* “Treasury officials meet with Puerto Rican governor, deny reports of facilitated bond restructuring” By Colin Wilhelm, Politico Pro (October 14, 2015)
* “Puerto Rico, Treasury in Talks to Restructure Island’s Debt” By Matt Wirz, Nick Timiraos and Aaron Kuriloff, Wall Street Journal (October 14, 2015)
Treasury officials meet with Puerto Rican governor, deny reports of facilitated bond restructuring
by Colin Wilhelm Politico Pro (October 14, 2015)
The Treasury Department today downplayed its power to assist in Puerto Rico’s fiscal crisis and called on Congress to provide bankruptcy options to the island – at the same time that reports surfaced that the agency is considering expanding its role.
According to a Treasury statement, officials met today with Puerto Rican Gov. Alejandro Garcia Padilla and discussed solutions that would put the onus on Congress to help the island restructure its $72 billion in debt. Meanwhile, a Treasury official said there were inaccuracies in a Wall Street Journal report that the agency is considering aiding Puerto Rico by administering a “superbond” account that would aid in a restructuring.
“It is inaccurate to suggest that Treasury is in talks to undertake any of Puerto Rico’s financial obligations,” the spokesman said. “Puerto Rico’s officials have routinely presented a range of ideas to help the Commonwealth return to a sustainable economic path.”
The statement on the meeting with Padilla discussed the need for Congressional action to provide “access to an orderly restructuring regime.”
“Without federal legislation, a resolution across Puerto Rico’s financial liabilities would likely be difficult, protracted, and costly,” the release said, referring to legislation to allow Puerto Rico to undergo Chapter 9 municipal bankruptcy, which it cannot file under its current status.
“We continue to believe that the best path forward is for Congress to grant Puerto Rico access to an orderly restructuring regime,” Treasury’s spokesperson told POLITICO. “We will continue to work to ensure that we are bringing our full capabilities, within the limit of our authorities, to bear in assisting the people of Puerto Rico.”
Puerto Rico, Treasury in Talks to Restructure Island’s Debt
Under plan, commonwealth would issue
‘superbond’ administered by Treasury
that would help restructure $72 billion of debt
by Matt Wirz, Nick Timiraos and Aaron Kuriloff
Puerto Rico and U.S. officials are discussing the issuance of a “superbond” administered by the U.S. Treasury Department that would help restructure the commonwealth’s $72 billion of debt, people familiar with the plan said.
Under the plan, the Treasury would administer an account holding at least some of the island’s tax collections. Funds in the account would be used to pay holders of the superbond, which would be issued to existing Puerto Rico bondholders in exchange for outstanding debt at a negotiated ratio. Investors would receive less debt but would have higher expectations for getting repaid.
The proposal would mark an important change in Puerto Rico’s relationship with the U.S. government, which has resisted wading into the island’s debt morass. A superbond would need to clear high political hurdles in Washington and Puerto Rico to become a reality.
Talks between Puerto Rico’s representatives and Treasury officials are preliminary and any plan wouldn’t include financial aid or a U.S. guarantee of Puerto Rico debt, the people said. They said the proposed bond would be just one piece of a restructuring puzzle that the island’s government is trying to assemble, after admitting this year that it cannot pay its debt in full.
The plan has no immediate precedent but echoes in some respects the Brady bonds used in Latin American debt restructurings of the 1980s. One difference: Those bonds, named for former Treasury Secretary Nicholas Brady, were backed by Treasury-issued zero-coupon bonds, which guaranteed repayment of the principal and part of the interest of the Latin debt.
The Treasury and the commonwealth are debating how much of Puerto Rico’s taxes would be funneled to the account and who would collect the taxes, the people said.
Puerto Rico’s leaders may not be willing to surrender control of tax revenue as required by the deal, the people said. Republicans in Congress have opposed any assistance for Puerto Rico unless the commonwealth cuts spending to balance its budget. Battles over spending and next year’s presidential election are likely to make passage of any Puerto Rico legislation difficult.
