Sunday, January 29, 2023

Jittery Creditors Leery of Debt-Moratorium Talk

By on March 24, 2016

By: Philipe Schoene Roura, Luis J. Valentín

Creditor groups angling to recoup their investment in the face of Puerto Rico’s volatile debt crisis are facing a deeper crisis of confidence as talk of legislation to declare a debt moratorium continues to resound among lawmakers and officials tied to the administration of Gov. Alejandro García Padilla.

And patience is wearing thin among creditor groups that will soon receive a revised debt-restructuring offer from the commonwealth government.

While La Fortaleza continues to say that debt moratorium remains an option, it has yet to call on the Legislature to enact a moratorium law. At least two sources have told Caribbean Business that the administration is seriously evaluating whether to pull the trigger on such a measure.

“All the talk about legislation to facilitate a debt moratorium makes investors jittery,” said one lobbyist with ties to two creditor groups who chose to remain nameless.El_Capitolio_de_Puerto_Rico

As previously reported by Caribbean Business, the government could be pressed to enact debt-moratorium legislation, as the clock continues to tick on Congress to act timely on Puerto Rico’s fiscal crisis—if it decides to do so. With the support of the U.S. Treasury, the García Padilla administration is seeking broad debt-restructuring tools, but a majority of Republicans on Capitol Hill have yet to come onboard with the idea, and instead are calling for strong fiscal oversight.

The standoff is taking place in the face of a fast approaching debt cliff—the commonwealth has large debt-service payments of $422 million due May 1 and more than $1.5 billion due July 1—which if unmet would prompt investors to file suit and bring down the fragile restructuring paradigm like a house of cards.

“This requires legislation and we have been discussing it for a long time. It is probably something that is necessary for Puerto Rico,” said Senate President Eduardo Bhatia earlier this week, when asked about declaring a debt moratorium. He stressed that the island has reached the end of the road and was quick to point out that litigation would most likely follow.

For his part, House Speaker Jaime Perelló seemed a bit more optimistic than his counterpart in the upper chamber, as he believes there is still time for Congress to act and avoid having to locally pass a debt-moratorium law.

“With all this [debt-moratorium talk], I don’t want Congress saying, ‘let’s not act because they are saying they would do that,” Perelló noted, while adding that all efforts must continue to focus on achieving timely congressional action. Nevertheless, absent the latter, he said legislation would be enacted to guarantee government stability.

Effects on Prepa, Prasa
The possibility of declaring a debt moratorium could hinder the prospects of the island’s main utilities, the Puerto Rico Electric Power Authority (Prepa) and Puerto Rico Aqueduct & Sewer Authority (Prasa), to access the market for much-needed financing.

“A measure to pave the way for what essentially amounts to a default will lead to litigation that could have devastating consequences on the Prepa and Prasa deals,” a source told Caribbean Business.

The moratorium monologues could have a negative impact on headway that has already been made in tortured negotiations fraught with complexity at Prepa—principally tied to the multiplicity of creditor groups backing the utility’s roughly $9 billion debt. “Imagine the impact that default on payments hitting in May could have on the securitization deals struck with Prepa,” the source noted.

Prepa was able to reach a restructuring agreement with a majority of its creditors and is now moving forward on a series of milestones geared toward consummating the deal.

Meanwhile, Prasa could also be affected if the commonwealth defaults on its debt—with or without a moratorium law—as it tries to follow Prepa’s footsteps in establishing a securitization mechanism that would allow it to access capital markets. While the water utility’s securitization bill cleared the House two weeks ago, it has been pending the Senate’s consideration ever since.

New debt-exchange offer
As this newspaper was going to press on Tuesday, at least two sources told Caribbean Business that the administration could present, as soon as this week, a revised voluntary debt-exchange proposal to creditors.

“This week, the excuse could be the Easter break, but the truth is that they still have a May 1 payment to meet and it could be done,” said one creditor who represents a huge constituency.

While some creditor groups have said talks with the commonwealth’s restructuring brigades have picked up steam lately, they still believe the government has somehow been dragging its feet, particularly amid the impasse in Congress. Consensual, debt-restructuring talks between Puerto Rico and its creditors would run counter to the administration’s demands on Capitol Hill over broad debt-restructuring authority.

As for the commonwealth’s most recent offer, it is expected to address some of the feedback received since the government put forth its last offer in February, particularly from those holding general-obligation (GO) and Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds.

The two groups of bondholders are in a classic face-off over the hierarchy of their investment—GO holders claim to have precedence because their paper is backed by Puerto Rico’s Constitution, while holders of Cofina bonds claim priority by noting that the portion of the island’s sales tax that pays Cofina has never been in the government’s pockets.

In this dangerous game of chicken being played by competing interests—analysts have resorted to the Latin phrase pari passu (all things being equal) to explain what in simple English means “treating things equally.” In the end, creditors have realized it will be impossible to please everyone equally.

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