty authority: The meager home-grown exports of this small island economy would deprive it of any meaningful leverage to negotiate favorable commercial treaties. As a U.S. territory with the right to unfettered trade of goods, services and people with the U.S. mainland, Puerto Rico already has one of the most coveted free-trade arrangements in the world that no other countries get.
More federal public assistance: While recognizing the principle of equal rights for U.S. citizens, any disparity in public benefits can be fixed without actually making Puerto Rico a state. The Territorial Clause of the U.S. Constitution gives Congress wide berth. Even a proposal to extend the federal Earned Income Tax Credit would not require changing Puerto Rico’s territorial status.
Real or imagined “colonialism” presents no obstacle to the island’s adequately taxing the top half of the economy. Instead of a mere $9.8 billion projected for fiscal year 2016, Puerto Rico’s central government tax revenues should be no less than $20 billion, still substantially below the 34 percent of GDP average of tax receipts for rich, developed jurisdictions.
While fostering a more progressive tax system and combating tax evasion, this additional revenue should come from three main sources: multinationals, high-value real property and automobiles. A gross receipts tax should replace the income tax since Puerto Rico has shown that it lacks the resources to effectively administer a tax system based on net income. Tax exemptions and preferences should be prospectively repealed.
The island vitally needs the extra revenue to fund major improvements of its energy and water resources, transportation, schools, public safety and hygiene as well as pay any debts that are lawfully owed. And with just strokes of a pen, the local government can eliminate our stifling bureaucracy and repeal our punitive labor laws that intimidate even the boldest of entrepreneurs. All these changes are within the power of Puerto Rico’s government, and “colonialism” is a convenient pretext for not making them.
Martin is managing attorney of D.R. Martin, LLC. He is also the author of “Puerto Rico: The Economic Rescue Manual.”
EW YORK - The Puerto Rico Electric Power Authority needs to get insurance companies that guarantee a portion of the utility's debt against default to endorse a conditional restructuring agreement by Thursday to avoid the risk of the deal with bondholders falling apart.
If MBIA, Assured Guaranty and Syncora Guarantee don't sign on to the debt exchange finalized with some investors last week, then the utility known as Prepa, its fuel- line lenders and the bondholder group will work to implement a recovery plan "through a mechanism to be agreed among the parties that may include, without limitation, a judicial process, including an enforcement proceeding under applicable law," according to the Nov. 5 agreement posted on the Municipal Securities Rulemaking Board's website.
"It produces some pressure on Prepa to hurry up," said Philip Fischer, head of municipal research for Bank of America Merrill Lynch in New York. "The insurers would have a disproportionate amount of insurance liability and they're trying to negotiate their way around that."
The insurers run the risk being liable for the repayment of about $2.5 billion of bonds if Prepa fails to make payments and the restructuring is viewed as a default. Under the agreement, about 35 percent of the utility's bondholders agreed to absorb losses of as much as 15 percent and delay repayment to give the struggling utility more breathing room to restructure its finances as well as time to improve operations. The agency is hampered by its inability to reorganize in bankruptcy court as utilities in the mainland United States can.
A restructuring of Puerto Rico's main electricity provider would be the largest ever in the $3.7 trillion municipal-bond market. The utility has $8.2 billion of debt. It would be the first commonwealth entity to reduce its obligations. Puerto Rico and its agencies racked up $70 billion in part by borrowing to balance budgets. Governor Alejandro Garcia Padilla is seeking to cut that debt load and revive an economy that's struggled to grow since 2006.
An extension beyond Thursday wouldn't be a surprise, Fischer said. Bondholders and fuel-line lenders extended a forbearance accord 13 times since August 2014 until reaching the Nov. 5 pact. That contract kept discussions out of court. Bond insurers also participated in those extensions through September.
"All of these agreements have been extended repeatedly," Fischer said. "The idea that this one might also be extended is realistic."
A bondholder or fuel lender can withdraw from the agreement if insurers fail on Thursday to reach an accord with Prepa. The bondholder pact will automatically terminate if there's no monoline plan and also no strategy for how to implement a recovery plan without the insurers, according to the restructuring support agreement.
