Municipal professionals, insurers and bondholders criticized the United States Treasury’s proposal for a “Super Chapter 9” bankruptcy bill for Puerto Rico as dangerous for the broader muni market.
The Treasury unveiled a formal four point program for U.S. territories on Wednesday that included a bankruptcy process that could cover all municipal securities in a U.S. territory. On Thursday it recommended this bill to the United States Senate Energy and Natural Resources Committee as a remedy for Puerto Rico. The plan for a broader bankruptcy regimen for Puerto Rico
“There is no justification for initiatives that could undermine the legal rights and remedies that were the basis on which bondholders agreed to provide capital for the island’s development,” bond insurer Assured Guaranty
“We continue to work with the Puerto Rico Electric Power Authority (PREPA) on a broad consensual settlement that would provide support from Assured Guaranty, and would put the utility on a sound financial footing going forward…. Unfortunately, such an agreement could be put in jeopardy by some of the initiatives discussed during today’s [Senate] hearing.”
Main Street Bondholders, a group representing investors seeking full repayment of Puerto Rico debt, also criticized the proposal, saying: “No state has the ability to restructure constitutional or full faith and credit debt and … if Puerto Rico were granted this, other states like Illinois might soon follow.” Main Street Bondholders represent holders of Puerto Rico’s bonds seeking full repayment.
“’Super Chapter 9,’ if enacted, is expected to roil municipal debt markets and raise the costs of borrowing for states and municipalities across the country,” Main Street Bondholders said.
At Wednesday’s hearing Puerto Rico Gov. Alejandro García Padilla and Puerto Rico’s non-voting representative in the United States Congress, Resident Commissioner Pedro Pierluisi, talked about what debt the commonwealth could or should pay.
García Padilla said: “While Puerto Rico has done everything in its power to avoid defaulting on its obligations … when faced with the prospect of either making payments on debt obligations or paying for essential public services, Puerto Rico will have no choice but to default. Nobody wants this, but it is a reality, and the consequences will be grave.”
Pierluisi added: “Part of our debt, and I should make this point, has been issued by the central government and has been guaranteed by [Puerto Rico’s] constitution. And Congress approved our constitution. I believe that that part of the debt, which is about $18 billion worth, is manageable. And we should pay every penny of it because it is our word, it is our constitution, and we should be a jurisdiction of law and order. So I want to clarify the record there. Even though I agree with having Chapter 9, I do not agree with the concept of restructuring or failing to pay all of our debt.”
One municipal analyst said Puerto Rico’s statements at Wednesday’s hearing showed its irresponsible attitude towards its appropriation debt. “Most states have debt backed by willingness to appropriate – while that means that they are not full faith and credit bonds, it does not make them illegal and invalid to be repaid,” said H.J. Sims senior credit analyst Richard Larkin in an email. “If Puerto Rico’s leadership believes they have a ‘good faith’ reason to not pay this debt, then they obviously don’t know what ‘good faith’ means.”
National Public Finance Guarantee, which also insures PREPA bonds, said officials made “many misstatements and factual errors, such as the rates PREPA is charging its customers for electricity.”
National said it was “disappointing that the hearing failed to promote discussion of ways to rectify the issues that are adversely impacting Puerto Rico’s ability to grow its economy. In addition, the commonwealth’s lack of current, reliable, and publicly available financial information is also disconcerting. However, we remain committed to working with the appropriate parties to find consensual solutions that will address Puerto Rico’s significant fiscal and operational difficulties while respecting the rights of its creditors.”