Puerto Rico hasn’t been able to sell bonds after years of issuing new debt to fund budget deficits. In August, it put on hold a $750 million sale for its water and sewer authority after demand was weak. In September, the U.S. commonwealth warned it is likely to run out of money between November and June and announced plans to restructure its bonds.
The commonwealth and its advisers have been working for months to develop a package of fiscal and financial overhauls.
A superbond could be appealing to creditors. Hedge funds that own billions of dollars of Puerto Rico debt have been pushing the idea of a superbond for months, hoping it would prevent a default and boost the value of their investments.
Bondholders are unwilling to swap the debt they hold for new bonds backed only by tax revenues under Puerto Rico’s supervision because they fear the money could be diverted. But they might be tempted to tender their bonds for less than face value in exchange for a bond involving the Treasury. A bond administered by the Treasury would give investors greater certainty that their stream of payments wouldn’t be siphoned off for other purposes or revoked by politicians in the future.
Puerto Rico is working with law firm Cleary Gottlieb Steen & Hamilton LLP, a specialist in government defaults, and Millstein & Co., a financial-advisory firm founded by the Treasury’s former chief restructuring officer, Jim Millstein, who ran the successful turnaround of American International Group Inc.
Puerto Rico cannot restructure its bonds in bankruptcy court because it is a commonwealth, not a state. Democratic lawmakers have proposed bills making the island’s municipal entities eligible for bankruptcy protection. Republicans in Congress have floated the idea of a federal control board and have said they want Puerto Rico to produce a more detailed plan to balance its budget before they support the legislation.
A superbond would need congressional approval if it involved creating a new federal tax administered by the Internal Revenue Service, which is already under fire from Republicans. Puerto Rico authorities may need to accept a federal control board to get such a law passed, but such a measure is deeply unpopular in the commonwealth because of its colonial overtones, the people said.
Given the political headwinds in Washington and in San Juan, Puerto Rico’s capitol, it may take a full-blown default and budget crisis to mobilize support for any overhauls, investors and people involved in the talks said.
Concerns about a potential default intensified over the summer as it became clear Puerto Rico was using tax revenue earmarked for debt payments to plug budget gaps. The commonwealth disclosed in September that it expects a $205 million shortfall this year when large bond payments are due.
Government Development Bank of Puerto Rico bonds that mature in 2016 traded at 49 cents on the dollar this month compared with 77 cents on the dollar in June, according to data from Electronic Municipal Market Access.
Fears of a default are intensifying divisions between different types of bondholders who are splitting into various factions, each of which claims priority in the event of a restructuring.
“Our view has always been that there’s a high probability of disorderly litigation here, and we see this looming now as imminent,” said Ted Hampton, an analyst at Moody’s Investors Service.
As Puerto Rico’s economic growth slowed in recent years, the island was forced to create complex types of bond to attract investors. The result is an alphabet soup of bonds, including securities backed by tax revenue, known by their Spanish acronym Cofina; general obligation, or GO bonds; bonds issued by the Government Development Bank, or GDB; and an assortment of debts owed by government utilities.
A bondholder group represented by GLC Advisors & Co. with more than $5 billion in bonds of different stripes dissolved in September as separate groups. Mutual funds managed by OppenheimerFunds Inc. and Franklin Advisers Inc. also own billions of dollars of Puerto Rico debt, while bond insurers Assured Guaranty Ltd., MBIA Inc. and Ambac Financial Group Inc. also have guaranteed billions of dollars of bonds.
Puerto Rico is attempting to capitalize on the divisions by only agreeing to negotiate with bondholders who agree not to discuss terms with investors holding different types of bonds, a person involved in talks said.
Puerto Rico’s advisers have yet to discuss the specifics of the superbond with existing bondholders because the commonwealth is still negotiating what the debt might look like with the Treasury, people involved in the talks said.
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