"While no agreement has yet been reached, negotiations are productive and ongoing," Lisa Donahue, Prepa's chief restructuring officer, said Tuesday before a Senate hearing in San Juan about talks with the bond insurers. "Any agreement that is ultimately reached with the monolines is contemplated to become part of the existing RSA."
Greg Diamond, a spokesman for MBIA and Michael Corbally, a spokesman for Syncora, declined to comment. Ashweeta Durani, spokeswoman for Assured, didn't reply to requests for comment.
A compromise with bond insurers is taking longer to reach than with the bondholder group because many of those investors purchased Prepa's securities at distressed levels and are willing to accept less than 100 cents on the dollar, Fisher said. Monolines would be required to make up to investors whatever principal or interest the utility fails to pay on time and in full. The bondholder plan includes delaying certain payments for five years.
MBIA insures almost $770 million of Prepa debt-service payments in the next five years, Edwin Groshans, an analyst at Height Securities, a Washington-based broker dealer, wrote in a Nov. 9 report. Assured guarantees payment on $262 million of Prepa principal and interest due in the next five years.
Prepa faces a $196 million interest payment due Jan. 1. The proposed debt exchange involves bondholders of uninsured debt swapping their existing securities for new securitization bonds that pay, for the first five years, only interest at a rate of 4 percent to 4.75 percent. Or investors can exchange for other securities, called capital-appreciation bonds, that will accrue interest for the first five years. The bondholder group will negotiate with Prepa to backstop a cash tender for bonds held by non-forbearing investors.
Members of the bondholder group include Angelo, Gordon & Co., BlueMountain Capital Management, D.E. Shaw, Knighthead Capital Management, Marathon Asset Management, Franklin Advisers, Goldman Sachs and OppenheimerFunds, according to the restructuring support agreement.
Along with legislative approval, the new bonds must receive an investment-grade rating and the exchange cannot leave more than $700 million of the agency's current uninsured debt remaining. The utility's debt is rated at junk-bond levels.
Prepa "would like help from the insurers to essentially allow the restructuring bonds to be investment grade," Fischer said. "That appears to be a very sticky thing for them to get resolved. What is clear to us is they simply need to move forward."
Prepa bonds maturing July 2040, the utility's most-actively traded insured security in the past three months by volume, changed hands Monday at an average 60.5 cents on the dollar, to yield of about 9.4 percent, according to data compiled by Bloomberg. The debt traded at about 50 cents at the start of 2015.
With $72 billion in unpayable debt, Puerto Rico is in deep trouble. So are its lenders.
Naturally, they want all their money back.
If the lenders get their way, the rest of us could pay a steep price. Their solution may well put Hillary Clinton or Bernie Sanders in the White House for at least four years.
Here’s why.
Puerto Rico’s governor, Alejandro Garcia Padilla, said on June 29 that the U.S.-owned territory could not repay its massive debts. The commonwealth and various governmental entities ran up huge bills and pushed repayment out into the future. Now the future is here.
Was the spending wasteful? Probably so, but that isn’t the point. Someone has to hold the bag. The question is who it will be.
Similar situations in the fifty states normally land in bankruptcy court. The city of Detroit is so far the largest municipal bankruptcy, though Chicago may not be far behind. In such cases, the court considers arguments from all the parties and tries to reach a fair compromise.
Bankruptcy is not a perfect system, but is usually better than the alternatives. Donald Trump’s business bankruptcies are good examples (see "Trump Teaches Americans a Bankruptcy Lesson").
As Trump argued in the first presidential debate, “Lenders aren’t babies.” He was exactly right. When you make a loan, you voluntarily accept repayment risk. Higher interest rates compensate you for taking that risk. Occasional losses are part of the deal.
In Puerto Rico’s case, bankruptcy is not an option. Current federal law does not let U.S. territories declare bankruptcy. The island’s leaders want Congress to change this.
Otherwise, the territory could be stuck in financial limbo for generations.
A group of hedge funds that own Puerto Rican debt (bought mostly at deep discounts) opposes this move. Rather than take their lumps and move on, they want to make island slash education, health care and infrastructure spending.
That may seem like a good idea, but it creates another problem.
While physically beautiful, Puerto Rico is economically a third-world country. Its people are mostly poor and uneducated. Some don’t speak English, yet they are U.S. citizens.
