Puerto Rico creditor group swells to $300 billion in assets

NEW YORK, Aug 13 (Reuters) - A group of creditors that could be a source of financing for Puerto Rico if it restructures some of its debt has gained eight new members with an additional $60 billion in assets, including hedge fund Davidson Kempner Capital Management, the group said on Wednesday.

The creditors, which call themselves the "Ad Hoc Group," now have 27 asset managers as members with more than $300 billion in assets under management. The group says it holds more than $4.5 billion of Puerto Rican bonds.

Davidson Kempner, with more than $20 billion in assets, will join the group's steering committee, which currently comprises Brigade Capital Management, Fir Tree Partners, Monarch Alternative Capital and Perry Capital.

The group's rapidly growing financial clout and increased membership is another indication of how Puerto Rico's debt holders are dividing into different camps ahead of what could be a scrappy and acrimonious battle should the island default.

The news of the addition of creditors to the Ad Hoc Group comes at a critical time for Puerto Rico, just one day a ahead of a deadline faced by its electric power utility, Prepa, to repay $671 million owed under credit facilities with Citigroup and Scotiabank.

The U.S. commonwealth passed a law in June that allows some of its public corporations, such as Prepa, to restructure around $20 billion in debt. Investors and analysts widely see Prepa as the most likely candidate to restructure. Puerto Rico has more than $70 billion in debt outstanding.

Investors who mainly hold debt backed by the commonwealth's government, such as the Ad Hoc Group members, say that restructuring peripheral entities will shore up the government's budget and make their debt holdings more secure.

Oppenheimer Funds and Franklin Templeton Investments, which hold around $1.7 billion of Prepa's debt, sued Puerto Rico in June. They argue the law, known as the Recovery Act, conflicts with the U.S. Constitution and that the power to make bankruptcy law rests solely with the U.S. federal government.

The funds filed an amended complaint on Monday arguing that Prepa has other alternatives open to it, such as raising electricity rates, collecting more than $640 million owed to it by the commonwealth and cutting staff.

BlueMountain Capital Management, a hedge fund with more than $400 million in Puerto Rico bonds, has also challenged the law, hiring as lead counsel Theodore Olson, one of the most prominent lawyers in the United States.

(Reporting by Edward Krudy; Editing by Steve Orlofsky)

By Edward Krudy

Puerto Rico creditor group swells to $300 billion in assets

Puerto Rico's power authority likely to get credit reprieve -source

SAN JUAN, Puerto Rico, Aug 13 (Reuters) - Puerto Rico's electric power authority, PREPA, is likely to get an extension of vital lines of credit in an agreement that could see lenders appoint a restructuring expert at the debt-stricken utility, a financial industry executive familiar with the situation said on Wednesday.

The U.S. commonwealth's restructuring specialists and its Government Development Bank are in talks with banks to extend PREPA's loans of $671 million to March 2015, with an option to shorten the extension to the year end, said the source, who is in contact with the negotiating parties.

PREPA has until Thursday to secure an extension of the credit lines, which it uses to buy oil for its generators. Failure to secure an extension could force it to seek protection under Puerto Rico's new Recovery Act that allows some public entities to enter a bankruptcy-like process.

Another option would be a short-term extension similar to a recent two-week reprieve, said the source, who declined to be identified because the discussions are confidential. Talks are continuing and still may fail to produce a deal.

PREPA is on the hook for $146 million from Citigroup Inc and $525 million from a consortium led by Scotiabank . Citi and Scotiabank declined comment and PREPA was not immediately available for comment on the terms of a possible deal.

"The banks will end up folding and extending the lines until March 2015, with an option to shorten that extension to December 2014," said the source.

The option to shorten a possible extension from March to December would be triggered by a vote of 25 percent of lenders, the source said.

Gary Krellenstein, an energy specialist at Oxford Advisors, said an extension to the credit lines would be a positive development. "It will allow some of the creditors, the commonwealth, and PREPA to negotiate further to see if there are some alternatives available to them," he said.

The banks could also name a chief restructuring officer at PREPA with responsibility for developing a restructuring plan by March, the source said. Such a move would suggest PREPA may eventually restructure over $9 billion in debt as is widely expected.

PREPA gained a two-week extension to the credit lines that expires on Thursday. Reuters reported at the time that banks were asking for 9 percent interest over the London Interbank Offered Rate (LIBOR). Details of the agreement were not published.

PREPA uses the credit lines to buy oil from its supplier, Brazil's Petrobras, and the loss of those lines could complicate operations even if it is able to tap existing funds to pay for operating expenses in the short term.

Hedge funds, that have been buying up Puerto Rico debt lately, are offering to provide PREPA with interim financing, according to two investors currently in Puerto Rico, as well as longer term financing to help convert their old oil powered infrastructure to cheaper natural gas.

The core of PREPA's problems is that it uses high cost oil to generate electricity. PREPA spends almost two-thirds of its operating budget on oil and electricity prices on the island are double those in the mainland United States.

