Governor Leaves for Debt-Restructuring Meetings in New York, Washington

SAN JUAN – Gov. Alejandro García Padilla left for New York and Washington on Tuesday to meet with creditors of Puerto Rico’s debt and continue efforts in Congress to see the island provided with tools to restructure its debt.

According to a release, the meetings are part of the García Padilla administration’s agenda “in search of fair and equal treatment for Puerto Rico.”

Secretary of State Víctor Suárez will serve as acting governor until Thursday, May 12, when the governor is expected back.

Gov. García Padilla during a meeting with Rep. Doug Lamborn (R-Colo.)

Gov. Alejandro García Padilla, left, during a previous meeting with Rep. Doug Lamborn (R-Colo.)




Panel Highlights Options to Pull Puerto Rico Out of Fiscal/Economic Hole

SAN JUAN—A group of panelists debated Thursday the merits of the alternatives available to Puerto Rico to alleviate its financial woes, at a time when it must tackle fiscal and debt restructuring and economic development simultaneously.

Jorge L. San Miguel, a lawyer at Ferraiuoli LLC, who represented AMBAC, a monoline insurance company that insures $2.2 billion in municipal bonds and recently sued the government over the clawbacking of payments, criticized some of the myths that the government appears to perpetuate during the crisis.

FILE - In this Wednesday, July 29, file 2015 photo, the Puerto Rican flag flies in front of Puerto Rico’s Capitol as in San Juan, Puerto Rico. On Monday, April 11, 2016, Puerto Rico released a new proposal to restructure part of its $70 billion debt to buy time to implement a fiscal growth plan as multimillion-dollar payments loom for a U.S. territory facing dwindling cash reserves. (AP Photo/Ricardo Arduengo, File)

FILE – In this Wednesday, July 29, file 2015 photo, the Puerto Rican flag flies in front of Puerto Rico’’s Capitol in San Juan, Puerto Rico.  (AP Photo/Ricardo Arduengo, File)

For instance, he said that not all of the debt could be restructured through Chapter 9, which means the bankruptcy process will not guarantee an orderly discussion of the debt. He also disputed government claims that the $72 billion debt is unpayable, noting that the Treasury Department reports more revenues each year and the government has said it has cut expenses.

San Miguel spoke at a debate dubbed “Debate: Default vs Restructuring vs. Other Alternatives,” organized by the Latin America Entrepreneurship Council (Consejo Empresarial de América Latina or CEAL) at a hotel in Condado.

Regarding the government’s assertion that the debt service as a percentage of revenues is unsustainable, he said, “True, when you use 92% of the debt and only 34% of revenues to calculate, using the government’s own data. When using complete data, the ratio is 16%, in line with other jurisdictions, and sustainable.”

San Miguel also challenged the government’s use of the Krueger Report to back its claims of unsustainability because of remarks in the report’s disclaimer that state the report is “for discussion purposes only”, “prepared at request of counsel”, and that it is based on public information that has not been reviewed or consulted with auditors.

“Unfortunately, recent events of default and moratoriums distract from the real and viable solution,” he said.

San Miguel said the island could take a number of initiatives that do not require restructuring or help from the U.S. Congress. These include improving tax collections, implementing an efficient permitting process, reactivating private public partnerships, implementing government procurement reform by centralizing purchases—which the government has already done—and completing the revitalization of the Puerto Rico Electric Power Authority (Prepa).

José Sosa Lloréns, a lawyer who spoke on behalf of the credit unions or “cooperativas,” noted that the interest of the Government Development Bank (GDB) in achieving debt reduction is evident. However, to the extent that said reduction impairs the capital of the Puerto Rican investors, the social benefit of reducing government debt will be offset by the damage to the economy.

“The decapitalization that our economy would suffer due to the principal haircuts will impair our prospects for economic recovery, which is an essential pre-condition for a definitive solution to Puerto Rico’s fiscal crisis,” he said. “It is for this reason that the principal ‘haircuts’ that the government proposals contemplate—which deliver their greatest damage upon Puerto Rico’s investors—end up laying the foundation for the trauma of a future default.”

“This risk of future financial failure is especially dangerous when we consider that debt restructuring is just but one piece of a decisive solution, which requires: adopting economic development policies that lead to growth (thus increasing government revenues), and reforming governmental structure and operations to ensure sustainable levels of spending and increase public productivity and effectiveness,” he added.

Sosa LLoréns, on the other hand, criticized the preliminary terms of a possible agreement to restructure the GDB’s debt. The terms, which a group of hedge funds agreed upon, contemplate a bond exchange with a principal “haircut” of 47%. The GDB’s press release points out that the proposal contemplates the issuance of other “par value” instruments, the specific terms of which have not been defined, he said.

“The GDB’s disclosure acknowledges that the bank’s restructuring will require the consent of the entirety of the bank’s bondholders, including the state chartered credit unions. Additionally, it recognizes that the hedge funds Ad-Hoc group represents only 25% of the GDB’s debt,” he said.

“The terms disclosed by the GDB aiming to make principal ‘haircuts’ correspond to the proposals and financial expectations of hedge funds, for whom said haircuts do not imply capital losses on account of them having acquired their bonds at a discount price in the secondary market. This is in contrast with the situation that traditional investors confront. To traditional investors, who typically bought their bonds at par in their original issuance, principal haircuts represent material losses, both of capital and of current income. This is the same situation that state chartered credit unions share with the rest of the Puerto Rican bondholders and traditional investors in the United States,” he said.

