Proskauer Rose Selection Raises Creditor Concern

The selection of Proskauer Rose LLC as the outside legal counsel for the Financial Oversight & Management Board has put some creditors on edge because the law firm was responsible for the drafting of the Puerto Rico Debt Compliance & Recovery Act.

The Recovery Act blueprint, written by Proskauer Partner Martin Bienenstock, was intended to provide Puerto Rico with a legal mechanism through which “public corporations could restructure their debt while accessing capital.”

“We knew that Proskauer Rose was being considered by the oversight board to become its outside legal counsel; they were also the law firm that advised the commonwealth [government] to file an appeal on the Recovery Act at the very same time that they were going to market. It was ill-advised,” said one creditor with knowledge of the selection process.

“There were also other liquidity discussions going on. And I think that it would taint the environment to bring into the mix a law firm or advisers that had been working along with the former administration; it sends the wrong message. I think we need a fresh start,” he added.

“This process of which law firms to pick was driven personally by former judge [Arthur J. González]; he really took over the process,” a high-level source on Capitol Hill with knowledge of the selection process told Caribbean Business. “He had favorites that he wanted to work with from the beginning and that those were the firms that prevailed in the end. No amount of attempt at dissuading him out of the full board made any headway.”

Two sources close to the board told Caribbean Business that the selection of the law firm was not a fight that some members were willing to pick. González’s expertise as a former bankruptcy judge held sway in the process. González served on the U.S. Bankruptcy Court for the Southern District of New York from 1995 to 2012, retiring as chief judge following his appointment to that position in 2010, according to the White House.

Read more: Without plan, no negotiations with creditors

Creditors feel that choosing Proskauer Rose signals an inclination toward bankruptcy and restructuring in Title III of the Puerto Rico Oversight, Management & Recovery Act (Promesa).

“They picked a former federal judge because that would carry a lot of weight,” the GOP source told Caribbean Business. “The narrative that the Democrats were hoping to drive is that if González were a sitting judge and they brought this to him, he would make creditors take large haircuts before going into austerity and touching retirees.”

Creditors have been fast and furious in their criticism of that philosophy, as they claim that the drive to Title III will have the effect of keeping Puerto Rico from obtaining market access. Others disagree with this claim, pointing out that Detroit went back to the capital markets in 2015, two years after filing for bankruptcy under Chapter 9.

If Republican members of the U.S. Congress, led by House Speaker Paul Ryan, are under the impression that they had discharged their responsibilities to help solve Puerto Rico’s debt crisis once they enacted Promesa, they need only look to the experience of Washington, D.C., in the 1990s for evidence of the pain that is likely to persist prior to growth.

 

Eyes on the board

In Puerto Rico’s case, the onus is on the oversight board that has been empowered to take over all commonwealth financial and budgetary affairs. There is concern among thoroughbred creditors, chomping at the bit for much-needed transparency, that the board is moving at a deliberately glacial pace.

“Unfortunately, I think the board is becoming part of the problem, not part of the solution,” said one high-level source in the creditor camp with ties to the GOP.

“The way that they were supposed to do this was to hire an executive director, then go and hire your financial and legal professionals so that you would be in a place to evaluate the information that is coming at you with some independent diligence. They have no independent diligence of the information that they are receiving. And they are relying on two young guys from the Treasury to effectively be their financial advisers,” this creditor GOP source said.

The creditor community’s concerns trace to the U.S. Treasury Department history in advising the Gov. Alejandro García Padilla administration in its management of Puerto Rico’s debt crisis. From the outset, experts from Treasury have been involved in outlining a plan and presenting their findings. The selling of a restructuring blueprint publicly kicked off with a dog and pony show hosted by former U.S. Treasury Chief Restructuring Officer Jim Millstein and former Government Development Bank President Melba Acosta at a creditor conclave in New York City more than a year ago.

The commonwealth’s message that Puerto Rico’s debt was unsustainable was received with great cynicism by creditors in the audience because Puerto Rico failed to present audited financial statements. The lack of transparency drew the creditors’ ire.

More than one year later, Treasury’s involvement in the Promesa process continues to be a source of concern among the creditor camp.

“These people have a motive; they want to go straight to Title IIIs so that they can say they were right over the past two years. And they aren’t giving [Gov.-elect Ricardo] Rosselló an opportunity to come in and have a say,” said the creditor source who chose to remain anonymous. “They are giving this governor the opportunity to have a second shot at an FEGP [Fiscal & Economic Growth Plan] and they are going to reject it before Rosselló even has a chance to take over his seat.”

Oversight board member José Ramón González, a former banker with vast experience in the credit markets, remarked during the public hearing recently held in Fajardo that going straight to Title III would cause Puerto Rico to lose access to the municipal bond markets.

“It is not in the best interests of Puerto Rico to be talking about going straight to Title III,” said a Wall Street executive. “The governor-elect is looking to build credibility and confidence in Puerto Rico. There is nothing worse for building confidence in the island than talking about not paying debt. We think it is very regressive and it doesn’t lead to the outcome that Puerto Rico deserves. If you start to talk to creditors about what kind of deals could be had under [Promesa’s] Title VI, along with the transparency aspects in Title II, then you have an environment in which you can start to talk about liquidity support.”

 

Creditors pushing for offshore funds

Some creditors are insisting that Democrats put pressure on the U.S. Treasury to facilitate Puerto Rico having the ability to borrow money. “Treasury could, in a zero-cost way, establish an account against which we could do TRANs [tax revenue anticipation notes]. Many would lend into that,” said a third Wall Street source.

The source added that “it would be extremely low-cost borrowing because it would be backed by a revenue stream and these offshore-based U.S. accounts. There are facilities available here. What I am talking about has absolutely no risk because the only thing that the Treasury would need to do is to transfer Act 154 revenues into an offshore fund and lenders would lend money against that fund.”

“There are definitely tools that Treasury and the Fed can use to bridge Puerto Rico to a better place. I think there has to be willingness, though. I haven’t seen any willingness from the Treasury or the Fed to take those kinds of steps,” said the Wall Street executive.

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