Oxford Advisors' Krellenstein estimates that PREPA could save $1 billion on its yearly $2.6 billion oil bill if it converts to natural gas.

(Reporting by Reuters in San Juan, writing by Edward Krudy and Megan Davies; Editing by Chizu Nomiyama, Matthew Lewis and Tom Brown)

Puerto Rico's power authority likely to get credit reprieve -source

PREPA Bondholders Seek Summary Judgment Invalidating Puerto Rico’s Public Corporation Bankruptcy Legislation

On August 11, Franklin Funds and Oppenheimer Rochester Funds filed a second amended complaint, opposition to motion to dismiss and cross-motion for summary judgment in the litigation they previously filed in the United States District Court for Puerto Rico challenging the constitutionality and validity of Puerto Rico's so-called Recovery Act.  

The second amended complaint reiterates that a PREPA filing under the Recovery Act, which establishes debt adjustment procedures for most of Puerto Rico's public corporations, is both "probable and imminent."  The motion seeks summary judgment on two of the plaintiffs' claims: that the Recovery Act is constitutionally and statutorily preempted, and that the Recovery Act's automatic stay provisions are illegal to the extent they purport to preclude a federal court action.  The motion asserts that these two claims are "purely legal, and will not be clarified by further factual development."

The summary judgment motion re-enforces our prior assessment that, once the court is persuaded to address the merits, one of the plaintiffs' strongest arguments is that Section 903 of the federal Bankruptcy Code precludes enforcement of any Recovery Act debt adjustment against non-consenting bondholders.

The motion, referencing legislative history and prior case law,  effectively dispenses with Puerto Rico's relatively weak arguments that Section 903 cannot or should not be read as applicable to Puerto Rico's public corporations.   Puerto Rico has argued that Congress could not have intended to leave its public instrumentalities without access to any debt adjustment process, which, given Puerto Rico's express exclusion from eligibility under Chapter 9 of the Bankruptcy Code, would be the effect of  applying Section 903 to Puerto Rico's own public corporation insolvency legislation.  Whether Congress indeed intended to leave Puerto Rico in such a predicament is unclear.  The plaintiff's brief suggests that because Puerto Rico's bonds, unlike any state's bonds,  benefit from nationwide triple tax-exemption (which accounts for Puerto Rico's status as the third highest volume issuer of tax-exempt bonds after California and New York), "Congress did not want Puerto Rico to restructure its municipal debt through either its own laws or Chapter 9."  Whether this or any other rationale for Puerto Rico's statutory treatment under the Bankruptcy Code exists, the plaintiffs' motion argues that the statutory language in Chapter 9 is explicit, and that if Puerto Rico is unhappy with its position, "Puerto Rico's remedy lies ... with Congress."

Although Section 903 does not technically preempt or prohibit all of the Recovery Act, if a court agrees that Section 903 is applicable, any debt adjustment produced by the Recovery Act's procedures could not be enforced against non-consenting creditors, thereby rendering the Recovery Act largely ineffective as a debt adjustment mechanism.

For an adjudication of the plaintiffs' challenge to take place in federal court, plaintiffs must establish standing and ripeness.  The Commonwealth and PREPA have asserted the obvious argument that PREPA has not filed under the Recovery Act, and that therefore there is no case or controversy to adjudicate. The plaintiffs' summary judgment motion, like the original complaint, argues that the plaintiff PREPA bondholders have suffered a devaluation of their bonds as a result of the Recovery Act's enactment, and that they are forced to litigate before a filing because the automatic stay provisions of the Recovery Act would preclude them from pursuing federal court litigation after a PREPA filing under the Recovery Act.  (As noted, the plaintiffs simultaneously seek summary judgment on the unconstitutionality of any such application of the Recovery Act's automatic stay to preclude or freeze a federal court action.) Whether these arguments that the case is ripe for adjudication will find traction with the court remains to be seen.

The filing also previews arguments that will be further litigated if the Recovery Act survives the plaintiffs' preemption claim.  The plaintiffs assert that the Recovery Act's provisions effect an unconstitutional impairment of contracts.   

As we have previously discussed, courts have interpreted the "Contracts clause" not as an absolute bar to impairment of contracts by state action, but rather as a balancing test in which the state's interests and needs and the extent of the contractual impairment are weighed against each other.  This makes contract impairment claims highly fact-sensitive and unlikely candidates for summary judgment.  For example, the plaintiffs' brief argues that PREPA has the following alternatives to impairing its bonds through debt adjustment:

(1)    PREPA can raise rates.
(2)    The Commonwealth of Puerto Rico could repay over $640,000,000 it owes to PREPA.
(3)    The Commonwealth could reduce PREPA's taxes and subsidies which the brief asserts amount to over $1 billion from 2014 through 2018.
(4)    PREPA should collect its full accounts receivable and pay subsidies after debt service instead of permitting customers to offset subsidies from their payments.
(5)    PREPA should cut costs and address inefficiencies.
(6)    PREPA should strengthen its capital markets reputation by hiring an investment banker and making public presentations.