“The G25’s position on this matter has been clear: (a) the restructuring of the bonds held by state chartered credit unions and the other Puerto Rican investors cannot be subordinated nor be conditioned to the hedge funds’ negotiation perspective; and (b) debt reduction cannot be achieved blindly, without acknowledging the full financial realities of each group of bondholders, especially those comprising a majority,” he said.

Claudio Loser, director of Centennial Group and chief executive officer for Centennial Group Latin America, said the current government strategy, as set up, envisages a comprehensive set of budget and structural reforms that would be supported by federal policy changes and by concessions made by public sector creditors.

He said studies have shown that, contrary to conventional wisdom, fiscal adjustment and reforms in other countries have helped reverse an economic decline by reestablishing confidence in the future and access to financing at lower costs, both of which are critical in promoting domestic investment. “For instance, the Independent Evaluation Office of the International Monetary Fund conducted a review of 133 programs in high- and middle-income countries, with an average targeted fiscal adjustment of about 2% of gross domestic product over two years. It found that economic growth in the first program year improved over the previous year, and that it improved further in the second year,” he said.

The Puerto Rico Fiscal and Economic Growth Plan, he said, does not stabilize the commonwealth’s finances, given that the central government overall deficit and corresponding financing need will still be sizable in fiscal 2020 and beyond. The plan does not fundamentally address the financial problems of the public pension funds and, given that it requires passage of constitutional amendments and various legislative changes, its implementation as envisaged could be uncertain for an extended period. The creation of the proposed control board would require the island to relinquish oversight over the budget and taxation, he noted.

Local officials are seeking a broad-based restructuring/default of government debt to cover an estimated financing gap of $14 billion. Puerto Rico’s public debt is not monolithic, as there are 18 major issuers of debt, and it is recognized that the entities that have issued debt have different circumstances than those of the government and, therefore, a restructuring of their debts may need to be considered.

He said the markets view such a default and unilateral restructuring as a sign of Puerto Rico’s unwillingness to pay, rather than a compelling need.

The objective of Puerto Rico’s economic policy framework should be the restoration of the conditions for sustainable economic growth through orderly fiscal adjustment combined with growth- and competitiveness-enhancing structural reforms, Loser said. The plan, he added, is a strong basis toward achieving this objective, but it needs to be strengthened under a reinforced plan.

The adjustment and reform effort in Fiscal Year 2016-17 should focus on achieving a central government deficit of half a percent of gross national product (GNP) in fiscal 2017, and a small surplus in fiscal 2018. This would help prevent a liquidity/credit crunch and a possible systemic crisis; restructuring the large public enterprises in ways that ensure continuing and more efficient service delivery at a lower cost;  and putting in place public-private partnerships to play a key role in such restructuring and boost infrastructure spending without unduly burdening government finances.

In fiscal years 2018-20, efforts should focus on finalizing negotiations for adequate federal government support of health care programs and expenditure restraint to help maintain an overall balance in the central government finances, while channeling more government resources to high priority investment projects and social spending, as well as deepening pro-growth structural reforms.

In this context, he said, the key modifications of the plan would include a medium-term debt sustainability analysis for the proposal that suggests that government debt would come down from the equivalent of 68% of GNP in fiscal 2016 to 61% in 2020, and to 51% in 2025.




Local Credit Union Group: Puerto Rico and Hedge Funds an ‘Unholy Alliance’

SAN JUAN — After agreeing to delay for a full year a $33 million payment originally due May 2, a group of local credit unions voiced concerns over debt-restructuring terms being discussed between the Government Development Bank (GDB) and several hedge funds that own about a quarter of the troubled institution’s $4 billion debt.

For G25—a group of local credit unions that own GDB notes—restructuring the bank’s debt “cannot be achieved blindly, without acknowledging the full financial realities of each group of bondholders, especially those comprising a majority,” according to a statement released Thursday.

gdb featureFailure to consider any proposals that take into account these realities would “reveal an unwillingness to protect the capital of traditional investors (both in Puerto Rico as well as in the U.S.), and a tactical affinity in negotiating with hedge funds, leading to an alignment of interests,” the group further noted.

Mere hours after Gov. Alejandro García Padilla declared a moratorium on the bank’s debt-service obligations, the GDB announced it agreed to a general restructuring framework with the hedge fund group, which owns about $900 million of the bank’s debt.

A “two-step restructuring” would see all creditors—including local credit unions—first exchange their GDB debt for new paper amid haircuts, or reductions to principal, of 43.75%. Once, and if, the commonwealth’s broader restructuring plan takes place, they would take a 53% haircut.

“An agreement with such a slim likelihood of real implementation and founded on the interests of a minority ends up being a simulation,” the co-op group went on. “Even if that simulation has the purpose of lobbying Congress for debt-restructuring powers that allow the imposition of principal ‘haircuts,’ this exercise lessens the restructuring negotiations and unnecessarily delays them.”

Caribbean Business reported Thursday that in the runup to Monday’s partial default, some advisers in La Fortaleza were of the opinion that striking deals with GDB creditors could run counter to the commonwealth’s prospects to achieve immediate congressional action over the island’s fiscal crisis.

