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García Padilla Outlines U.S. Treasury’s Role in Passing Promesa

By on December 14, 2016

BY PHILIPE SCHOENE ROURA AND LUIS J. VALENTÍN ORTIZ

In a wide-ranging interview that took place dockside in Old San Juan, outgoing Gov. Alejandro García Padilla confirmed that the U.S. Treasury played a key role on Capitol Hill in driving the narrative that Puerto Rico is suffering a humanitarian crisis because they were hell bent on passing the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) in the U.S. Congress.

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Gov. Alejandro García Padilla and Treasury Secretary Jacob Lew

“[They played] a fundamental role,” García Padilla told Caribbean Business during the exit interview that will be published in full next week. “Together with the U.S. Treasury, we took our case before Congress and their reaction was the same initial response that we had, the same [initial] response that the U.S. Treasury had—this is a liquidity problem; let’s boost revenue. The U.S. Treasury convinced Congress. The legislation was passed thanks to [U.S. Treasury Secretary] Jack Lew, thanks to [Treasury counselor] Antonio Weiss and their team.”

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(CB/Juan J. Rodríguez)

The governor explained that he reached out to the U.S. Treasury because he was finally convinced that the debt was not payable after former International Monetary Fund (IMF) Deputy Managing Director Anne Krueger presented the report “Puerto Rico—A Way Forward.” That report, compiled with the assistance of Krueger’s former IMF colleagues Ranjit Teja and Andrew Wolfe, made clear that Puerto Rico, despite having implemented rather hefty spending cuts and tax increases that levied more than $2 billion in taxes on taxpayers and the business community, continues to hemorrhage jobs and people, and therefore, lacks the revenue stream to meet enormous debt-service payments that will total more than $5 billion in 2017.

The governor believes the U.S. Treasury continues to influence Puerto Rico’s financial oversight process to this day. “The board did not want to see [that debt service was not sustainable] and Treasury said: ‘You know what—a dollar here, a dollar there—that is the case. And the board becomes convinced that the numbers are correct,” said García Padilla in reference to initial skepticism by the control board that he believes is changing.

That apparent turning tide is a growing concern among creditors and local bondholders who see members of the U.S. Treasury continuing to influence the shape of debt restructuring to come. “This control board seems to be off the rails a little bit and what I am hearing is that they have in the [request for proposals] process for the financial adviser in the mix in a strong way is Centerview Partners, which is a firm that was founded by Blair Efron who is good friends with Antonio Weiss, where [former U.S. Treasury Secretary] Bob Rubin is one of the principals,” a Wall Street source told Caribbean Business.

Creditors rant

“This process is taking on a life of its own. It has come to the attention of the congressional leadership in Washington, D.C. People are going to be called to the carpet to explain why they have given away the Republican leadership that was so, so hard fought for. And I think there’s going to be a lot of focus on [board Chairman José] Carrión and his leadership. The intent behind this thing was not to be put on a fast track straight to Title III, which would lead to the destruction of Puerto Rico’s access to the markets—exactly the opposite of what Congress intended. To add Centerview to Proskauer Rose would be the final nail in the coffin,” the Wall Street source said.

This source is one of several in different creditor camps who are complaining about the control board allowing the ensconcing of U.S. Treasury officials tied to the Obama administration, who prefer to restructure Puerto Rico’s debt rather than provide funding mechanisms for the island.

The director of the Office of State & Local Finance at the U.S. Treasury, Kent Hiteshew, who played a key role for the García Padilla administration in helping to rally support for Promesa on the Hill, is seen as one of the proponents of a “restructuring first” philosophy.

“Creditors were willing to back an offshore fund using Act 154 funds; everyone was in agreement and Hiteshew said there is no legal impediment, but we won’t allow it because we don’t think you should be borrowing more money. That is a decision for the control board. If they allow a [Fiscal & Economic Growth Plan] to be railroaded based on faulty information before [Gov.-elect Ricardo] Rosselló has a chance to have his imprint, it will be disastrous for Puerto Rico. [House Speaker Paul] Ryan is livid about the way this is being handled,” said the Wall Street source.

Among the developments that sent jitters through the creditor community, many of whom are nervous about haircuts, was the selection of Proskauer Rose as one of the law firms providing outside counsel to the control board. Proskauer partner Martin Bienenstock was responsible for drafting the language in the Debt Enforcement & Recovery Act, a law that intended to provide the island’s public corporations with access to an orderly restructuring process as well as capital.

Adding dramatic tension to the negotiations are competing interests between large creditors who believe their sterling credits take precedence over smaller bondholders, and other stakeholders who include Puerto Rico pensioners. Although those holders of pension plans may not represent as powerful a credit constituency as general obligation and senior Cofina (Sales Tax Financing Corp.) bondholders, the impact on their personal finances is enormous and would have a devastating effect on the local economy.

Seeking a funding mechanism

Some inside the outgoing García Padilla administration have already suggested looking no further than debtor-in-possession (DIP) financing under Promesa’s Title III to provide short-term liquidity to the cash-strapped government. But this funding mechanism could be available to the commonwealth and troubled instrumentalities only if the fiscal control board decides to follow the Title III debt-restructuring road in federal court.

Other short-term financing deals with certain creditor groups have been brought to the table, sources said, but it is still too early to tell if a deal would be struck before the expiration of Promesa’s legal stay early next year. As for using Act 154 revenues to issue debt, it faces steep hurdles as it would depend on decisive action from Treasury over the creditability at the federal level of the locally imposed excise tax.

Moreover, García Padilla shunned the notion that the U.S. Treasury could have avoided the narrative to go down the Promesa road, while having other lending mechanisms at their disposal. “Well, the conventional wisdom in Washington, D.C., is that the relief that U.S. President William Jefferson Clinton gave to Mexico in 1998 forced Congress, under the leadership of then-House Speaker Newt Gingrich, to impede that sort of help from the U.S. Treasury without congressional authorization,” he explained.

Another Wall Street source tied to general-obligation bondholders told Caribbean Business that Treasury would not provide a funding mechanism for Puerto Rico because of the precedent it would set at a most dangerous juncture, with several U.S. jurisdictions facing significant debt burdens that could prompt some form of assistance.

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