If PREPA, or any other public corporation, eventually seeks protection and debt adjustment under the Recovery Act, these types of arguments about whether the applicable issuer requires any debt adjustment in order to maintain financial and operational viability (and, if so, whether the proposed amount of debt adjustment is necessary for such viability) will be front and center in such proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

PREPA Bondholders Seek Summary Judgment Invalidating Puerto Rico’s Public Corporation Bankruptcy Legislation

Puerto Rico July tax revenue beats forecast on excise tax

Puerto Rico's tax revenues beat the government's forecast in July due to higher-than-expected collections of foreign corporation tax, but receipts from other taxes, such as personal income and corporation, missed targets.

Revenue rose 26 percent from the same period last year to $624 million in July, exceeding the government's forecast for the first month of fiscal 2015 by $37 million, the government said in a release dated Aug. 7.

Foreign corporation excise tax collection reached $283.3 million during the month, an increase of $148.4 million over July 2013 and $75.3 million over target. The growth was due to an increase in the tax to 4 percent from 2.75 percent.

"Preliminary revenues for July 2014 are a good sign for the beginning of fiscal year 2015. Since January 2013, we have been on a steady path towards recovery and fiscal accountability. This month's results strengthen the foundation for Puerto Rico's future economic growth," Treasury Secretary Melba Acosta Febo said in a statement.

Despite beating the outlook in overall collection estimates, Puerto Rico missed forecasts in important taxes, according to the release dated Aug. 7. Individual income tax was $15.1 million below forecast at $142.1 million, and corporate tax was $3.7 million below forecast at $99.3 million.

Sales and use tax, which is used to support COFINA, or sales tax revenue bonds, rose 6 percent to $113.7 million. The Treasury did not provide an estimate for sales tax revenues for July.

(Reporting by Edward Krudy in New York; Editing by Chizu Nomiyama and Jeffrey Benkoe)

Puerto Rico July tax revenue beats forecast on excise tax

New York Fed study finds Puerto Rico emigration has not led to 'brain drain'

Island's population has been falling for a decade due to emigration, but share of college graduates has increased as low-skilled workers are leaving in greater numbers

Author: Central Banking Newsdesk

Source: Central Banking | 08 Aug 2014

Categories: Economics

Topics: Federal Reserve Bank of New York, United States, Labour

Puerto Rico's population has been falling for nearly a decade, and the pace of decline has accelerated in recent years, largely due to net out-migration of the island's citizens, according to a Federal Reserve Bank of New York study.

The Causes and Consequences of Puerto Rico's Declining Population, by Jaison Abel and Richard Deitz, examines the factors contributing to this population loss and discusses the resulting challenges.

The study shows that although the outflow of people has quickened the pace of population aging, it has not necessarily led to a ‘brain drain'.

"The share of residents with a college degree has increased slightly in recent years, in part because people without college degrees have been leaving in higher numbers," the study notes.

Abel and Deitz also call for measures to shore up Puerto Rico's economy, including programmes that expand job opportunities for lower-skilled workers.

New York Fed study finds Puerto Rico emigration has not led to 'brain drain'

Assured Rises Most Since May as Puerto Rico Worries Fade

Assured Guaranty Ltd. (AGO:US), the bond insurer whose shares have slumped this year, rose the most in three months after telling analysts the firm could manage losses tied to Puerto Rican government debt.

Assured climbed (AGO:US) 3.9 percent to $22.83 at 10:10 a.m. in New York, the biggest gain since May 8. The shares had dropped (AGO:US) 6.9 percent this year through yesterday, including a stretch of eight straight days of losses in June and July after lawmakers in Puerto Rico approved a bill allowing some public corporations to restructure debt.

Assured has about $2.5 billion of net exposure to Puerto Rican debt, including $772 million tied to the troubled Puerto Rico Electric Power Authority, chief executive officer Dominic Frederico said today on a conference call with analysts and investors to discuss second-quarter earnings. The debt payments on the PREPA bonds would average about $64 million a year over 10 years, and $113 million for the other debt. With $12 billion in claims-paying resources, Assured could manage the payments in the event of a default, Frederico said.

Story: Can Puerto Rico Keep the Lights On?

“Even 100 percent severity loss would obviously be manageable,” he said.

Assured’s second-quarter earnings beat estimates of analysts surveyed by Bloomberg. Adjusted profit was 56 cents per share, the Bermuda-based company said in a statement yesterday. Analysts had predicted (AGO:US) 41.3 cents.

To contact the reporter on this story: Craig Giammona in New York at cgiammona@bloomberg.net

Video: Puerto Rico: Island of Debt and Opportunity

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Mitchell Martin, Faris Khan

By Craig Giammona

Assured Rises Most Since May as Puerto Rico Worries Fade

Puerto Rico: The New Hub for Ag-Biotech Innovation

A quote that wholly describes the agricultural climate of Puerto Rico.  The country offers a perfect location, climate, great soil quality, inviting regulatory system, three pronounced academic/research programs and friendly biotech work environment for future Ag biotech companies.