Puerto Rico missed about $370 million of its $390 million GDB debt-service tab, of which $120 million is covered under a 30-day forbearance agreement reached with the hedge fund group. The bank paid, in full, interest payments worth $22 million—a move aimed at protecting local bondholders and credit unions, according to government officials.

GDB President & Chairwoman Melba Acosta told Caribbean Business on Wednesday that more local credit unions would accept pushing maturity on their bonds for a year, after failing to receive this week about $30 million worth of principal. “There are more co-ops that will be joining. Probably next week, we are going to have a second closing with some other co-ops,” she said.

G25, represented by lawyer José Sosa-Lloréns and banker Fernando Viñas, says it will continue debt-restructuring negotiations with the GDB.

GDB Restructuring Terms

According to the G25 statement, the terms being discussed would respond to hedge funds’ interests, while the proposed haircuts would not represent losses for this creditor group, after having acquired their bonds at discount. Moreover, a reduction to principal could even translate to double-digit gains for hedge funds, the group further noted.

“To traditional investors, who typically bought their bonds at par in their original issuance, principal haircuts represent material losses, both of capital and current income,” read the statement, while warning against the negative impact it could have on the island’s already-battered economy.

The credit union group argued that the GDB would have to offer bonds carrying principal premium and/or higher yields if traditional investors were to receive “a truly comparable transaction” — one that takes into account the actual capital invested by each bondholder.

G25 downplayed “unworkability” claims over such an approach, as well as conflicts with bankruptcy principles, particularly given that it would take place under a voluntary process “governed by the parties’ freedom of contract.”

Finally, in addition to debt restructuring, G25 stressed that a comprehensive solution must include economic development policies and a revamped government structure that can lead to a much more effective operation. By itself, “debt restructuring will only generate a ‘mega-deal,’ the effects of which will be brief and insufficient.”




More Local Credit Unions On the Brink Of Joining GDB Deal

SAN JUAN — Government Development Bank (GDB) President & Chairwoman Melba Acosta told Caribbean Business on Wednesday that more local credit unions are on the brink of joining a deal in which maturity on their GDB notes, initially due May 2, would be extended by a year.

“There are more co-ops that will be joining. Probably next week, we are going to have a second closing with some other co-ops. It could be about $30 million [worth of notes],” Acosta said on her way into La Fortaleza, where commonwealth restructuring advisers met with Gov. Alejandro García Padilla to discuss the latest developments related to the island’s debt-restructuring efforts.

Melba Acosta Jim MillsteinLate last week, the GDB pushed maturity on roughly $33 million in notes that were due May 2, after reaching a deal with a group of local credit unions. On Sunday, in a broadcast message, García Padilla announced he had declared a moratorium on the bank’s debt-service payment, as the island stood ready to default on as much as $370 million.

Millstein & Co.’s Jim Millstein, the commonwealth’s lead restructuring adviser, and Richard Cooper, a partner at New York-based law firm Cleary & Gottlieb, were on the island to participate in Wednesday’s meeting with the governor.

Regarding the risk of litigation following Monday’s partial default, the commonwealth’s fiscal advisers conceded that although there is a moratorium law in place, there is always the risk of having affected creditors challenge the statute.

Mere hours after the governor’s TV message, another deal was announced by the GDB with a group of hedge funds that owns about one-fourth of the bank’s roughly $4 billion in debt, as Caribbean Business reported on April 19. In addition to a 30-day forbearance on about $120 million, the GDB and the hedge fund group agreed to a general debt-exchange framework that would include a “two-step restructuring” of the bank’s debt. All creditors would first exchange their GDB debt for new paper amid haircuts, or reductions to principal, of 43.75%. Once and if the commonwealth’s broader restructuring plan takes place, they would take a 53% haircut.

The officials said Wednesday they continue to negotiate the aforementioned terms with the hedge fund group, particularly the treatment of interest when and if the commonwealth is able to strike the broader restructuring plan. Moreover, the GDB is expected to continue efforts to bring all of its creditors onboard the deal, a key condition for it to materialize, officials added.

Acosta said earlier this week that as part of talks leading to the May debt payment, they reached out to “other large holders, some of them local banks, which were invited to join the deal or negotiate with us.

“Unfortunately, they didn’t want to,” she noted at the time.

All things said, the commonwealth missed roughly $370 million of its $470 million debt-service tab across credits due May 2, of which $120 million are covered under the 30-day holiday granted by the GDB’s hedge fund group. The bank paid in full interest payments worth $22 million—a move aimed at protecting local bondholders and credit unions, according to government officials.




House Democrats Urge Congress to Pass Debt Restructuring Citing Zika Threat

SAN JUAN–House Democrats are urging the U.S. Congress to approve debt restructuring legislation for Puerto Rico, arguing that forcing the island to carry out further cuts will prevent the U.S. commonwealth from dealing effectively with the Zika virus.

A female Aedes aegypti mosquito acquires a blood meal on the arm of a researcher at the Biomedical Sciences Institute in the Sao Paulo's University in Sao Paulo, Brazil. The Aedes aegypti can spread the Zika virus, which is spreading in parts of Latin America and the Caribbean and usually causes a mild illness but is now suspected in other health issues. (AP Photo/Andre Penner, File)

A female Aedes aegypti mosquito acquires a blood meal on the arm of a researcher at the Biomedical Sciences Institute in the Sao Paulo’s University in Sao Paulo, Brazil.  (AP Photo/Andre Penner, File)

The comments were made in a report issued by Democrats on the House Natural Resources Committee Wednesday. The relatively high number of cases of the mosquito-borne disease in Puerto Rico has prompted the Centers for Disease Control to issue several advisory warnings to travelers.

