WASHINGTON – The Association of Financial Guaranty Insurers is urging House and Senate leaders to pursue federal oversight of Puerto Rico but avoid bankruptcy access for the commonwealth.
AFGI's letter to the congressional leaders responds to a letter Treasury Secretary Jack Lew sent the legislators on Jan. 15 arguing that only Congress can take the steps necessary to resolve Puerto Rico's $70 billion debt crisis. The Treasury Department has pushed for a four-part Puerto Rico solution, including both a federal oversight board and extending Chapter 9 bankruptcy to the commonwealth.
AFGI represents some of the companies that insure more than $14 billion of bonds issued by the commonwealth or its public authorities, including Ambac Assurance Corp., Assured Guaranty, Financial Guaranty Insurance Company, and National Public Finance Guarantee Corp., according to the letter.
"We applaud Secretary Lew for advocating federal legislation providing a framework for strong financial oversight to remedy Puerto Rico's history of fiscal mismanagement," AFGI chairman Bruce Stern wrote in the letter. "We believe this type of oversight will best be provided by an independent, federally mandated control or oversight board authorized to implement the fiscal and economic reforms that the Commonwealth requires."
But Stern said AFGI believes that the future of Puerto Rico's economy and access to capital "would be jeopardized were Puerto Rico incentivized to cease consensual debt restructuring negotiations in favor of nonconsensual restructurings under a bankruptcy regime or other new laws."
"There is no question that any effort to provide Puerto Rico or its municipalities with bankruptcy relief will lead Puerto Rico and its creditors (U.S. taxpayers) down a difficult path of unsettled law on a number of complex legal issues," he said.
Instead of bankruptcy, Stern said Congress should look at the December deal where the Puerto Rico Electric Power Authority reached an agreement with its creditors, including insurers, to restructure its roughly $9 billion in debt as proof that consensual restructuring negotiations work. The PREPA agreement hinges on the Puerto Rico legislature passing legislation to support the agreement and holders of an additional $2 billion in PREPA bonds signing on.
Republicans in Congress generally have taken the same stance as Stern and AFGI against extending bankruptcy protections, citing a lack of audited financial information that fully shows Puerto Rico's financial situation.
Meanwhile, Puerto Rico Gov. Alejandro Garcia Padilla, with the help of congressional Democrats, has been a strong advocate for congressionally authorized bankruptcy relief, saying that without it, his government's inability to pay its debts will get worse. Puerto Rico has already defaulted on three bond payments.
"It appears that Puerto Rico has prioritized creating a 'crisis narrative,' expending significant time, energy and government funds on consultants and lobbyists to maximize relief from its financial obligations through bankruptcy in lieu of working with its creditors to achieve a consensual solution," Stern said about the Garcia Padilla administration.
House Speaker Paul Ryan set a March 31 deadline for the House to have a workable legislative package to address Puerto Rico's situation after negotiations to include provisions in the year-end omnibus bill failed.
The House Natural Resources Committee's Subcommittee on Indian, Insular, and Alaska Native Affairs is scheduled to hold a hearing on Jan. 26 on the need to establish a federal oversight board for Puerto Rico and how much control such a board should have.
Resident Commissioner Pedro Pierluisi, Puerto Rico's non-voting member of Congress, said this week that if the eventual legislative package includes a federal control board but not some restructuring authority for Puerto Rico, he will oppose it and "it will not become law."
