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Bond Insurers Call for Federal Fiscal Oversight, No Bankruptcy Regime for Puerto Rico

By on January 22, 2016

SAN JUAN – In a letter sent Friday to House Speaker Paul Ryan (R., Wis.), the Association of Financial Guaranty Insurers (AFGI) states that providing a bankruptcy regime for Puerto Rico to restructure its debt obligations is not the best path toward solving the island’s fiscal and economic crisis.

Moreover, AFGI members “feel strongly” that Puerto Rico needs independent fiscal oversight, which would best be provided by a “federally mandated control or oversight board authorized to implement the fiscal and economic reforms that the Commonwealth requires,” the letter says.

AFGI members include Ambac Assurance Corp., Assured Guaranty, Financial Guaranty Insurance Co., National Public Finance Guarantee Corp., MBIA Insurance Corp. and Syncora Guarantee Inc., insuring among them roughly $14 billion of Puerto Rico’s $70 billion debt.

The island’s future return to capital markets and economic growth “would be jeopardized were Puerto Rico incentivized to cease consensual debt restructuring negotiations in favor of nonconsensual restructurings under a bankruptcy regime or other new laws,” according to the letter.

While supporting U.S. Treasury Secretary Jacob Lew’s view on Puerto Rico’s need for independent fiscal oversight, AGFI believes the federal agency should also encourage consensual negotiations instead of a bankruptcy regime. They highlighted the Puerto Rico Electric Power Authority’s (Prepa) recently struck restructuring support agreement with a majority of its creditors, as an example that shows “consensual restructuring negotiations work.”

According to AFGI, the delay in debt-restructuring talks between Puerto Rico and its creditors, outside the Prepa case, “brings into question the Commonwealth’s objectives and raises concerns about coordinated efforts by the Commonwealth to delay the public corporations’ individual restructuring processes.”

They add it seems like Puerto Rico has “prioritized creating a ‘crisis narrative,’ as the commonwealth focuses on achieving bankruptcy instead of working toward a consensual solution with its creditors.

“Lew should use his authority to bring Puerto Rico’s government officials and creditors to the table to negotiate a restructuring that is fair to all parties,” the letter reads, adding that bond insurers are prepared to engage in talks with the commonwealth.

The García Padilla administration is banking on congressional action during the first half of 2016 in a bid to avoid Puerto Rico’s looming debt cliff come summertime. Insurers Ambac, Assured and Syncora have already sued the commonwealth over García Padilla’s recent fiscal maneuver to redirect revenue sources that were pledged to cover public corporation debt, a mechanism known as “clawback.”

During a visit to the island earlier this week, Treasury’s Lew once again urged for prompt congressional action on Puerto Rico’s fiscal crisis, namely providing a bankruptcy regime along with fiscal oversight that respects the commonwealth’s self-governance.

“Retroactively abrogating contractual and constitutional rights underlying Puerto Rico securities owned by U.S. taxpayers means ignoring the rule of law, which is the foundation of the $4 trillion U.S. municipal bond market,” AFGI states in its letter. “Bankruptcy of Puerto Rico municipal issuers would raise the cost or otherwise impair capital market access for thousands of U.S. municipalities seeking to sell municipal bonds under a cloud of uncertainty regarding bondholder rights. And to what end? Bankruptcy will cost U.S. taxpayers without providing meaningful benefit to Puerto Rico’s residents.

“The rush to bankruptcy urged by the Commonwealth should be discouraged,” AFGI states.

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