“We have heard from opponents of this legislation that the real solution to restructure some of Puerto Rico’s debt is for the Commonwealth to just cut spending even more deeply,” committee ranking member Raúl Grijalva (D-Ariz.) said in a statement. “This report demonstrates that calls for more cuts, while they might be easy to make, are actually irresponsible and dangerous.”

The report contends that the costs of the health care system have contributed to the island’s financial crisis and that the Zika virus is going to put more pressure over the system.

“Puerto Rico’s health care system is living on borrowed time. Over one third of the island’s massive $72 billion debt is estimated to be attributable to health care spending,” the report says. “If not controlled, Zika stands to wreak havoc on Puerto Rico’s broken health care system.”

Currently, Puerto Rico is under a watch for the transmission of the virus but it is not under an epidemic, according to the Puerto Rico Health Department.

The Zika virus may result in birth defects, such as microcephaly, if contracted by pregnant women. There is also the possibility the virus may produce the Gillain-Barré syndrome, a form of nervous paralysis, in some adults.




Fiscal Team Briefs Governor On Efforts To Tackle Looming Debt Wall

SAN JUAN — On Monday, the Puerto Rico government’s fiscal team briefed Gov. Alejandro García Padilla on plans to tackle the commonwealth’s looming debt payments, particularly the $422 million owed by the Government Development Bank (GDB) in less than a week.

The bank’s president & chairwoman, Melba Acosta, said the commonwealth is “talking with different groups” about separate deals. “With some groups, we are just talking about forbearance and maybe extending maturities. With others…maybe we are doing something else,” she conceded.

La Fortaleza

La Fortaleza

Yet officials continue to warn the government could still default — while declaring a moratorium on GDB’s debt payments — on as much as half of the $422 million due May 2.

“We have been meeting with a group that owns about $120 million of the $422 million [May] payment, as well as with another group that holds a lesser amount. Obviously, if all these alternatives materialize, we are talking about roughly half of the payment. So we are probably going to use the [recently enacted] moratorium law,” warned Acosta, who is expected to travel to New York this week to work “on various matters.”

Caribbean Business reported on April 19 that a tentative deal could have been struck with a GDB creditor group owning the $120 million of the May payment and about a fourth of the bank’s roughly $4 billion debt. In addition to a forbearance agreement, this creditor group would be willing to exchange its GDB debt for new paper amid a haircut, or reduction to principal, in the vicinity of 50%, sources added.

“All the creditors are watching each other. So, you know, the first that reaches an agreement sets a precedence over the rest,” said the commonwealth’s lead restructuring adviser, Millstein & Co.’s Jim Millstein, who traveled to the island along with Richard Cooper, a partner at New York-based law firm Cleary & Gottlieb, to take part in Monday’s meeting.

When asked whether agreements have been reached with any of the GDB’s creditor groups, both Acosta and Millstein said negotiations continue. The GDB chief believes they are closing in on some deals, “but terms are not final…. There is nothing final.”

The commonwealth is also engaging other GDB creditors, including a group of local cooperatives that hold about $30 million of the GDB’s May payment, sources said, in an effort to strike forbearance agreements.

Other officials attending Monday’s meeting at La Fortaleza were Chief of Staff Grace Santana, Justice Secretary César Miranda, Treasury Secretary Juan Zaragoza, Office of Management & Budget Director Luis Cruz and Secretary of State-designate Víctor Suárez, who was recently appointed chief of the island’s new fiscal agent.




GOP Battles Bailout Perception on Puerto Rico

In this April 13, 2016, file photo House Speaker Paul Ryan of Wis., pauses during a news conference on Capitol Hill in Washington. Debt-ridden Puerto Rico faces a $422 million bond payment deadline May 1 with no sign Congress will act in time to help. Further complicating lawmakers’ efforts to steer the U.S. territory away from economic collapse are ads airing nationwide that claim the legislation amounts to a financial bailout even though the bill has no direct financial aid. House conservatives have latched onto that argument, making it difficult for Ryan, to garner support for the bill. (AP Photo/J. Scott Applewhite, File)

U.S. House Speaker Paul Ryan (AP Photo/J. Scott Applewhite, File)

WASHINGTON – Debt-ridden Puerto Rico faces a $422 million bond payment deadline Sunday with no sign Congress will act in time to help.

Further complicating lawmakers’ efforts to steer the U.S. territory away from economic collapse are ads airing nationwide that claim the legislation amounts to a financial bailout, even though the bill has no direct financial aid.

Some House conservatives have latched onto that argument, making it difficult for Speaker Paul Ryan, R-Wis., to garner enough support for the bill. Natural Resources Committee Chairman Rob Bishop, R-Utah, says he is reworking the bill.

House Majority Leader Kevin McCarthy on Tuesday acknowledged that House action won’t come in time for Puerto Rico to avoid default on the nearly half-billion-dollar debt payment. The AP explains Puerto Rico’s debt crisis, what’s happening in Congress and the outside forces.

