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Puerto Rico Briefs Congress on Debt-Exchange Plan, Calls for Broad Restructuring Regime

By on February 5, 2016

SAN JUAN — Representatives of the Puerto Rico government briefed Congress staffers for about two hours on Friday over Gov. Alejandro García Padilla administration’s latest plan to restructure a large chunk of its $70 billion debt, while returning to much-needed fiscal stability and economic growth.
Three government officials sought to make clear that Puerto Rico needs to restructure its debt, and are asking Congress to help in making it an orderly process by providing the commonwealth with access to a broad debt-restructuring regime.
Government Development Bank (GDB) President & Chairwoman Melba Acosta, along with Puerto Rico’s lead restructuring advisers Jim Millstein, chairman of Millstein & Co., and Richard Cooper, partner at law firm Cleary Gottlieb, went over the recently revised debt-restructuring proposal — a voluntary debt exchange offer to creditors that was recently made public. Also discussed was the commonwealth’s updated Fiscal & Economic Growth Plan, which now states a gloomier fiscal and economic picture for the island during the next decade.
“We’ve ran out of magic tricks. We have real default ahead of us if we can’t cut a deal with our creditors,” Millstein said.
The commonwealth has been lobbying hard to achieve access to a restructuring regime, particularly under Chapter 9 of the U.S. Bankruptcy Code. But the latter would only cover public corporations — and not all types of commonwealth debt such as general obligations (GOs) — so officials believe a broader restructuring regime is needed from Congress.
“Having a comprehensive restructuring regime that includes the commonwealth and all its tax-supported debt is quite essential,” said Cleary Gottlieb’s Cooper, hinting that Chapter 9 although useful, could fall short.
The Obama administration, through the federal Treasury Department, has already recommended Congress to provide Puerto Rico with a broader restructuring regime — a ‘super Chapter 9’ — exclusive to U.S. territories. In fact, a couple of blocks away from Capitol Hill was Treasury’s adviser on Puerto Rico matters, Antonio Weiss, supporting once again their proposed debt-restructuring regime during a forum held by a D.C.-based nonprofit.    
Yet, Republicans have remained skittish even over just granting Chapter 9 access for Puerto Rico, not to mention a broader, similar regime.
The three officials argued on Friday that with the government’s first offer to creditors already on the table, successfully moving forward could be particularly difficult if no legal restructuring regime is in place. After all, the interdependence of all the different credits makes Puerto Rico a tough nut to crack.
“This is as complicated a structure I have ever seen in the 30 years I’ve been doing this,” Millstein conceded.
“There are these embedded intercreditor conflicts that no matter what we do, even if the commonwealth weren’t to initiate lawsuit, lawsuits would be initiated by one creditor class against another,” said Cooper, adding that a stay on lawsuits against Puerto Rico is also needed as talks with creditors continue.
For his part, Millstein warned there could be as many as “11 different judges eventually in charge of this if we don’t have a central forum within which to resolve these issues,” which could take “conservatively, five years of litigation.” Moreover, he noted how a restructuring regime could also do away with potential holdout creditors, “as a majority of creditors supporting a deal can make that deal binding on a minority…eliminating any of the holdouts.”
As for the potential establishment of a federal fiscal control board on Puerto Rico, the topic of the most recent congressional hearing over the island’s fiscal and economic matters, Cooper said enhanced oversight would be demanded by creditors.
Meanwhile, Millstein called for a balance in any solution presented by Congress. “There’s going to have to be a balance…between sovereignty of the federal government and bringing the extraordinary bankruptcy power that the federal government has for the benefit of the commonwealth, with the sovereignty that Congress gave the commonwealth to manage [its own affairs],” he said.
The commonwealth is banking on congressional action during the first months of the year as it tries to avoid additional defaults amid a steeper debt-service schedule come this summer. House Speaker Paul Ryan (R., Wis.) has said the lower chamber aims to come up with a solution to the Puerto Rico issue before the end of March.

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