Puerto Rico has a distinct advantage over the United States: nearly a full year of spring-summer conditions, permitting 3-4 cycles for harvest a year. Not to mention that the southern part of the island, where many biotech farms are already located, has particularly low precipitation and has perfect conditions to grow corn and sorghum, two of the most popular crops from the island. This substantially reduces research and development time, and costs:

Most projects take 10 to 15 generations. Normally they are developed in temperate countries where it is only possible to plant one generation per year. In Puerto Rico, we can plant one generation per year, sometimes 4.

Not only does Puerto Rico have the ideal climate to cultivate, but it also has a very qualified labor force and high employee availability. The unemployment rate in Puerto Rico averages 14 percent, while in the southern part of the island, where many of the seed facilities operate, the unemployment rate may be higher than  25 percent. For many seasonal workers employed within the Ag-biotech industry, these companies may be the only income source for them.

Since the island is U.S. territory, it must undergo the same regulatory procedures for agricultural biotech companies located in the states, which includes USDA, FDA and EPA approvals and oversight. Additionally, the Commonwealth of Puerto Rico has its own regulatory process.  Within Puerto Rico, there are even Ag biotech government incentives provided by state and federal programs. From a marketing standpoint, Puerto Rico is located closer to the United States than Hawaii, and this makes exportation of products to the U.S. deliverable in a shorter amount of time.

Unlike other industrial clusters, the Ag-Biotech industry in Puerto Rico did not develop as a concerted effort of local authorities. Instead it was the natural result of companies recognizing the advantages Puerto Rico has to offer.

“Biotechnology Innovation—the union of scientific discovery and capital can flourish in a supportive research and regulatory environment. Key policy principles will help facilitate the discovery, development, and commercialization of biotech products that will fight disease, feed the hungry and improve the environment”-BIO 2014

Kathryn Mueller

Puerto Rico: The New Hub for Ag-Biotech Innovation

Hedge Funds Campaign For Puerto Rico Power Authority Debt Relief

NEW YORK (The Deal) -- As the Puerto Rico Electric Power Authority faces a Thursday forbearance agreement expiration and a daunting Aug. 14 debt maturity, an ad hoc group of 19 hedge fund bondholders is evaluating ways to provide financing and support to the commonwealth, including providing debtor-in-possession financing, according to some sources.

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One source following the situation said the ad hoc group is meeting with Puerto Rico's financial advisers at Millco Advisors LP soon to "orchestrate a campaign" for the hedge funds to support the new restructuring framework that was signed into law on June 28.

A different source familiar with the situation contended that the ad hoc group is focused on supporting Puerto Rico in its efforts to reduce its debt load while preserving the pledge of Puerto Rico's good faith, credit and taxing power for four types of bond issuances -- general-obligation bonds issued by the commonwealth, as well as debt issued by the Government Development Bank for Puerto Rico, the Public Buildings Authority, and COFINA, an issuer that's backed by sales taxes.

The source said the ad hoc group is "broadly supportive of Puerto Rico's efforts to protect those four bonds. ...The group's position is not tied to the recovery act."

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Puerto Rico's recovery act provides a framework for government-owned corporations to restructure their debt. No such possibility existed before, since Puerto Rico and its public agencies are prohibited from filing for Chapter 9 bankruptcy.

Officials at Millco didn't respond to requests for comment.

Robert Donahue, a managing director at muni credit resesarch firm Municipal Market Advisors, believes the hedge funds in the ad hoc group are interested in possibly providing a DIP loan that could help PREPA restructure under Chapter 3 of the new act.

PREPA's role as a "distressed issuer that provides an essential service" is enticing for hedge funds that are looking for outsized returns in a shorter timeframe, Donahue said by phone.

The key would be inking a deal to provide super-senior financing with strong creditor protections.

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"Certainty of getting paid when PREPA restructures its old debt and begins the process of diversifying its fuel sources - that's what is appealing to them," Donahue said.

A spokesman for the ad hoc group responded, "We are exploring all potential financing possibilities that could help support the Puerto Rico government in some of its initiatives, and ensure that four types of debt - GO, GDB, PBA and COFINA - are safeguarded."

PREPA's biggest operational problem is its high fuel cost.

Sources believe the turnaround case rests on the utility's efforts to convert oil-fired power generation plants to use natural gas and renewable sources, which would significantly reduce its operating costs and improve its financial performance.

PREPA's forbearance agreement with its bank lenders expires on July 31, and it is unclear whether or not the agreement will be extended.

Agustin A. Irizarry-Rivera, a member of PREPA's board of governors, said by phone Wednesday that the "discussions with bank lenders and others are continuing."

He declined to comment on whether a forbearance agreement extension is expected, or on whether or not PREPA made a required $41.6 debt reserve fund replenishment payment that was due on July 25.

Municipal Market Advisers' Donahue said there is a "high probability" that the banks will extend the maturity on their credit facilities, but warned investors to prepare for the possibility that they will "rip off the Band-Aid sooner rather than later."