___

PUERTO RICO’S IN BAD SHAPE

Puerto Rico’s government is running out of money, partly because federal tax incentives that lured manufacturers were phased out by Congress a decade ago.

The territory’s financial problems grew worse as a result of setbacks in the wider U.S. economy, and government spending in Puerto Rico continued unchecked. Borrowing covered increasing deficits and bonds were sold on special terms. More than 200,000 people have left Puerto Rico in the past five years, reducing the island’s tax base.

Those left behind have struggled with higher taxes and utility bills that have forced businesses to close or lay off workers. Foreclosures are skyrocketing and the island’s unemployment rate of 12 percent is the highest compared with any U.S. state.

___

IT’S ALL ABOUT PERCEPTION

Ryan is lobbying his House Republican caucus to support the legislation, which would create a control board to help manage the island’s $70 billion debt and to oversee some debt restructuring. Ryan says Congress is staunchly opposed to a bailout, but the U.S. could ultimately be responsible if Congress doesn’t act soon to prevent collapse.

Some lawmakers are claiming the opposite.

“This could be a first step toward a bailout,” said Louisiana Rep. John Fleming, a GOP member of the House Natural Resources Committee, which will have to approve the bill before it moves to the floor.

Creditors who are owed money are spending millions to lobby on the bill and have hired former lawmakers to push their case. In some cases they are battling each other.

Former Sen. Judd Gregg, R-N.H., represents a group that hold bonds that are backed by a portion of the territory’s sales tax, and he has been asking lawmakers to support the House bill. Those bondholders stand to benefit if the territory’s economy – and sales – thrive because of restructuring. Gregg says the bill “treats creditors fairly and does not use taxpayer dollars.”

Former Rep. Connie Mack, R-Fla., represents a group of general obligation bondholders opposed to the bill. In an email to former colleagues obtained by The Associated Press, Mack wrote: “The legislation is pure and simple a BAILOUT on the backs of taxpayers, retirees and savers … Some in leadership have decided to try and pull the wool over the House GOP Conference’s eyes.”

Bishop says “the goal is to make sure that everyone is paid, and not just a few people are paid.”

___

ADS CREATE ANGST

Some of the ads run by the Center for Individual Freedom have specifically targeted Bishop and Wisconsin Rep. Sean Duffy, the bill’s sponsor. New ads that started Friday feature a Puerto Rican bondholder named Theresa who says she will lose her life savings if the House bill becomes law.

The group is organized as a politically active nonprofit that doesn’t have to disclose its donors. As of last week, it had spent an estimated $1.9 million so far this month, according to advertising tracker Kantar Media’s CMAG.

The Alexandria, Virginia-based group was founded in the late 1990s by tobacco industry leaders seeking to fight government restrictions on smoking. In the years since, it has evolved to aid Republican politicians and take up conservative causes such as balancing the federal budget and fighting donor disclosure laws at the state level.

The group’s chairman is Tony Fabrizio, a longtime, well-known Republican pollster and strategist.

Bishop says he thinks most of his colleagues won’t be convinced by the ads, which he says are “so over the top that it’s hard for people to believe them,” he said.

Bishop canceled a scheduled April 14 session to finalize the bill after Fleming and others made it clear they wouldn’t support the legislation and the ads from the Center for Individual Freedom raised doubts within the caucus. While some Republicans are on board, others said they were wary it could set a precedent for financially strapped states.

Bishop has also continued negotiations with Democrats, Puerto Rican officials and the Obama administration.

Senate Republicans say they are waiting to see what happens in the House.

“We know it needs to be dealt with and we’re in discussions with them about what ought to be done,” Senate Majority Leader Mitch McConnell said Tuesday.

The Associated Press




New Bondholder Group Demands Representation in Debt Discussions

SAN JUAN – A group of individual holders of Puerto Rico bonds announced Sunday the creation of Backyard Bondholders (“Bonistas del Patio”), which seeks to “be heard” in the negotiations between the Puerto Rico Government, the U.S. House of Representatives and other bondholders on debt restructuring.

Backyard Bondholders said in a statement that it aims to advocate for local bondholders who own approximately $14 billion, or 20%, of the commonwealth’s debt. “Due to public confusion on this important issue, Backyard Bondholders is engaged with key decision-makers to prevent misguided decisions from disparately penalizing the savings of thousands of Americans in Puerto Rico. Every one of us has worked hard, saved and invested our hard-earned savings in Puerto Rico,” the group’s statement reads.

“The future of Puerto Rico and the repayment of our savings that were invested in its bonds, is being negotiated in Puerto Rico and Washington, D.C., without our input. The local bondholders have so far been absent throughout this discussion. Now we will be heard,” Jorge Irizarry, executive director of Backyard Bondholders, says in the release.