Puerto Ricans can move to the U.S. any time they wish. They don’t need anyone’s permission. Immigration agents will welcome them, not stop them.
Legally, Puerto Ricans are as “American” as you are.
If the hedge funds impose austerity measures and make Puerto Rico even more unlivable, some number of Puerto Ricans will move to the mainland for its better welfare programs.
Once here, they get to vote.
Puerto Ricans living on the island can’t vote for president. Those living on the mainland can – and they lean heavily Democratic.
In 2012, Barack Obama carried Florida by only 73,189 votes. He won Ohio by 103,481 votes and lost North Carolina by only 97,465 votes.
Puerto Rico’s population is about 3.5 million. If a relatively small number move to the mainland in the next year, they will help those battleground states either swing or stay Democratic.
Whatever their wealthy investors lose in bankruptcy court will pale in comparison to what President Clinton or President Sanders will cost them – and all of us. Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW
Ambac Financial Group, Inc. AMBC, -0.06% ("Ambac" or the "Company"), a holding company whose subsidiaries, including Ambac Assurance Corporation ("Ambac Assurance"), provide financial guarantees and other financial services, confirmed today that certain Puerto Rico Highways and Transportation Authority ("HTA") Transportation Revenue Refunding Bonds (Series N) issued in 2007 and insured by Ambac Assurance have been cancelled by the HTA.
HTA's repurchase of these bonds required the bond cancellation, at no cost to Ambac Assurance. As a result of the bond cancellation, Ambac Assurance has eliminated $228.5 million net par exposure to HTA, equating to approximately $493 million of lifetime principal and interest.
Commenting on today's announcement, Nader Tavakoli, Interim President and Chief Executive Officer said, "After working with HTA to ensure cancellation of these bonds, we are pleased that Puerto Rico has honored its obligation to do so. We hope to continue working with Puerto Rico constructively."
About Ambac Ambac Financial Group, Inc., ("Ambac"), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiaries, Ambac Assurance Corporation ("Ambac Assurance"), Everspan Financial Guarantee Corp., and Ambac Assurance UK Limited ("Ambac UK"), provide financial guarantees and other financial services to clients in both the public and private sectors globally. Ambac Assurance, including the Segregated Account of Ambac Assurance (in rehabilitation), is a guarantor of public finance and structured finance obligations. Ambac is also selectively exploring opportunities involving the acquisition and/or development of new businesses. Ambac's common stock trades on the NASDAQ Global Select Market under the symbol "AMBC". The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac's common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac's common stock. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates to the status of certain primary residential mortgage backed securities litigations. For more information, please go to www.ambac.com.
Puerto Rico May Default On $700 Million In Debt Payments Due in December 2015 and January 2016.
The Island's Debt Exceeds Its GNP And Debt Service Is One-Third Of Its Tax Revenue.
Congress Is Unlikely To Act To Offer Bankruptcy Help.
Even though the situation is dire in Puerto Rico and time is running out, we have yet to hear from our Congress. A default on its debt will throw Puerto Rico's government and people, along with the $3.7 trillion municipal bond market, into turmoil.
One of Puerto Rico's chief restructuring advisors, former Detroit bankruptcy Judge Steven Rhodes, sounded frustrated with Congress in an article last month in Caribbean Business.
Judge Rhodes, who oversaw Detroit's $18 billion bankruptcy, pleaded with Congress in interviews recently to allow Puerto Rico to use Chapter 9 of the U.S. Bankruptcy Code to provide an orderly restructuring of the government's debt and the debt of its public corporations. Congress appeared unmoved and is unlikely to offer bankruptcy help for the island.
We feel like we are a forgotten people in a forgotten land." Those were the poignant and sadly accurate words of a small business owner to a New York Times reporter back in July about the dire economic conditions on the island of Puerto Rico. It has been said that when the U.S. economy catches a cold, Puerto Rico gets pneumonia. For the last decade, the island has been mired in a recession and fiscal crunch, which led Puerto Rico's governor to announce this summer that the island is running out of money and would likely be unable to pay its $73 billion debt by the end of the year. Critically, the economic challenges facing the island are leading to a humanitarian crisis of enormous proportion for the 3.5 million American citizens who live there.
