February 6, 2016
Puerto Rico and its top advisers made their case in Washington on Friday for a law that would allow broad restructuring of the island’s multibillion-dollar debt, saying that if Congress did not act soon, major defaults were likely this spring.
The officials also said they knew that any legislative help would come at a stiff price: Puerto Rico would have to submit to a federal control board, something viewed by some on the island as colonialist-style interference.
“I think everybody has acknowledged that a control board is an essential feature,” Jim Millstein, a financial adviser to the Puerto Rican government, said in a briefing for staff members of the House of Representatives, which is considering some form of legal help.
For the last week, Puerto Rico has been meeting with creditor groups over the government’s proposal to restructure about $49 billion of its $72 billion total debt. Time is short, officials said, because Puerto Rico cannot pay the big principal and interest payments that are due in May and June.
The island has already defaulted on smaller amounts and is being sued by the affected creditors.
Mr. Millstein and the other officials said they doubted they could get enough creditors to agree to the $49 billion restructuring without the kind of leverage that only an act of Congress could provide.
Negotiating debt relief “is a difficult endeavor in any circumstance,” said Richard J. Cooper, a partner with Cleary Gottlieb Steen & Hamilton, who is representing Puerto Rico in the talks. “But in the Puerto Rican circumstance, the challenge is quite enormous. That’s why we’ve asked for a restructuring authority.”
The $49 billion debt that Puerto Rico hopes to restructure, most of it in the form of municipal bonds, was issued by 11 separate branches of the Puerto Rican government. It is held by a wide range of investors with diverse and competing interests. They are not only at odds with Puerto Rico, but also with one another, over whose bonds have priority.
Some of the creditors have reason to give concessions, by accepting lower payments, for instance, but others want to hold out for payment in full. Although the bankruptcy code has tools for getting reluctant creditors to go along when a majority agrees to a settlement, Puerto Rico does not have access to bankruptcy.
“Puerto Rico will be thrust into litigation battles, or into a place where you can’t predict what the future is,” Mr. Cooper said.
Mr. Millstein said he envisioned 11 different lawsuits by creditors of the 11 different branches of government, all moving at cross purposes through the courts and getting conflicting rulings by their respective judges. The process could easily drag on for five years, he said.
“The impact of five years of litigation on the economy of Puerto Rico is obvious,” he said. “It would be a bad result. It would make the creditor recoveries even lower.”
As Mr. Millstein spoke, a Treasury official, Antonio Weiss, made a similar argument at the Bipartisan Policy Center, which hosted a panel discussion on a legal framework for resolving Puerto Rico’s crisis.
“Without the backstop of a restructuring authority, our biggest concern is that a decade of recession could become another lost decade,” Mr. Weiss said.
The officials said it was not essential to grant Puerto Rico access to Chapter 9 bankruptcy, an approach that was considered last year but now appears to have been discarded. Instead, they said Congress could enact other measures to help Puerto Rico restructure its debts under the Territorial Clause of the United States Constitution.
The most important element would be a mechanism to bind holdouts to agreements by other creditors, they said.
The restructuring plan would cover the $49 billion of debt backed by various types of taxes. Debts backed by user fees and rates, such as revenue bonds issued by Puerto Rico’s Electric Power Authority, would be handled separately.
To determine how much of the $49 billion Puerto Rico’s taxpayers could reasonably be expected to repay, the officials reviewed the debt burdens of taxpayers in states. They said that the typical state was spending about 5 percent of its tax revenue on payments of interest and principal to bondholders.
But in Puerto Rico, they said, payments on this type of debt were now consuming an unsustainable 36 percent of the island’s tax revenues.
Next, they looked for a state with a financial profile roughly similar to Puerto Rico’s, and decided that Hawaii came closest. In Hawaii, they said, debt payments consume 13 percent of annual tax revenue.
“We thought, ‘We’ve got to be closer to Hawaii,’ ” Mr. Millstein said. “We aimed at 15 percent. That would mean we can’t have debt service in excess of $1.7 billion a year. That’s our upper boundary.”
By spreading $1.7 billion of annual debt-service payments over 30 years and discounting the total at a rate of 5 percent, they came to the conclusion that the taxpayers of Puerto Rico could carry $26.7 billion of debt instead of the current $49 billion.
“That involves, therefore, a $22 billion haircut on the debt, which is huge,” Mr. Millstein said. “There is no way to discount that.”
To give the bondholders some hope of a better recovery, the restructuring proposal would replace investors’ current bonds with two new bonds. One of them would have a fixed interest rate and a total par value of $26.7 billion. The other would make payments only to the extent that Puerto Rico recovers.
The officials also sought to defuse a controversy over Puerto Rico’s failure so far to produce audited financial statements for 2014 and 2015. Some members of Congress, especially Republicans, have warned they will be hard-pressed to assist Puerto Rico if it cannot present basic public records.
Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, said at the Friday briefing that the financial statements were undergoing frequent revision as the island struggled to meet its various obligations.
“We don’t want people to think we’re hiding something, because we’re not hiding anything,” she said. “You have to understand what we’re living with right now.”
Even without the reports for 2014 and 2015, Ms. Acosta said anyone who wanted to understand Puerto Rico’s finances could look at 15 prior years’ worth of financial statements and they would see “deficit after deficit.”
“Trust me, 2014’s going to be the same,” she said. “The situation is just as bad as ever.”
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