SAN JUAN, PUERTO RICO - JUNE 30: Hilda Soto has breakfast as she reads a newspaper article about the speech Puerto Rican Governor Alejandro Garcia Padilla gave regarding the governments $73 billion debt on June 30, 2015 in San Juan, Puerto Rico. Soto said that she believes it's the moment for the island to go independent, as the Governor said in his speech that the people will have to sacrifice and share in the responsibilities for pulling the island out of debt. (Photo by Joe Raedle/Getty Images)

Hilda Soto has breakfast as she reads a newspaper article about the speech Gov. Alejandro García Padilla gave regarding the government’s $70 billion debt, June 30, 2015, in San Juan. (Photo by Joe Raedle/Getty Images)

The group explains that local bondholders are people who have “dedicated their lives to economic development, job creation and boosting Puerto Rico’s economy,” and argues that the money these lent to the government was made on the island and was “continually reinvested in Puerto Rico.” It is concerned that island residents, as opposed to non-residents, will be taxed to repay all the debt, “including ours,” which until now, had no representation, according to the statement.

“Our participation is key to [ensure] justice in the decisions [made] in relation to the fiscal crisis. To decapitalize the local bondholder would be a mortal blow to the local economy of Puerto Rico,” Irizarry added.

The organization has stateside and Puerto Rico advisers and says it continues to grow by actively recruiting local bondholders. The group hired Washington, D.C.-based law firm Williams & Jensen, which will work with a local firm the group says it will be announcing.

 




The Barber of San Juan: Creditors Brace for Haircuts

By: Philipe Schoene Roura & Luis J. Valentín

“Debt restructuring”—If there was any logic to the English language, this term would be a four-letter word. In Puerto Rico’s case, there are 18 different credits with varying hierarchies and values—fittingly restructuring has been defined as an exercise steeped in hardship. The two sides—creditors and the commonwealth’s restructuring brigades—have been in a race against time as the deadline for the first big payment of $422 million by the Government Development Bank (GDB) comes due on May 2.

The most recent proposal to restructure Puerto Rico’s debt continues to target some $49 billion across 11 credits in a plan that now respects the hierarchy of constitutionally guaranteed general-obligation bonds (GOs) and sales tax-backed Cofina (Spanish acronym for Sales Tax Financing Corp.) bonds, with a scalable debt-exchange offer. Proposed haircuts include about 16% for commonwealth-guaranteed debt, including GOs, and 43% for Cofina. Less secure paper, such as those for the Highways & Transportation Authority and the GDB, could see cuts to principal of 44% and 64%, respectively, while other credits would fall around the 50% range.

TCB-Cover-image---Barber-Shophe offer now makes extensive to local bondholders as much as $8 billion in a new type of base bonds, in a par-for-par deal exclusive for them. The revised proposal also replaces what were once growth bonds—repayable only if Puerto Rico’s economy grew—with capital appreciation bonds (CABs). These would accrete at a rate of 5% annually, payable after 40 years, through a 10-year cycle, until 2065.

The Alejandro García Padilla administration’s counterproposal is the product of talks between the commonwealth’s advisers, headed by Millstein & Co. founder Jim Millstein, a former chief restructuring officer for the U.S. Treasury, and teams of lawyers for creditors who are all jockeying for position. Thoroughbred credits—GOs backed by constitutional guarantees and Senior Cofina credits backed by the local sales & use tax (IVU by its Spanish acronym)—are running neck and neck in this race, insisting that their credits be first in line.

Millstein, Richard Cooper of law firm Cleary Gottlieb and the commonwealth’s Chief Financial Officer Melba Acosta looked at a proposal by a group of GO bondholders that offered a five-year holiday on principal payments that would save the island roughly $1.9 billion, while providing $750 million in new money by issuing more GOs.

Puerto Rico’s fiscal team countered that just paying interests and even with the liquidity injection, cash shortfalls would remain, while leaving nothing to pay other credits, including Cofina. It would end up in courts in a fight with other credits, and significant participation would still be required from GO holders outside of the group that made the offer.

A month before the GO offer, a group of senior Cofina bondholders put forth a plan providing debt-service relief under Cofina during the next four years, although extending debt-service payments for a longer time. This way, Puerto Rico would save roughly $2 billion during the next few years, according to the group’s proposal.

But by defaulting on this credit, payments to holders of senior Cofina bonds would be accelerated, with subordinate Cofina bondholders—many of whom are Puerto Rico residents—getting paid after 25 years.

The common thread in both creditor groups—a claim of “just no haircuts”—has now reportedly been tempered to a claim that premium paper be kept premium. The GOs do not want to trade their steel-belted radial credits for other paper. Cofinas want to keep their sales-tax-backed, golden-lockbox structure. They would be willing to take haircuts in an exchange of GOs for GOs, Senior Cofinas for Senior Cofinas.

This is reportedly an option that Millstein says the commonwealth is COVER STORY ARTWORK FOR APRIL 21willing to entertain, so long as the math in the equation provides adequate levels of annual debt service, not exceeding 15% of government revenue in a year. This option also cannot place the burden solely on other credits.

“We have no religion on this. We think everyone is better off being in one big superbond. But if the economics work…we are prepared to consider that,” Millstein said.

“We can fashion a baby superbond for the other guys,” he added, while noting that the rest of the island’s creditors have expressed interest in taking part of the superbond structure.

The so-called “superbond” is still the administration’s only card on the table—a “global” structure whereby the island’s different credits are streamlined into a single “currency” by pooling in the various revenue sources that secure the repayment of these credits.

Commonwealth advisers believe the superbond provides a stronger, more liquid instrument, while reducing inter-creditor conflicts. They continue to stress that the island cannot afford a partial deal that leaves it in court with billions of dollars of debt.