Puerto Rico has shed more than a quarter of a million jobs in recent years, the unemployment rate is currently twice that of the national rate, and nearly half of the population lives in poverty. The result is that during a time of unprecedented growth in the Latino community, the island is one of the few places in which the Hispanic population has shrunk. In fact, for the first time in history according to the Center for Puerto Rican Studies at Hunter College, there are more Puerto Ricans living on the mainland than on the island--a consequence of hundreds of thousands of people leaving in search of the success and stability that eludes them at home. In the next few months, the government of Puerto Rico will be making massive cuts in services that will cost thousands their jobs, cripple public transportation, close even more schools than the hundreds that have already gone under, and likely end health care for millions of residents on the island, putting all families there--especially the poorest and most vulnerable--in peril.
The repercussions of this crisis also resonate far from the island as well--in the communities, like Orlando, which are absorbing migrants from Puerto Rico; and with the organizations helping these new residents, often without dedicated resources, as I have heard from NCLR community-based Affiliate partners in Pennsylvania and New York. Yet outside of the Puerto Rican community both on the island and on the mainland, few of our fellow Americans are aware of what is happening. Our government is reacting with a decided lack of urgency. That has to change.
These "forgotten people" are American citizens. Many are veterans of our Armed Forces or part of the families who supported them. Since the First World War, more than 200,000 Puerto Ricans have served our country in every conflict the United States has been in and there are more than 10,000 serving right now in the military--a disproportionately high participation rate. They are also part of the larger Latino community, especially along the east coast, but increasingly in states like Texas and Ohio. That is why NCLR has been meeting with the administration, members of Congress, and Puerto Rican sister organizations here on the mainland to urge immediate action from Washington.
Specifically, on behalf of our fellow citizens in Puerto Rico, we are urging swift and robust action on the part of the federal government, especially from Congress. Puerto Rico cannot solve this crisis on its own and that is by design--Congress's design. By law, Puerto Rico cannot avail itself of bankruptcy laws like other U.S. states and it cannot appeal to international financial institutions like other countries. Congress made these rules and it is now time for Congress to abide by them. Continuing to ignore and neglect this crisis is not an option, and Congress has a legal and moral obligation to its fellow citizens in Puerto Rico to stop shirking its responsibility.
The Obama administration took some important steps last week in the plan the Treasury Department released, like extending needed tax credits, expanding access to Medicaid, and calling for bankruptcy reform. But we are on the brink of a humanitarian crisis: workers who do not get paid cannot provide for their families; children will lose educational time if schools close; and patients will surely suffer with cuts to health care.
The exodus of families from Puerto Rico started at least three years ago. We have watched as our fellow Americans in Puerto Rico have borne the brunt of austerity measures. We have witnessed parents making the choice to separate so that they can find work to support their children. Florida sees these families. Puerto Rican leaders see these families. NCLR sees these families. But Congress has turned a blind eye, choosing to let these families suffer.
NCLR joins the voices of concerned and responsible Americans in calling for Congress to open its eyes to the humanitarian crisis at our doorstep. It's time to act. Give Puerto Rico the opportunity, the ability, and the essential policy changes to resolve this crisis. Show our fellow Americans in Puerto Rico that they are not forgotten.
The Puerto Rico Electric Power Authority needs to get insurance companies that guarantee a portion of the utility’s debt against default to endorse a conditional restructuring agreement by Thursday to avoid the risk of the deal with bondholders falling apart.
If MBIA Inc., Assured Guaranty Ltd. and Syncora Guarantee Inc. don’t sign on to the debt exchange finalized with some investors last week, then the utility known as Prepa, its fuel-line lenders and the bondholder group will work to implement a recovery plan “through a mechanism to be agreed among the parties that may include, without limitation, a judicial process, including an enforcement proceeding under applicable law,” according to the Nov. 5 agreement posted on the Municipal Securities Rulemaking Board’s website.
“It produces some pressure on Prepa to hurry up,” said Philip Fischer, head of municipal research for Bank of America Merrill Lynch in New York. “The insurers would have a disproportionate amount of insurance liability and they’re trying to negotiate their way around that.”
