Puerto Rico Legislative leaders back local bondholders
SAN JUAN — Senate President Thomas Rivera Schatz warned that the Senate will not allow hedge funds or corporate creditors to get a better deal than local bondholders in debt restructuring negotiations with the government.
Rivera Schatz and House Speaker Carlos Méndez also said during the Bonistas del Patio local creditor event that the government will continue to pay Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds, whose legality is being challenged in a lawsuit against the government.
Rivera Schatz made a distinction among the hedge funds or corporate creditors and the local bondholders. Hedge funds purchased bonds in the secondary market at very low prices and seek payment on the full value of the bonds. Local bondholders, he said, are different because they are not savvy investors with the resources to have known that the government was going to default.
Throughout many years, the government told investors and Wall Street that it had the financial capacity to pay its obligations and that, in the case of general obligations, they were guaranteed by the island’s Constitution.
“They are trying to provide the perception that local bondholders deceived the government and have been demonized… These are people who invested the money they earned… And they cannot be treated worse than the hedge funds,” he said.
He said the Senate is open to helping local bondholders. “At the Senate, we will not pass any law that treats corporate bondholders with better conditions than local bondholders. If that bondholder wants to seek a reasonable deal under Title VI [voluntary negotiations under Promesa]…no bondholder who speculated with the bonds can expect to obtain a 100% investment back… Therefore, I urge hedge funds to join local bondholders in good faith and obtain investments proportionally to what they made,” he said.
The leaders of both legislative chambers proposed legislation that would provide tax credits to local bondholders on future government earnings so they can get some of their investment back. He also proposed that any government savings as part of public-private partnerships be used to pay local bondholders. The local government has previously proposed using such savings to capitalize the commonwealth retirement system.
“I am just exploring such alternatives,” Rivera Schatz said.
Méndez said the tax credit bill will be presented “as soon as it is viable.”
The two legislative leaders stressed the legality of Cofina, which critics say was a structure created in 2006 to circumvent limits on constitutional debt. Méendez said similar structures have been created in other jurisdictions.
“Cofina was created in a legal fashion with the support of all political parties in a unanimous way. It served as a rescue bond for Puerto Rico to pay other debt, and at its time obtained a high credit rating… A lot of local bondholders are Cofina bondholders… It is not in my interest to hinder what was done in the past… If there were any incorrect acts, we will correct them,” the House speaker said.
“Facts are sacred. Opinions are free,” Rivera Schatz said about the claims against Cofina.
The legislative leaders also criticized the dismantled committee that sought to audit the entire public debt, contending it is not needed and is just another attempt to avoid paying the debt. Rivera Schatz revealed that leaders of the audit committee lied when they said they brought 100,000 signatures to the Legislature to audit the debt. He said the names provided did not have addresses or phone numbers, and that typewritten names were included instead of handwritten signatures. “They are lying to the people of Puerto Rico… They are charlatans,” Rivera Schatz said.
In an aside with the press, the legislative leaders also said they will not yield to the fiscal oversight board’s demands that the Legislature cut contracts or reduce the workweek because the entity’s jurisdiction is over the executive not the legislative branch. The board’s contracts, according to Rivera Schatz, are more expensive than those of the Legislature. The board costs the government $3 million a month. “I don’t work for the board. I work for the people of Puerto Rico,” the Senate president said.
Rivera Schatz spoke about apparent conflict of interest with respect to the chairman of the board, José Carrión, and its executive director, Ramón Ruiz Comas.
“What has caught my attention is that the oversight board chairman and its interim executive director have bonds and, if that is true, we have to see if there is a potential conflict as to whether they will make decisions to ensure the government pays their bonds first over other bonds… That is why board members have made courtesy visits to different entities except us because they cannot visit the Senate with hypocrisy,” he said.
Earlier in the event Thursday, three local bondholders described how their lives were turned upside down after the government defaulted on payments in the money they had invested. There are an estimated 60,000 local bondholders.
The government very recently began to pay interest on the general obligation bonds after defaulting in June. The first big default, the Government Development Bank’s, occurred in May.
Mercedes Pont said her parents always told her to work and not depend on any man. She saved her hard-earned money initially in Christmas Clubs and then she put funds in a savings account at a cooperative. Then she decided to invest in government bonds because they were low risk. In 2011, her company eliminated her position, but she decided not to work again to take care of her mother, who was 87 years old, as well as do social work. She was living off the interest of her investments.
“I figured I would have enough money until the age of 65. Everything was fine until 2016. Now, not only have I lost interest, but I am at risk of losing the principal, the money that I had and gave the government to help it out,” she said.
Since then, she has suffered the humiliation of having to ask for help because she does not have the funds to pay for utilities. She said she does not expect to recuperate all of her money but expects everyone to make sacrifices.
“We are willing to make a sacrifice as long as they take us into account during the debt negotiations. We are as vulnerable as the government retirees,” she said.
José Julian Álvarez and Juan Rodríguez, two other retirees, also dreamed of living their golden years worry-free and are now struggling to survive.
“When they stopped paying, I woke up to a new reality that was not what I sought out,” Álvarez said.
Rodríguez said he worked about 40 years as a manager in a needle factory and saved the money he had earned, and added that his son offered him a room in his house in the mainland United States if things get worse.