An offer they might refuse
“It is really more of the same; it has little improvement with the CABs that have some slight initial value and improve the notional recovery, but we don’t see the rationale for this proposal from an absolute or relative basis,” said Nader Tavakoli, CEO of Ambac Assurance, during an exclusive interview with Caribbean Business. Ambac is one of the municipal bond insurers with exposure to Puerto Rico debt.

“It is interesting to see the timing for the release of these proposals, right before or during congressional hearings to give the impression that something is being done—when, in fact, it is not a counterproposal. It was a counterproposal to their own proposal to which no one made a counter,” he added.

Tavakoli is not alone in his allegations. Several Caribbean Business sources have confirmed that there were no constructive meetings in which the commonwealth’s first proposal was rehashed leading to the latest offer. “The new iStock_000079315145_Full(congress)proposal is very much like the first proposal; there is some tinkering around the edges, and some of the securitization structures could possibly be left in place, but it really is not that different,” said one source with knowledge of negotiations taking place between the commonwealth’s advisers and various creditor groups.

“The exchanges are based on market prices and those stronger credits—namely GOs and Senior Cofinas—are not going to agree to a market pricing as a fair value in an exchange program,” the source added.

The market pricing is an issue that seems to be a deal breaker for GO and Cofina credits, which analysts do not see participating in the superbond structure as it currently stands.

Although none of the creditor groups is willing to be the last in line, hedge funds are now snuggling up to a dog of a deal that is starting to look more attractive by the day. Creditors who possess stronger paper have watched in dismay as their assets have tanked over the past several months, thanks largely to actions by the government. In what is being interpreted as scorched-earth policy, the commonwealth’s media tour of the U.S. Congress and Wall Street, more than stressing the impossibility of making the next two big debt-service payment due dates—the GDB’s $422 million on May 2 and some $1.5 billion in July 1, including $780 million for GOs—has served to push the value of Puerto Rico’s bonds to record lows.

Then, the death knell was struck when García Padilla signed into law the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act. At this writing, the once-sterling GO and Cofina bonds were trading at under 50% of their value.

A novel idea
“The problem is that the GOs and the Cofinas both feel that their paper has a superior hierarchy,” said Latin Media House Chairman Miguel Ferrer, a hedge-fund manager who owns a share of Puerto Rico bonds. “It is pari-passu, all things are equal—they are both right.”

Miguel A. Ferrer, Latin Media House Chairman

Miguel A. Ferrer, Latin Media House Chairman

Ferrer believes the impasse between the GO and Cofina bondholders could be resolved with an offer that prioritizes stronger paper, made on the basis of three series. Series I, which would have maturities of 7 to 15 years, with 70% of the value of the bonds exchanged and a 3% coupon; Series II, which would have 15- to 30-year maturity, with 85% of the value of bonds exchanged and a 5% coupon payable each year. Series III would contain 30- to 45-year maturities at par value.

“You would prioritize maturities, offer the option of shorter maturities to those bondholders that have the most valuable paper first; in other words, GOs and Cofinas get a first crack at participating in the Series I,” said Ferrer, who believes this offer brings in elements of the “entry point” component of the proposal made earlier in the year by a coalition of local cooperatives and credit unions, seeking a debt-restructuring mechanism based on the price at which each bondholder acquired their respective Puerto Rico bonds.

“You would pay each maturity in the order of priority until each tranche is paid. So again, the stronger credits would get their 70% in year seven, while others would obtain it in year 15. You would go paying creditor by creditor in the tranche. Then the next maturity group would hit,” Ferrer added.

The new Series I bonds would be funded through a securitization mechanism similar to that structured for the Puerto Rico Electric Power Authority (Prepa). The utility’s restructuring support agreement includes a back-stopped liquidity entity funded by a securitization mechanism that will allow Prepa bondholders to trade their paper for investment-grade bonds. Ferrer sees sources of payment coming from unassigned portions of the IVU, as well as the petroleum-products tax, known as la crudita.

Series II, those creditors seeking an 85% exchange rate, would be grouped in maturities extending from year 15 to year 30. Again, Ferrer explained that higher-rated credits exchanging into Series II would be able to get out at year 20, “and so on down the line until you run through the entire tranche.”

Rob Bishop (hearings)

Rep. Rob Bishop and Rep. Raúl Grijalva

Gustavo Vélez, an economist who has taken some high heat for his advocacy of a federal oversight board, believes that an offer like this could entice hedge funds that bought at a discount, while those holding less secure paper could go for the Series I offer. “If we assume that these have 30% of the $49 billion, that represents 25% savings on principal payment of $15 billion ($3.75 billion) and another $300 million annually in interest (a 2% coupon cut),” Vélez said.

Ferrer envisions a scenario whereby the government can save billions of dollars. “Imagine, if you had $20 billion of the $50 billion getting out at 70%, you would have $6 billion in savings alone and imagine that those have a 5% coupon, you would have $300 million in annual savings,” he explained. “Plus you have $14 billion that remain on, which would lower the coupon from 5% to 3%. That’s several $100 million more. It may not achieve the $22 billion that Melba [Acosta] wanted, but it will come close. And it is a more reasonable offer to close the gap between what the creditors want and what they can receive.”

Ferrer believes that hedge funds will jump at the chance to get into Series I because theirs is an issue of timing: They want to get out quick at 70% rather than fighting to obtain par value. “They want their money out now; the sooner, the better option even at 70% is achievable,” he said.