The insurers run the risk being liable for the repayment of about $2.5 billion of bonds if Prepa fails to make payments and the restructuring is viewed as a default. Under the agreement, about 35 percent of the utility’s bondholders agreed to absorb losses of as much as 15 percent and delay repayment to give the struggling utility more breathing room to restructure its finances as well as time to improve operations. The agency is hampered by its inability to reorganize in bankruptcy court as utilities in the mainland U.S. can.
Possible Extension
A restructuring of Puerto Rico’s main electricity provider would be the largest ever in the $3.7 trillion municipal-bond market. The utility has $8.2 billion of debt. It would be the first commonwealth entity to reduce its obligations. Puerto Rico and its agencies racked up $70 billion in part by borrowing to balance budgets. Governor Alejandro Garcia Padilla is seeking to cut that debt load and revive an economy that’s struggled to grow since 2006.
An extension beyond Thursday wouldn’t be a surprise, Fischer said. Bondholders and fuel-line lenders extended a forbearance accord 13 times since August 2014 until reaching the Nov. 5 pact. That contract kept discussions out of court. Bond insurers also participated in those extensions through September.
“All of these agreements have been extended repeatedly,” Fischer said. “The idea that this one might also be extended is realistic.”
Insurer Talks
A bondholder or fuel lender can withdraw from the agreement if insurers fail on Thursday to reach an accord with Prepa. The bondholder pact will automatically terminate if there’s no monoline plan and also no strategy for how to implement a recovery plan without the insurers, according to the restructuring support agreement.
“While no agreement has yet been reached, negotiations are productive and ongoing,” Lisa Donahue, Prepa’s chief restructuring officer, said Tuesday before a Senate hearing in San Juan about talks with the bond insurers. “Any agreement that is ultimately reached with the monolines is contemplated to become part of the existing RSA.”
Greg Diamond, a spokesman for MBIA and Michael Corbally, a spokesman for Syncora, declined to comment. Ashweeta Durani, spokeswoman for Assured, declined to comment.
Possible Liability
A compromise with bond insurers is taking longer to reach than with the bondholder group because many of those investors purchased Prepa’s securities at distressed levels and are willing to accept less than 100 cents on the dollar, Fisher said. Monolines would be required to make up to investors whatever principal or interest the utility fails to pay on time and in full. The bondholder plan includes delaying certain payments for five years.
MBIA insures almost $770 million of Prepa debt-service payments in the next five years, Edwin Groshans, an analyst at Height Securities, a Washington-based broker dealer, wrote in a Nov. 9 report. Assured guarantees payment on $262 million of Prepa principal and interest due in the next five years.
Bondholder Group
Prepa faces a $196 million interest payment due Jan. 1. The proposed debt exchange involves bondholders of uninsured debt swapping their existing securities for new securitization bonds that pay, for the first five years, only interest at a rate of 4 percent to 4.75 percent. Or investors can exchange for other securities, called capital-appreciation bonds, that will accrue interest for the first five years. The bondholder group will negotiate with Prepa to backstop a cash tender for bonds held by non-forbearing investors.
Members of the bondholder group include Angelo, Gordon & Co., BlueMountain Capital Management LLC, D.E. Shaw & Co., Knighthead Capital Management LLC, Marathon Asset Management LP, Franklin Advisers Inc., Goldman Sachs Group Inc. and OppenheimerFunds Inc., according to the restructuring support agreement. The group held about $3 billion of uninsured Prepa bonds, as of Nov. 3, according to forbearance documents.
Along with legislative approval, the new bonds must receive an investment-grade rating and the exchange cannot leave more than $700 million of the agency’s current uninsured debt remaining. The utility’s debt is rated at junk-bond levels.
Prepa “would like help from the insurers to essentially allow the restructuring bonds to be investment grade,” Fischer said. “That appears to be a very sticky thing for them to get resolved. What is clear to us is they simply need to move forward.”
Prepa bonds maturing July 2040, the utility’s most-actively traded uninsured security in the past three months by volume, changed hands Monday at an average 60.5 cents on the dollar, to yield of about 9.4 percent, according to data compiled by Bloomberg. The debt traded at about 50 cents at the start of 2015.
