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Gov’t Says Ch. 9 Is Insufficient; Counterproposal to Creditors in the Works

By on March 1, 2016

SAN JUAN — Speaking in front of an audience mainly comprising investors, Puerto Rico government officials argued in favor of a broad restructuring regime if the island is to solve its debt crisis promptly and pull itself out of its economic free-fall.

Government Development Bank (GDB) Chairwoman & President Melba Acosta and Puerto Rico’s lead restructuring advisers, Millstein & Co.’s Jim Millstein and Cleary Gottlieb’s Richard Cooper, were among those who participated of the presentation, a copy of which can be found here.

They warned once again it is expected Puerto Rico will run out of cash to meet the more than $2.5 billion in debt-service payments it owes this summer, beginning with $422 million due May 2 by the cash-strapped GDB. And once again, they urged for the need to broadly restructure the island’s unsustainable $70 billion debt and more than $40 billion in unfunded pension liabilities.

After putting forth earlier this year a voluntary debt-restructuring offer to creditors, the administration is already “working to develop a counterproposal that is responsive to all of the creditor feedback but falls within the parameters of the commonwealth’s ability to pay,” according to the presentation. The exchange offer targets about $49 billion in “tax-supported debt,” including general obligations (GOs), Sales Tax Financing Corp. (Cofina by its Spanish acronym) and various other public entities.

Affected creditors could face initial haircuts, or reductions to principal, in the vicinity of 45%, depending on the credit, but the government says these losses could be eventually recovered through so-called “growth bonds,” one of the two new securities that would be paid only if sustained economic growth is achieved in the midterm.

Nevertheless, government officials are convinced chances to achieve a voluntary agreement without a broad restructuring regime in place are slim at best given the complexity of Puerto Rico’s debt web.

Not long ago, the Alejandro García Padilla administration relentlessly pushed Congress for access to Chapter 9 of the U.S. Bankruptcy Code, the federal statute that covers the restructuring of public corporations’ debts. But according to a presentation given Tuesday by Puerto Rico officials during an investor event in Miami, Chapter 9 is now insufficient to tackle the problem, given Puerto Rico’s complex debt structure and the competing interests that permeate it.

Among the reasons Chapter 9 won’t be enough for Puerto Rico, the officials mentioned it would fail to cover such credits as GOs, Cofina and pension systems, all of which are part of the administration’s restructuring plans. Meanwhile, Chapter 9 eligibility standards could end up in a protracted litigation even before the underlying restructuring is actually addressed, according to the presentation.

Commonwealth officials believe an effective regime to restructure Puerto Rico’s tax-supported debt, or roughly $50 billion, should be comprehensive enough to cover GOs, Cofina and pensions, while everything is done under one coordinated proceeding. It should allow to bring holdouts onboard any deal potentially reached with a majority of creditors, while establishing access to interim funding through a process known as “debtor in possession” (DIP) financing, as well as a temporary stay on litigation. A fiscal oversight council — a commonwealth entity authorized and designed by federal statute — should also be established.

Mesa Redonda BGF 6

Gov. Alejandro García Padilla’s Economic Recovery Workgroup

Moreover, the regime should comprise an out-of-court process, whereby an overseeing federal court would first appoint a mediator in the restructuring talks between Puerto Rico and its creditors, amid a short-term litigation stay and DIP financing to finance government operations. If an acceptable deal is reached by the majority, the court would then make it binding on all creditors. If no accord is struck, an in-court proceeding similar to Chapter 9 would follow, although with the “broadest definition of instrumentality and streamlined standards for eligibility,” the presentation reads.

Resident Commissioner Pedro Pierluisi recently told Caribbean Business that Congress is looking into a board that would have a role within the commonwealth’s debt restructuring. “But, it is clear that it would have to be a restructuring that has the support of a majority of creditors,” he said, adding the board would oversee and mediate in the negotiation process of Puerto Rico and its creditors.

The commonwealth team’s presentation took place during a three-day event hosted annually by J.P.Morgan, with about 600 investment firms, represented by 1,200 investors, participating of the gathering. As part of the “Global High Yield & Leveraged Finance Conference,” the officials discussed the fiscal and economic situation of the island, along with its need for immediate action by Congress to successfully restructure its unsustainable debt and return to economic growth.  

The Puerto Rico government continues to lobby for immediate congressional action over its debt crisis, particularly on access to debt-restructuring powers. House Speaker Paul Ryan (R-Wis.) has said the lower chamber aims to come up with a solution before the end of March, as there is still no consensus on how exactly the Republican-led Congress should deal with the problem.

For more in-depth coverage, don’t miss Caribbean Business’ print edition Thursday.

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