No sympathy for the devil
Because the creditor body is not monolithic—there are creditors who do not care in the short term about payments, but rather owning a piece of paper that trades well—there are creditors that are more dependent on a current income stream.

“Having a choice of different options may be palatable, but the devil really is in the details,” said one lobbyist on the Hill who spoke to Caribbean Business on the condition of anonymity. “It is an interesting idea. Frankly, it sounds a lot like some of the elements that were in a proposal that we saw presented by the Senior Cofina bondholders, in the sense that it offers a mechanism that allows those creditors who want current income to trade at a discount. You would have to see how it is executed; there is a limited amount of money. What happens if everyone goes for Series I? Do you securitize?—That has to be answered.”

Underpinning those questions is a pressing concern over the commonwealth’s delay in presenting updated audited financial statements, which makes many creditors skeptical of new proposals. “There is a general skepticism in the creditor community about possibilities and probabilities because we don’t even have financial statements for these entities. How do we agree to anything until we get a sense of what is really needed,” Ambac’s Tavakoli told Caribbean Business. “We are supportive of Congressman Bishop’s work toward a federal oversight board. We want the oversight board to get down there and assess the situation. And, not presume that there is all of this debt restructuring that needs to happen. We are happy to look at anything that is constructive, but our focus right now is on the congressional bill.”

Ambac is one of the Highways & Transportation Authority’s (HTA) bond insurers, with a total exposure of $493 million of lifetime principal and interest on the authority’s more than $4.5 billion in outstanding debt.

Nader Tavakoli 1, CEO Ambac Assurance Corp

Nader Tavakoli, CEO Ambac Assurance Corp

As this newspaper was going to press, there was a protracted fight being waged in the hallowed halls of Congress by lobbyists for GO bondholders who are trying to brand the oversight bill as a bailout. Those bondholders are behind the Super PAC that is funding the advertising campaign running on U.S. networks with the slogan “No Bailouts for Puerto Rico.”

One lobbyist tied to the Democratic Party who has been part of meetings with House Speaker Paul Ryan (R-Wis.) and House Natural Resources Committee Chairman Rob Bishop (R-Utah) told this newspaper that “a lot of the Republicans who are being affected by the ad campaign are much more understanding that Promesa [the acronym for the Economic Stability Act] is not a bailout and that it is headed toward being a responsible bill.”

Some creditors, namely GOs, who prefer regular Chapter 9 bankruptcy since it would exclude them, are against the oversight bill. Other creditors, namely the big bond insurance companies that are on the hook for $16 billion in commonwealth debt, welcome the oversight bill because it would help them to avoid footing the bill for more than $2 billion in defaults that could kick off in this summer of discontent.




Bernier Calls For Voluntary Deals With Creditors as Hopes Dim on Congressional Action

SAN JUAN — The gubernatorial candidate for the Popular Democratic Party (PDP), David Bernier, said Wednesday that, as prospects of achieving a timely and favorable federal legislation on the Puerto Rico’s fiscal crisis continue to dim, the commonwealth urges a “voluntary postponement of principal payments” between the government and its creditors, paving the way for talks to continue toward a broader debt-restructuring deal.

“The best route at this time to restructure public debt and jumpstart our economy is to negotiate with creditors a voluntary postponement of principal payments. This would allow us to inject money to the General Fund and continue negotiations toward a comprehensive debt restructuring,” said Bernier, while adding that interest payments must nevertheless continue, due to many Puerto Rico pensioners depending on such payments.

David Bernier

David Bernier

“That has to be the route to avoid default,” the PDP governorship hopeful stressed.

Although the U.S. House Natural Resources Committee was expected to vote last week on a bill dubbed Puerto Rico Oversight, Management & Economic Stability Act, or PROMESA, plans were suddenly halted amid concerns over the lack of support for the bill to clear the committee.   

The bill seeks to establish strong, independent fiscal oversight through a seven-member board. The board would also oversee the commonwealth’s debt-restructuring efforts, with the aim of having all sides reach a consensual agreement. If no consensus can be struck with creditors, the board could authorize taking the matter to federal court under a debt-restructuring mechanism exclusive to the territory. Moreover, PROMESA would also establish a temporary stay on creditor lawsuits against the commonwealth.

As the bill struggles to achieve enough bipartisan support to even reach a vote on the House floor, Sen. Orrin Hatch (R-Utah), chairman of the Senate Finance Committee, said this week that PROMESA “is not satisfactory and it’s not going to work. And we’re not going to be able to pass it over here,” according to a Reuters report.

Meanwhile, the clock continues to tick on the commonwealth, as the first large debt-service payment, $422 million due May 2 on Government Development Bank (GDB) debt, quickly approaches. The Alejandro García Padilla administration has repeatedly warned it doesn’t have enough money to meet in full neither the bank’s payment, nor the more than $1.5 billion slated to hit on July 1, including $780 million in general obligation bonds (GOs).

“I’m glad to know there is progress in the negotiations on the GDB debt. I urge the parties to continue the dialogue until they can reach an agreement that would enable this restructuring,” Bernier noted, in reference to a tentative agreement between the bank and a group of its creditors that would provide the GDB some sort of relief before its May payment, as Caribbean Business reported Tuesday night.