There are compelling cases for and against extending the forbearance agreement.

A longer forbearance period could give PREPA more time to work out a hedge-fund-led financing solution, Donahue said, adding that new hedge fund money could give the banks a better recovery on their investment than they may have been expecting.

The bank lenders, however, may be interested in preserving PREPA's cash.

If the utility filed for Chapter 3 restructuring, an automatic stay would go into effect upon the filing of the petition, which would prevent creditors from demanding their claims.

If banks are swayed by that possibility, they may refuse to provide a forbearance extension, Donahue said.

A $550 million revolving credit facility from Scotiabank Group that comes due on Aug. 14 is another near-term liquidity threat.

The ad hoc group was formed by hedge funds Brigade Capital Management LLC, Fir Tree Partners, Monarch Alternative Capital LP and Perry Capital LLC. According to a July 28 announcement, the group now consists of 19 asset managers holding nearly $4 billion of GO, GDB, PBA, and COFINA bonds.

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Another member of the ad hoc group is Aurelius Capital Management LP, which is well-known for its role in litigation against the Republic of Argentina.

"Given the Ad Hoc Group's more than $240 billion in capital under management, we could be a significant source of financing to relieve liquidity constraints for the Commonwealth going forward," the group said in a July 28 statement.

Morrison & Foerster LLP restructuring lawyers Anthony Princi, Gary Lee and James Newton are providing legal advice to the group.

The bonds held by the group would benefit from a reduction in debt levels at Puerto Rico's public corporations.

Some PREPA bondholders have filed lawsuits alleging that the new restructuring law is unconstitutional.

New York hedge fund BlueMountain Capital Management LLC filed a complaint on July 22 in the U.S. District Court of Puerto Rico, advised by Gibson, Dunn & Crutcher LLP's Theodore Olson, following a similar suit from fixed income funds run by Oppenheimer Funds Inc. and Franklin Templeton Investment Co.

Olson represents Aurelius and NML Capital Ltd. in their efforts to extract bond payments from Argentina.

Research firm Puerto Rico Clearinghouse noted that it expects more litigation, particularly from the bond insurers that insure more than $6.8 billion of Puerto Rico's debt.

"In previous U.S. municipal bankruptcies bond insurers have been the most aggressive litigants," the firm said in a July 28 report. "They are also likely to move aggressively in Puerto Rico."

By Lisa Allen

Hedge Funds Campaign For Puerto Rico Power Authority Debt Relief

Puerto Rico Debt Load Defied as Bonds Extend Rally

The Federal Reserve Bank of New York says Puerto Rico needs to cut its debt to levels from 2000. The burden isn’t stopping buyers of distressed assets from driving the island’s obligations to their longest rally since May.

Hedge funds and nontraditional municipal-bond buyers are purchasing junk-rated commonwealth securities as the obligations are on pace to gain for a fourth straight week, according to S&P Dow Jones indices.

The debt is rebounding from record low prices set after lawmakers approved a law in June that would let certain public corporations restructure their debt. Yesterday, the island’s delegate in the U.S. House of Representatives proposed a bill letting some agencies file for bankruptcy protection. Buyers with a stomach for risk see opportunity at these distressed levels, said Dan Toboja, senior vice president of muni trading at Ziegler Capital Markets in Chicago.

“People think that even if there’s a restructuring, those bonds are still probably going to have some sort of profit in them,” Toboja said.

Puerto Rico officials are struggling to revive the island’s economy while digging out from under $73 billion of debt and tackling a jobless rate that’s more than double the U.S. average. The population of the self-governing island of 3.6 million has shrunk for eight consecutive years as residents flee to the U.S. mainland, according to Census data.

Debt Suggestion

The island should lower the ratio of public debt to its gross national product to 60 percent -- the level of 14 years ago -- from 100 percent last year, the New York Fed said yesterday in its first report in two years on Puerto Rico, which is part of its district. The ratio and the commonwealth’s speculative-grade ratings raise borrowing costs, which the report said can impede economic growth.

“While these adjustments can be difficult, the experience of New York City suggests that it is possible to tackle fiscal pressures head on and come out stronger,” William Dudley, president of the New York Fed, wrote in a foreword. “Puerto Rico clearly has the assets and attributes to do so.”

Time Requirement

Reducing the island’s debt load will take time, said Matt Dalton, chief executive officer of White Plains, New-York based Belle Haven Investments, which oversees $2.2 billion of munis.

“If your credit card debt is as much as you make, how do you fix that problem? There’s not an obvious fix,” Dalton said.

Puerto Rico and its agencies, including the Electric Power Authority and the Highways & Transportation Authority, have borrowed over the years to help balance budgets. The commonwealth is the third-largest municipal debtor behind California and New York. The bulk of its obligations are tax-free nationwide, leading 66 percent of U.S municipal mutual funds to hold the securities.

Prepa, as the electric agency is known, may be the first to use the new debt-restructuring law. It faces $671 million of bank loans that it must repay Aug. 14 after extending the lines of credit.

