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U.S. Treasury officials didn’t tell Puerto Rico to default on general-obligation bond payments, according to a lawyer representing the island in its $70 billion debt restructuring, Bloomberg News reported yesterday. “At least in my experience, U.S. Treasury doesn’t say to the commonwealth ‘do x or y,’ " Richard Cooper, a partner at Cleary Gottlieb Steen & Hamilton LLP, said on Tuesday during a Puerto Rico conference at the CUNY Graduate School of Journalism in New York. Puerto Rico skipped paying nearly $1 billion to bondholders on July 1, including $780 million of principal and interest on general obligations. It was the largest default in the $3.7 trillion municipal-bond market and the first time a state-level borrower failed to pay on its direct debt since the 1930s. Cleary Gottlieb is Puerto Rico’s legal adviser as it seeks to reduce a $70 billion debt load. The firm has been in discussions with U.S. Treasury staff, commonwealth officials and creditors as the parties negotiate on a how to restructure the island’s debt. “Anyone who is seriously looking at this situation could tell you there wasn’t enough funds on July 1 to make those payments,” Cooper said. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Chicago school officials presented a budget that relies on the state of Illinois passing an overhaul of its underfunded pension system and assumes that the teachers’ union will agree to pay more into their retirement funds, Bloomberg News reported yesterday. The $5.4 billion operating budget for the fiscal year that began July 1 is more than $230 million smaller than last year’s spending plan, district officials said. The plan relies on the state providing the district with an additional $215 million for its pension bills, which lawmakers and Governor Bruce Rauner (R) have agreed to pay only if the state comes up with a plan to restructure its own retirement system. The six-month spending plan approved at the end of June allows Chicago to establish a property tax levy up to $250 million specifically to help cover the teachers’ pension fund. The retirement system was only 52 percent funded as of June 30, 2015. The school system also secured $131 million of additional state funding from a so-called equity grant to bolster districts with high concentrations of students in poverty.

When Quincy, Mass., Mayor Thomas Koch looked into borrowing $38 million this summer as an advance on a planned bond issue, he was distressed to find the costs had jumped nearly 60 percent since January. Around the same time, a few Japanese banks looking for short-term funds to support their U.S. lending businesses found borrowing costs had almost doubled. Rates on short-term loans between banks have risen to the highest levels in seven years. The common thread: a move by the Securities and Exchange Commission to make money-market funds safer in the wake of the financial crisis, the Wall Street Journal reported today. The regulatory changes are giving investors a reason to flee the $2.7 trillion U.S. money market, putting unintended stress on a crucial funding source for cities, counties and foreign banks.

Companies and government agencies are “calling” bonds at the fastest pace in four years, taking advantage of provisions that let them redeem securities under certain circumstances and save money by reissuing at lower rates, the Wall Street Journal reported today. Redemptions hand investors their money back at a time when many portfolio managers are struggling to find attractively priced securities to purchase. Some investors now are paying up for so-called noncallable bonds, ones that don’t give the issuer a redemption option. The trends are particularly acute in the markets for bonds sold by government-sponsored enterprises such as the Federal Home Loan Banks, Fannie Mae and Freddie Mac, companies that provide financing to the mortgage market. Investors have had almost $248 billion in callable GSE debt redeemed this year through July, according to Performance Trust Capital Partners LLC, a fixed-income trading firm. GSE calls in the second quarter hit $125 billion, the most since 2012.

A group of Avaya Inc. creditors led by Franklin Resources Inc. has approached other senior lenders, including Apollo Global Management LLC and Blackstone Group LP, about jointly negotiating a $6 billion debt restructuring, Bloomberg News reported yesterday. Franklin held initial talks with Apollo and Blackstone Group’s credit arm GSO Capital Partners, which lead the first-lien debt holders, over pushing the struggling software and services provider to restructure its balance sheet. Teaming up would make it easier to reach an agreement among investors and result in a more focused effort when dealing with the company, said one of the people. The talks came after the first-lien holders started urging Avaya, controlled by TPG Capital Management and Silver Lake Management, to cut debt in half because the interest burden has become unsustainable. The two private-equity firms acquired the Santa Clara, Calif.-based company in a 2007 leveraged buyout. Avaya has a $73 million interest payment due Sept. 1 on its $1.38 billion of 10.5 percent second-lien bonds due in 2021. Franklin held about a third of those securities at the end of June, according to data compiled by Bloomberg. The Franklin group’s holdings also overlap with GSO and Apollo in some of the first-lien debt.

Warren Buffett’s Berkshire Hathaway Inc. is well known as a tapestry of modern capitalism for its ownership of dozens of companies and investments in dozens more. Now that interconnected web is prompting U.S. regulators to examine whether Berkshire’s stake in one of its biggest holdings, Wells Fargo & Co., violates rules for how much credit banks can extend to corporate insiders, Bloomberg News reported today. Wells Fargo provides financing to many in Berkshire’s sea of subsidiaries. The relationships have triggered questions from agencies including the Federal Reserve into whether legal limits are being exceeded for how much a bank can lend to entities controlled by someone who owns a big chunk of its stock. An arrangement raising particular concern is Berkshire’s 16 percent investment in American Express Co., which does substantial business with Wells Fargo.

U.S. authorities have issued subpoenas to Goldman Sachs Group Inc. for documents related to the bank’s dealings with a Malaysian investment fund at the center of an international corruption scandal, the Wall Street Journal reported today. Goldman received the requests for information earlier this year from the U.S. Justice Department and the Securities and Exchange Commission, the person said. Investigators have also subpoenaed a Goldman banker who worked closely with the Malaysian fund. The authorities also want to interview current and former Goldman employees in connection with the inquiries, though by Friday none of those meetings had occurred. Goldman Sachs is also providing information to the Monetary Authority of Singapore, the city-state’s central bank and financial regulator that also has inquired about the firm’s work for the fund in question—1Malaysia Development Bhd., or 1MDB.