Puerto Rico Acknowledges Ceding Control Key to Debt Accord

  • Commonwealth advisers provide Congressional staffers update
  • Federal control board seen as ``essential,'' Millstein says

Puerto Rico’sdebt-restructuring advisers appear willing to give creditors and lawmakers one of the key conditions demanded as part of any debt restructuring: a degree of federal oversight of the commonwealth’s finances.

“It’s clear that Congress, to the extent that it’s going to share its bankruptcy power with the commonwealth and allow us to use it to address the complexity of this restructuring, I think everybody’s acknowledged that a control board is an essential feature,” said Jim Millstein, the founder of restructuring adviser Millstein & Co.

Millstein, along with attorney Richard Cooper of Cleary Gottlieb Steen & Hamilton LLP and Melba Acosta, the island’s debt chief, updated House and Senate staff members Friday in Washington on the commonwealth’s plan to reduce its debt load to $26.5 billion from $49.2 billion, a 46 percent cut.

The House Natural Resources Committee Tuesday spent about two hours discussing the possibility of putting a U.S. authority in place to help end to the chronic budget strains that have pushed the Caribbean island to default on some of its bonds. The idea has gained backing with Republicans as the House seeks to craft legislation by the end of March to assist the U.S. territory, though the scope of the new federal powers are still being considered.

Weiss’s View

Puerto Rico unveiled its restructuring proposal to the public Monday and warned it may stop paying principal and interest if it fails to reach an agreement with creditors by May 1, when a $422 million Government Development Bank payment is due. President Barack Obama, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and Vice President Joe Biden discussed Puerto Rico’s fiscal crisis during a White House lunch Tuesday. Ryan has asked legislators to craft a proposal for the island by March 31, which may include a federal control board that would manage its budgets and borrowings.

“We’ve run out of magic tricks,” said Millstein, who estimates about five years of legal fights if creditors start filing suit. “We’ve got real defaults ahead of us if we can’t cut a deal with the creditors.”

Antonio Weiss, counselor to U.S. Treasury Secretary Jacob J. Lew, said Friday during a separate event in Washington that discussions on Puerto Rico look promising.

Island officials are also asking Congress to grant the commonwealth bankruptcy powers, a provision currently unavailable to U.S. territories, and boost health-care funding levels. Republicans have said any changes to bankruptcy laws must also include a federal oversight panel.

Colonial Legacy

Some Puerto Rico leaders have expressed concern that a federal control board would strip the commonwealth of its sovereignty and risked returning the island to colonial-like conditions. Governor Alejandro Garcia Padilla’s original debt-restructuring proposal called for a locally-controlled fiscal oversight board.

Puerto Rico and its agencies piled on debt by borrowing for years to fix budget shortfalls as its economy has shrunk every year but one since 2006. Its 12.2 percent jobless rate is double the national average and higher than any U.S. state. Puerto Ricans are leaving at record numbers to find work on the U.S. mainland. The island lost 64,073 residents in 2014, a 30 percent increase from 2013, and the biggest outmigration in at least 10 years, according to U.S. Census data.

Growth Bonds

The restructuring proposal would put off all interest payments until the 2018 fiscal year and affect even general-obligation bonds, which have the strongest repayment pledge. It asks that creditors exchange existing securities for two new securities: a “Base Bond,” with a fixed rate of interest and amortization schedule through 2035, and a “Growth Bond,” which is payable only if the commonwealth’s revenue exceeds certain levels.

In the proposal, general-obligation investors would recover about 72 percent, as they exchange about $17 billion of debt for $12.24 billion in Base Bonds. Holders of sales-tax debt, known by the Spanish acronym Cofina, would recover about 49 percent, with $17.2 billion outstanding obligations exchanged for $8.4 billion of Base Bonds. Other investors, with $15 billion of debt, would have a 39 percent recovery. The new bonds would be repaid with revenue already backing the existing bonds as well as $325 million of annual oil-tax revenue.

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