Uninsured Prepa bonds maturing July 2042 traded yesterday at an average price of 48.11 cents on the dollar, the highest since June 26, the day after Governor Alejandro Garcia Padilla proposed the debt-restructuring bill, data compiled by Bloomberg show. The bonds fell to about 38.50 cents July 2, the lowest ever.

July Rebound

After losses in early July, Puerto Rico securities have recovered as investors absorbed the significance of the debt-restructuring law, Dalton said.

“That initial cannon fire over the bow, everybody just goes to the worst-case scenario of what they perceive it to be,” Dalton said.

Borrowing by public corporations accounted for almost 85 percent of the increase in the island’s debt ratio, according to the New York Fed report.

While those agencies have benefited from Puerto Rico’s ability to borrow through capital markets, “they have now harmed that access, threatening the delivery of the commonwealth’s core public services,” according to the report.

In response to the report, Garcia Padilla, who took office in January 2013, said his administration has reduced deficits, attracted businesses and created 50,000 jobs.

Work Ahead

“There is more work to be done, and we continue to execute on a comprehensive plan to drive economic growth and fiscal stability,” he said in a statement.

Puerto Rico’s utilities need to improve their finances and become more efficient, and may benefit from changes in “governance and ownership structures, including implementing selective privatization,” according to the report.

Lawmakers in June approved a measure allowing certain public corporations to negotiate with bondholders to reduce their debt.

Puerto Rico needs to eliminate budget deficits and implement multiyear spending plans, build reserves against economic shocks and improve its financial reporting, according to the New York Fed, whose markets desk implements monetary policy and monitors financial conditions.

“It takes money to make all that happen and they don’t have it,” Dalton said. “They’re desperate for cash.”

The report also suggests expanding Puerto Rico’s tax base and reducing rates across a range of levies to stimulate growth.

Pedro Pierluisi, a Democrat who can propose legislation but can’t vote on it, yesterday introduced a measure that would let agencies restructure debt in court. They don’t have that option, unlike cities including Detroit and Stockton, California, that have done so to escape financial burdens they could no longer afford.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman atsmerelman@bloomberg.net Mark Tannenbaum, Mark Schoifet

By Michelle Kaske

Puerto Rico Debt Load Defied as Bonds Extend Rally

Minimum-Wage Hike Threatens 200,000 Puerto Rican Jobs

An report in this summer’s edition of Regulation draws a horrific picture of Puerto Rico’s future if the federal minimum wage increases to US$10.10 per hour. The analysis details what would happen to employment if the wage were raised by the US Congress from the current $7.25.+

US$10.10 Minimum-Wage Impact (from $7.25)

	Employees Affected	Employment-Loss Estimate
Puerto Rico	471,040 - 480,461	193,610 - 203,031
US Total	22,387,175 - 23,575,380	730,906 - 1,919,111

Source: Regulation, summer 2014.
 

In what may be just an election-year tactic, the Democrat-controlled White House and US Senate are proposing just such a change, presumably to highlight the differences between them and the Republicans. Republicans, in general, oppose the hike, although the GOP has on occasion supported such mandated wage hikes in the past.+

Party politics aside, the study offers greater proof that raising the minimum wage hurts the poor, instead of helping them.+

Earlier this year, the non-partisan Congressional Budget Office said that raising the minimum wage would cost anywhere between 100,000 and 1 million jobs nationwide, with the greater impact on poorer states and territories. The “best guess” average was that it would cost roughly 500,000 jobs nationwide.

Puerto Rico, however, is a unique case. With total employment at about 985,000, and 285,000 of those employed by government, the real employed workforce (in private industry) is only about 700,000. Of the total employed, 471,000 earn less than the proposed $10.10 minimum wage. The same report indicates that a staggering 193,000 of these individuals would lose their jobs, and that is the rosy, low estimate.+

What the report doesn’t say is that many of the small businesses that employ minimum or low-wage workers may not have enough room in their profit margins to withstand yet another blow to their bottom lines. They would be forced to either raise prices — eliminating any value the new wage would add to workers’ salaries — or they would go out of business completely. This would compound the total number of jobs lost and tax-revenues forgone.+

This would put Puerto Rico’s already disastrous financial situation into the abyss of economic chaos.+

Caribbean Business reports that the Puerto Rico Economic Activity Index fell in June for the 19th straight time, and another 2.9 percent year over year. With this decrease in economic activity, how exactly does the current administration believe they will continue to meet revenue expectations needed for a balanced budget and maintain payments on their debt? In private, I suspect they don’t, but I digress.+

The point is that many small business owners, barely staying afloat and out of bankruptcy, will be faced with impossible choices: raise prices, cut employees, or close their businesses. Raising prices in this economic environment would likely cause sales to drop, thus killing the necessary income stream to maintain the level of service expected to keep customers coming back.+

There will be those business owners who can absorb the cost and those industries that can absorb the increased prices, but the number of small business owners holding on by a very thin economic thread has to be substantial in Puerto Rico and the rest of the nation.+

While the US Congress remains divided on the issue in an election year, there is no telling if enough Republicans will support the move and get it passed. If that happens, Puerto Rico may find itself asking for the Obama administration to exclude it from the program, as they were from Obamacare.+

However, what self-disrespecting politician in Puerto Rico will come out against a hike in the minimum wage? And, when the impact starts to hurt, which one of those politicians will be brave enough to say why the economy has tanked even further than it already has?

