Sunday, December 5, 2021

Debt Crisis Prompts Skyfall

By on March 3, 2016

A spiffy image of Gov. Alejandro García Padilla as Agent 007 is a fitting representation of his administration’s attempt to act as an agent of change with the initiative to put together a SuperBond deal as a last resort to provide the cash-strapped government with much-needed liquidity.

The crusade for a SuperBond has now turned to a movement that seeks a broader restructuring regime, or at the very least, some type of restructuring mechanism that would help bind holdouts and avoid “scorched earth” litigation that could cost both the commonwealth government and creditors several hundred million dollars per year.
Investors realize that the potential for default is real. Amid the uncertainty of how and when Congress could act—if it decides to—the clock continues to tick on the commonwealth as it hits a $2.5 billion debt-service wall beginning May 2, with $422 million owed by its cash-strapped Government Development Bank.

All told, Puerto Rico will be using about 36% of its tax-generated revenue to pay debt service. That is 23% higher than the highest state, Hawaii, which pays some 13% of tax-generated revenue for debt service.

So, the García Padilla restructuring brigades, led by former U.S. Treasury Chief Restructuring Officer Jim Millstein, are making an offer they were hoping creditors could not refuse. The commonwealth’s advisers were betting that a majority of creditors would gladly exchange 55% of their notes, which are worth about 37¢ on the dollar, for debt in tradable instruments as part of an exchange that amounted to a 45% haircut. The offer is being scoffed at because it bundles Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds, which are supported by Puerto Rico’s 11.5% sales & use tax and constitutionally protected general-obligation debt, and attempts to bundle them in a structure that exchanges their paper for debt composed of investment-grade “base bonds” and highly speculative “growth bonds”—that deliver dividends only if Puerto Rico’s economy grows on par with the U.S. economy.
Creditor groups are none too pleased—slight of hand will probably not do the trick in obtaining consensus among so many competing creditor groups.

The consensus on Capitol Hill is that Puerto Rico needs some sort of fiscal oversight board that would help guarantee expenditure remains in line with revenue in the face of budgetary constraints that leave little or no wiggle room over the next decade. Puerto Rico’s debt-service payment over the next five years alone totals some $27 billion.
But there is no consensus yet in the hallowed halls of Congress as to the shape of the restructuring to come. At this writing, there was chatter about collective action clauses that allow majority bondholder agreements to impose terms on holdouts, which is starting to pick up steam. However, it does not seem likely that concrete action will take place on the floor prior to March 31.

In a related story, economist Deborah Kobes, who received her doctoral degree from the Massachusetts Institute of Technology, told this newspaper that “control boards tend to be established in communities with low median-household incomes; low rates of employment, homeownership and high-school graduation; and high rates of poverty, minority population and female-headed households.”

Beyond the debt crisis and the mechanisms employed for recovery of market confidence, the socioeconomic markers cited by Kobes are ultimately the important issues that we must address or we will be left to suffer a generation of socioeconomic decay.

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