Sunday, January 29, 2023

P.R. Bondholders Give Promesa Mixed Reviews

By on June 30, 2016

Economists and bondholders agreed on June 27 that the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) is a good start for taking the commonwealth government to recovery, but objected to several dispositions that would allow for a stay on claims and debt restructuring.

Their remarks were made on two panels that analyzed Promesa during the First Encounter of Bondholders, organized by Bonistas del Patio, which represents more than 60,000 local bondholders. Caribbean Business Executive Editor Philipe Schoene Roura moderated two of the panels and reporter Luis Valentín participated in one panel.

Héctor Negroni, Co-CEO of Fundamental Advisors, which has been involved in attempts to negotiate with Puerto Rico debt issuers, said he may challenge the provision that imposes a stay on legal claims imposed by Promesa.

“The stay on Promesa is a fairy tale. The stay stops you from pursuing your rights…,” he said.

Nader Tavakoli, president & CEO of Ambac, a company that sued the government because of the debt defaults and clawbacks—tapping into revenue streams that were originally destined for other debt—said if the federal fiscal-control board is imposed by Promesa, Ambac would also challenge the stays if the board does not do what it is supposed to do, such as shrinking the size of the government.

In a panel titled “The Truth about the Territorial Control Board,” Javier Ortiz, a partner at Falcon Cyber Investments, said the three most important aspects of Promesa are the stay on lawsuits, the creation of a bicameral commission that would look into Puerto Rico’s economy and the appointment of the fiscal control board.

“Ultimately, the fact that something is happening is good,” he said.
Promesa was passed by the U.S. House of Representatives and is slated to be voted on by the U.S. Senate as soon as this week.

General lack of knowledge in Congress

J. Steven Hart, CEO of Williams & Jensen, a lobbying firm, said he had more problems lobbying in Washington, D.C., with the rank-and-file members of Congress instead of the leadership because of the general lack of knowledge about Puerto Rico. He noted problems with the Freedom Caucus, the conservative House Republican group, which did not know how Puerto Rico’s problems trickle into other financial problems.

He noted that while lawmakers were unwilling to provide economic and welfare reforms, he hoped the bicameral commission would lead to Puerto Rico’s inclusion in a tax reform proposal.

Congress has declined to give Puerto Rico tax incentives under Article 243 because it was not part of the committee’s jurisdiction, but Ortiz believes there was more to that. He noted that granting Puerto Rico tax incentives for U.S. corporations, such as those it had under Section 936, becomes “a vehicle for things that have nothing to do with Puerto Rico.

“Congress is dealing with issues that go beyond Puerto Rico,” he said.

The panelists noted that if Puerto Rico wants to have Section 936 benefits back, the government will have to “call it something else,” as some members of Congress believe it was a tax gimmick that led to a bloated government.

They also said the island needs to raise awareness that the tax rules that apply to the states do not work for Puerto Rico.

Hart said that while the Democratic Party lawmakers have expressed concerns about the fact that the fiscal control board is not elected by the people, he noted that the Republicans were not worried about being called anti-Hispanic.

Creditors Give Their Perspective

The individuals who participated in another panel called “Promesa: Perspectives from the Creditor Camp,” made a list of the bill’s positive and negative points. They emphasized the need to jumpstart the local economy to ensure the government complies with debt payments.

Tavakoli said the success of the oversight board is “to get the government back on track and not worry about the debt. The debt will take care of itself over time if we fix the economy.”

Joseph Rosenblum, senior vice president of AllianceBernstein LLP, said Promesa was a good first step because it provides fiscal management and oversight that will help restore the island’s credibility in the bond market, but he expressed concerns about debt restructuring, which would be left in the hands of the board.

Negroni described Promesa’s provisions as a “Super Chapter 9,” in reference to the bankruptcy law, noting that it would prevent bondholders from seeking payment or remedies in the courts. He added that Fundamental Advisors may challenge such a disposition.

Negroni also claimed the government is not insolvent, but has a liquidity problem. He said government revenues have gone up and debt service has gone down because of defaults.

“Where has the money been spent?” he asked. “There is no test for insolvency; fortunately, there is a test for priority. There are people at the table willing to negotiate, but they must follow the rule of law and respect the real finances,” he said.

Tavakoli said that Title II of the bill, which gives the fiscal board its duties, including having balanced budgets, makes Title III unnecessary, the chapter in the bill that allows for debt adjustments.

“Resorting to Title III will be a loss…will be a defeat to the entire board,” he said, adding that the board’s goal should be to help Puerto Rico regain credibility and access to the markets.

Rosenblum said that pushing the government into austerity measures “does not ride the ship either,” as he indicated that essential services must be taken care of. He declined to say what the tax-to-revenue ratio should be because budgets have different requirements.

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