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Scotiabank, Insurers, U.S. CofC Against Recovery Act

By on March 10, 2016

SAN JUAN — Scotiabank de Puerto Rico, the Association of Financial Guaranty Insurers and the U.S. Chamber of Commerce are urging the U.S. Supreme Court in legal briefs to uphold the illegality of the Puerto Rico Debt Enforcement & Recovery Act.  

On March 22, the top court will hear arguments over the Recovery Act, a local statute that allows for the debt restructuring of the island’s financially battered public corporations that was found to be unconstitutional at the federal district and appellate levels. The local government contends that because Puerto Rico’s public corporations cannot file under federal bankruptcy law, it can enact its own bankruptcy law to fill in the gap.  

Scotiabank, in an amicus brief filed after reaching joining in a restructuring agreement with the Puerto Rico Electric Power Authority (Prepa), says local banks that comprise the fuel-line syndicate, which pays for the utility’s oil, play a vital role in the island’s economy and support initiatives to address its fiscal problems.

“But the Recovery Act, moreover, is so unfavorable to creditors—and so much less protective of creditors’ rights than the federal Bankruptcy Code—that it will inevitably affect the financing available to Puerto Rico,” Scotiabank warns.   

The group of banks of which Scotiabank is part of has extended approximately $550 million in credit to Prepa, including Oriental Bank and Firstbank Puerto Rico.

For over a year, Prepa and its creditors, including the local banks, have worked tirelessly to negotiate a consensual restructuring of Prepa’s debt, with an agreement in place between the utility and about 70% of its creditors.

“Although Prepa asserts in its amicus brief that the Recovery Act spurred negotiations on a consensual restructuring, the opposite is true. The Recovery Act reduced Prepa’s incentive to negotiate, and little progress was made before the district court struck down the Act on February 6, 2015. Only after that decision—on June 1, 2015—did Prepa deliver a proposed recovery plan to creditors, as required by its forbearance agreements. And only then could Prepa and its creditors begin to negotiate in earnest on a consensual restructuring,” the bank says.

Supreme Court of the United States

U.S. Supreme Court building

The Association of Financial Guaranty Insurers (“AFGI”), the national trade association of the leading insurers and reinsurers of municipal bonds and asset-backed securities, says its interest in the outcome of this case extends well beyond the debt issued by Puerto Rico and its public corporations. “The prospect of States or territories enacting their own municipal bankruptcy laws would have grave consequences on the monoline insurance industry, as well as on the municipal bond market as a whole. Upholding the Recovery Act would establish, and signal to monoline insurers and other creditors, that contractual terms with municipalities could be altered in unpredictable, inconsistent and selfserving ways. This would create a chilling effect on credit markets and increase the cost of financing to municipal borrowers (and, therefore, to taxpayers),” the organization argues.  

AFGI says the government has painted a grossly inaccurate picture of the purported catastrophes that supposedly await Puerto Rico residents without the Recovery Act. “This false portrayal of the potential impact of applying existing federal and Commonwealth law to the bond contracts at issue is an attempt to shift focus from the ‘straightforward’ issue of federal preemption here and from the dramatic negative effects that permitting laws like the Recovery Act would have on the nationwide municipal securities market,” the group adds.

As for the U.S. Chamber of Commerce—which represents 300,000 direct members and indirectly the interests of more than 3 million companies and professional organizations of every size—says there can be no bankruptcy uniformity if states and territories could break contracts for the special benefit of distressed municipalities. The result would be a municipal bond market with reduced access to the low-cost capital the investor class has always supplied.

“The economy is likely to suffer in the end. Municipal bonds fund infrastructure projects that keep the backbone of our economy in good condition. Safe roads, bridges, and airports, good schools, and well-equipped public safety departments create the conditions that spur economic growth,” the chamber notes.

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