Frank Worley-Lopez

Minimum-Wage Hike Threatens 200,000 Puerto Rican Jobs

Pierluisi Offers Bill to Include Puerto Rico Under Muni Bankruptcy Law

WASHINGTON — Pedro Pierluisi, Puerto Rico's sole non-voting member of Congress, has introduced legislation that would allow the commonwealth's government to authorize certain government-owned corporations to enter Chapter 9 municipal bankruptcy.

The bill, the Puerto Rico Chapter 9 Uniformity Act of 2014, would adjust the federal bankruptcy code that currently allows only a "municipality" to restructure its debt under Chapter 9. A provision in the code defines this term as a "political subdivision or public agency or instrumentality of a state." Another provision in the code provides that the term "State" includes Puerto Rico, "except for the purpose of defining who may be a debtor under chapter 9 of this title." Pierluisi's bill would remove this prohibition.

Pierluisi said earlier this month that he would explore the possibility of legislation to make Puerto Rico equal under the bankruptcy law.

His public push began in reaction to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act signed into law by Gov. Alejandro García Padilla last month, which allows public corporations to restructure their debt. That law has spurred major credit concerns surrounding the Puerto Rico Electric Power Authority's bonds and prompted investment firms to file suit against the commonwealth in an effort to have the law overturned.

"By enacting the Recovery Act, the governing party in Puerto Rico gave a clear signal that one or more of its government-owned corporations might seek to adjust their debts in the future," Pierluisi said in a release. "This signal generated a strong negative reaction from the bond market and credit rating agencies. It also led to legal challenges filed by investors represented by some of the best law firms in the nation, who argue that the Puerto Rico government does not have the power to enact this law."

Pierluisi has been critical of the move to attempt a solution by local law without consulting his office, although the governor consulted U.S. Treasury officials about the possibility of amending the bankruptcy code and backed off the idea after deciding it would be too slow a process.

Pierluisi said that amending Chapter 9 is a better route, calling it "more predictable, orderly and swift."

"I believe that amending the U.S. Bankruptcy Code to extend Chapter 9 to Puerto Rico is the most sensible and logical way to proceed," he said.

Those following the Puerto Rico situation from Washington said when Pierluisi floated the idea in early July that it could work, but would take time. Congress is headed out on a recess this week and will not return to legislative business until Sept. 8.

The National Bankruptcy Conference, a group of bankruptcy experts dating back to the Great Depression, issued a letter endorsing Pierluisi's bill.

"The Conference sees no bankruptcy policy reason why Puerto Rico's municipalities should not have the same access as municipalities in the states to Chapter 9," the letter states. "Enactment of the bill, allowing Puerto Rico to authorize its municipalities to file for Chapter 9 relief, would ensure immediate access to debt adjustment for Puerto Rico on a less constitutionally-contested basis than the Commonwealth's [Recovery] Act."

The conference also said it "does not see any impediment in the U.S. Constitution to giving Puerto Rico the same right as states to authorize municipalities to file for Chapter 9 relief," However it added that "questions may arise about the intersection between the bill and the Public Corporation Debt Enforcement and Recovery Act enacted by Puerto Rico in June 2014.

Pierluisi's announcement was also quick to reassure holders of Puerto Rico bonds that he does not believe his bill would result in rampant bankruptcy filings among Puerto Rico issuing authorities like PREPA.

"A government-owned corporation must be "insolvent" to be eligible for relief under Chapter 9, not simply financially distressed, he noted in a statement. "A federal bankruptcy judge would dismiss a Chapter 9 case filed by a government-owned corporation in Puerto Rico if it fails to meet this test, which appears to be more stringent than the test established by the local Recovery Act."

Pierluisi also said his bill would do nothing to change the fact that Puerto Rico, like the 50 states, is not eligible for bankruptcy. Reassuring investors and credit rating agencies has been a recent theme for Pierluisi, who traveled to New York in mid-July and spent time meeting with rating analysts and investment bankers to urge them to keep the faith in Puerto Rico.

Bankruptcy experts have floated the idea of having the federal government backstop Puerto Rico debt so that it could be refinanced at a lower rate, but most observers view that as politically difficult if not impossible. U.S. Treasury officials have repeatedly denied that any "bailout" of Puerto Rico is under consideration, but the federal government has offered Puerto Rico technical guidance in the past.

by Kyle Glazier

Pierluisi Offers Bill to Include Puerto Rico Under Muni Bankruptcy Law

Puerto Rico Municipal Bankruptcy Proposed in U.S. House Bill

Puerto Rico’s government-owned corporations could file for bankruptcy protection under a bill proposed in the U.S. House of Representatives by the delegate from the Caribbean territory, which is struggling to pay $73 billion in debt.

