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Debt-Restructuring Panel a Glimpse of Road Ahead?

By on February 18, 2016

SAN JUAN– Participants Weigh in on Puerto Rico Moving Forward to Tackle its Fiscal, Economic Crisis

Some would argue it would be foolish to talk about debt restructuring during a major investment conference, in which the main goal is to attract investment capital. Yet that is exactly what happened last week when a panel comprising key players on the commonwealth’s fiscal crisis discussed the matter during the Puerto Rico Investment Summit.

Jim Millstein, lead restructuring adviser for the commonwealth government, and Nader Tavakoli, CEO of Ambac, a bond insurer with roughly $2.2 billion in net par exposure to Puerto Rico debt, discussed the best path forward for the island and provided attendees with a first-row glimpse of what could lie ahead in the island’s debt-restructuring saga. Also joining them was AlixPartners’ Lisa Donahue, who has led yearlong restructuring talks between the Puerto Rico Electric Power Authority (Prepa) and a majority of its creditors. The panel was moderated by Caribbean Business Executive Editor Philipe Schoene.

The commonwealth government advisers led the charge on Puerto Rico’s need for a debt restructuring mechanism. Millstein noted how “Plan A” is aimed at reaching a consensual, voluntary transaction with creditors—although a broad restructuring regime is still needed.

Perhaps Tavakoli put it best when he said, “[I] see things quite differently.” His company recently filed a lawsuit against the local government over the so-called “clawbacks,” or the use of previously pledged monies to pay for other government obligations.

“I’m not sure where this notion of bankruptcy being a good thing came from, but I have had 35 years of experience in bankruptcy, and I will tell you with most surety it is a terrible idea,” he said, while warning how it could wipe out confidence in Puerto Rico.

Millstein then mentioned how Ambac itself benefited from restructuring its debt when it filed for Chapter 11 back in 2010. “The fact is sometimes companies get out over their skis,” he said, as quoted by Reuters. “They underwrite exotic derivatives, for example, when in fact they were a bond insurer, so they need the help of state-supervised restructuring.”

While some would argue that the bankruptcy process Ambac went through is a different animal than what the commonwealth is seeking, “the notion of bringing debt service in line with payment capacity—is done traditionally within a court process,” Millstein added.

BINDING HOLDOUTS

Following the commonwealth government’s latest debt-restructuring proposal to creditors, Millstein feels confident a voluntary deal can be reached with a majority of Puerto Rico’s creditors. Still, he added that a debt-restructuring mechanism would help to bind minority creditors, or “holdouts.”

“I think we will achieve consensual offer with the majority of creditors. But we need a mechanism to bind holdouts,” he said.

Donahue noted that with such a regime in place, like Chapter 9 of the U.S. Bankruptcy Code, Prepa could work around a “prearranged-type deal” with a majority of its creditors before entering the court. This would, in turn, help the utility bring holdout creditors on board the prearranged deal.

But Ambac’s Tavakoli believes the issue with minority creditors is not as bad as in other cases, while calling Chapter 9 “a massive excuse for not making decisions.” He warned how the debt-restructuring-regime debate could delay winning back market confidence, and called for long-lasting fixes if Puerto Rico is to truly tackle its underlying problems and return to sustainable growth.

What’s more, the fact bankruptcy was being discussed at an investor conference was “surreal,” he said, and it seemed some among the crowd felt the same way, including New Progressive Party resident commissionership hopeful Carlos Pesquera.

“How the island treats existing creditors is very telling on how you are going to treat future [creditors],” Ambac’s CEO added.

For Millstein, the government’s initiatives to deal with its crisis, including its debt-exchange offer and long-term fiscal and economic plan, are something potential investors want before putting new money into Puerto Rico.

PREPA’S PATH

Despite feeling optimistic about closing the deal, it has certainly been a bumpy road for Donahue and Prepa’s restructuring talks with creditors.

Moments before the Investment Summit kicked off, members of Prepa’s main employee union, the Irrigation & Electrical Workers Union, as well as the Puerto Rican Independence Party and Working People Party, protested outside the Convention Center in Miramar, where the event was being held. Meanwhile, legislation necessary to begin the implementation of a restructuring deal struck by Prepa and a majority of its creditors had been stuck in the Puerto Rico Legislature for weeks, but was approved at the last minute by the House on Monday evening, but with a number of amendments. The approved measure has now been sent back to the Senate as of this writing.

Millstein noted how legislative leaders have constituencies to represent, but still believes that at the end of the day, they will understand why it must be done.

“It’s unfortunate we are sitting here in the middle of an election year,” Tavakoli said, adding that there were concerns among creditor groups about what would happen during the next 18 months in Puerto Rico and how the government will move forward on carrying out the fiscal adjustments it must make.

Nevertheless, he conceded that so far, Donahue has done a good job at Prepa and he remains hopeful the utility’s deal would be finally achieved.

“The costs of utilities will be the last of your concerns,” Gov. Alejandro García Padilla told attendees at the investment conference during his keynote speech. But several obstacles still lie ahead for Prepa and the government as they seek to restructure their debt obligations, while efforts in Washington, D.C., continue to focus on the commonwealth achieving access to a bankruptcy regime.

In the electric utility’s case, if minority creditors fail to come on board the deal, “we are back at the table,” Donahue said.

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