Pedro Pierluisi, a Democrat who can propose legislation but can’t vote on it, today introduced the measure that would let agencies restructure debt in court. They don’t have that option, unlike cities including Detroit and Stockton, California, that have done so to escape financial burdens they could no longer afford.

The bill would “enable the Puerto Rico government to authorize its government-owned corporations to utilize the tried-and-true Chapter 9 procedure if it becomes necessary, under the expert supervision of an impartial federal bankruptcy judge,” Pierluisi said in a statement.

Puerto Rico’s credit rating was cut to junk this year, prompting speculation among investors about bond defaults. The island of 3.6 million people and its agencies, including its electric company, have borrowed to pay bills as the economy shrank and residents left for the U.S. mainland. Its debt is tax free in all states and is held in 66 percent of U.S. municipal-bond mutual funds.

No Guarantees

The legislation’s prospects are uncertain. Pierluisi said he has no guarantees from Republican leaders that they would consider the legislation, which he plans to push once lawmakers return in September.

The bill would give Puerto Rico the privileges extended to states under bankruptcy law. The territory, like states, wouldn’t be eligible to file itself, Pierluisi said.

“Everybody that we’ve talked to is receptive,” he said today.

Bond investors in the U.S. have long opposed municipal bankruptcies, which let cities force creditors to accept less than they are owed. Only about half the states let their municipalities file for bankruptcy.

Puerto Rico lawmakers have already taken their own steps to allow the restructuring of debts short of bankruptcy. A law passed last month would allow some public corporations to negotiate with bondholders, potentially forcing them to accept unfavorable terms. Two investment funds, Franklin Templeton Investments (BEN) and Oppenheimer Funds Inc., have sought to have the law thrown out in court. No agency has sought to utilize the law.

The Puerto Rico Electric Power Authority, which supplies most of the island’s electricity, is a leading candidate. The authority has been negotiating with banks for time to make payments on credit lines used to buy fuel. Fitch Ratings on June 26 downgraded the authority to CC, its third-lowest speculative grade, citing a probable restructuring or default.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman atsmerelman@bloomberg.net Alan Goldstein

By William Selway and Derek Wallbank

Puerto Rico Municipal Bankruptcy Proposed in U.S. House Bill

Puerto Rico Power Authority in Deal With Banks to Defer Loan Payments

The Puerto Rico Electric Power Authority reached agreements Thursday with banks to defer payments on lines of credit to Aug. 14, according to a statement from the authority.

The extension is the second this month for the authority, giving it two more weeks of breathing room to forestall a possible restructuring of about $9 billion in total debt. Earlier this month it reached deals with Citigroup Inc. unit Citibank and a syndicate led by Bank of Nova Scotia’s Scotiabank de Puerto Rico to delay some payments on $671 million it owed the banks between July and mid-August. Scotiabank declined to comment. Citibank representatives didn’t respond to requests for comment.

The utility, known as Prepa, is at the forefront of Puerto Rico’s long-running financial difficulties. Prepa is scrambling to find cash to fund operations and make payments to lenders, even as the commonwealth broadly struggles with steep unemployment and a weak economy.

“It just delays the decision but it’s good to hear they’re working together enough to get a delay,” said Daniel Solender, director of municipal-bond management at Lord Abbett & Co., which oversees about $15.5 billion in municipal-related holdings, including some from Puerto Rico.

Standard & Poor’s Ratings Services also weighed in on Prepa’s debt Thursday, droppingcut its already-junk rating on $8.3 billion of power revenue bonds to triple-C and warning of future downgrades. The ratings firm said “the authority’s debt is vulnerable to nonpayment.” S&P also affirmed its double-B rating on Puerto Rico’s general-obligation debt.

Some power-authority bonds were trading at around 48 cents on the dollar Thursday, unchanged from Wednesday.

The authority said it is having “productive discussions” with creditors with the goal of reaching an agreement to improve short-term liquidity. Payments to employees and suppliers will continue.

“This latest show of support from our bondholders, bond insurers and lenders provides us with additional time to evaluate all available options to ensure we are reaching the best possible outcome for our employees, customers, creditors and suppliers,” Juan F. Alicea Flores, Prepa’s executive director, said in the statement.

Puerto Rico has about $73 billion in total obligations and its debt is widely held by municipal mutual funds and individuals, leading some analysts to worry that the power authority’s troubles could escalate into losses for investors nationwide.

Puerto Rico lawmakers in June approved legislation allowing some public agencies, including the island’s power, water and transportation authorities, to overhaul almost $20 billion in debt. The law doesn’t apply to Puerto Rico’s general-obligation or sales-tax debt.

By Aaron Kuriloff

Utility Reaches Pact to Postpone Payments Until Aug. 14; Extension Is Second This Month

Puerto Rico Power Authority in Deal With Banks to Defer Loan Payments