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Puerto Rico, already facing multiple battles over billions of dollars in debt, was in yet another courtroom yesterday, the New York Times reported today, locked in a legal dispute with its biggest sales-tax collector and its biggest private employer: Walmart. This time the dispute is not about bond payments, but taxes: the taxes that Puerto Rico is charging Walmart for the goods it brings from its distributors off the island — including in the U.S. — to sell in its stores in Puerto Rico. In May, the island raised the special tax on those goods to 6.5 percent from 2 percent for the largest retailers. Walmart filed suit in December, saying that the increase left it with an effective income tax of 91.5 percent. The tax “sentences Walmart in Puerto Rico to death, for a crime there is no evidence it committed,” Walmart’s lawyer, Neal S. Manne, told the court. Read more. 

In related news, Republican presidential candidate Chris Christie said that Barack Obama’s administration has overlooked Puerto Rico’s debt crisis and that he would be willing to assist in return for more oversight over the island, Bloomberg News reported yesterday. Christie, New Jersey’s two-term governor, said that he would support some form of assistance for the territory of 3.5 million people if he were president, but cautioned it wouldn’t come without “tough love.” Obama in October pressed Congress to give Puerto Rico bankruptcy powers not now available to American territories in order to reduce its $70 billion debt load. He also proposed a federal oversight board to help balance its budgets and manage borrowing. The president has called for increasing health care funding for Puerto Rico and extending tax credits to the poor. “I would be willing to help the people of Puerto Rico, but in return I would have to have strict control over their budgets going forward,” Christie said. Read more. 

Experts gather in San Juan today to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here for more information 

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

Chicago’s troubled public school system yesterday had to slash the size of one of the biggest "junk" bond offerings the municipal market has seen in years and agree to pay interest costs rivaling Puerto Rico’s in order to lure investors into the deal, Reuters reported. The Chicago Board of Education managed to sell only $725 million of an originally planned $795.5 million of tax-exempt bonds, and yields on the deal topped out at 8.5 percent, a massive premium relative to higher-rated debt sold in the U.S. municipal bond market and a clear indication of investors’ view of the depths of the district’s fiscal woes. Yesterday’s sale came a week after the school system had to pull the deal in its first attempt at an offering amid worry by investors that the district could end up in bankruptcy. 

Puerto Rico’s financial troubles are so complex and far-reaching that bankruptcy alone will not solve them, and might even make them worse, experts on financial distress told lawmakers yesterday, the New York Times reported today. Instead, witnesses who testified before the House Agriculture Subcommittee on Indian, Insular and Alaska Native Affairs yesterday recommended appointment of a federal control board, saying that it would have a better chance of resolving Puerto Rico’s debt in the short term and preventing the island from falling into debt again in the future. As evidence, witnesses pointed to Detroit’s recent experience with municipal bankruptcy, the largest so far in American history. Bankruptcy proceedings helped Detroit reduce its debts, they said, but did not leave the city with a recovery plan. By contrast, some pointed to the financial crisis that gripped Washington in the late 1990s. The district never went bankrupt but was placed under supervision of a financial control board and now enjoys a double-A bond rating. “In my view, the time is now for Congress to create an authority that would have as its goals both achieving financial stability and a balanced budget for the island,” said Anthony A. Williams, who served as Washington’s chief financial officer during the period of federal supervision. Read more. 

Experts gather tomorrow in San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here to register! 

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

Puerto Rico is seeking to cut its debt load by 46 percent in its first offer to investors, a proposal that may face revisions as bondholders fight to get the most repayment, Bloomberg News reported yesterday. The commonwealth unveiled its plan yesterday to reduce the island’s obligations and help restart an economy that’s failed to grow in the past decade. The proposal for a voluntary exchange would cut the island’s debt to $26.5 billion from $49.2 billion, put off all interest payments until the 2018 fiscal year and affect even general-obligation bonds, which have the strongest repayment pledge, according to a restructuring proposal posted on the Government Development Bank website. The plan may pit the commonwealth’s investor groups against each other. In the proposal, general-obligation bonds get more money back than sales-tax debt, called Cofinas by their Spanish acronym. Cofina investors may take issue with that, said Lyle Fitterer, head of tax-exempt debt in Menomonee Falls, Wis., at Wells Capital Management, which oversees $39 billion of municipal bonds, including Puerto Rico securities. The island, which doesn’t have access to municipal bankruptcy, may need a legal framework to bring all of the island’s creditors together, Fitterer said. Read more. 

In related news, a New York Times analysis today reported that the Puerto Rico Electric Power Authority (PREPA) has been giving free power to all 78 of Puerto Rico’s municipalities, to many of its government-owned enterprises, even to some for-profit businesses — although not to its citizens. It has done so for decades, even as it has sunk deeper and deeper in debt, borrowing billions just to stay afloat. Now, however, the island’s government is running out of cash, facing a total debt of $72 billion and already defaulting on some bonds — and an effort is underway to limit the free electricity, which is estimated to cost the power authority hundreds of millions of dollars. But like many financial arrangements on the island, the free electricity is so tightly woven into the fabric of society that unwinding it would have vast ramifications and, some say, only worsen the plight of the people who live here. “If the towns don’t get free energy, they’re going to have to pay for it by increasing their property taxes or something, so the people will end up paying,” said Eduardo Bhatia, the president of the Puerto Rico Senate. Residents of the island are already upset about a recent sales tax increase to 11 percent, from 7 percent, and a property tax increase now would cause an outcry. The last assessment was in 1958. Read more. 

Additionally, the House Natural Resources Subcommittee on Indian, Insular and Alaska Native Affairs will hold a hearing today at 11 a.m. ET titled “The Need for the Establishment of a Puerto Rico Financial Stability and Economic Growth Authority.” To review the witness list and background for today’s hearing, please click here. 

Experts gather later this week in San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here to register! 

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

Puerto Rico has been anxious for Congress to address its $70 billion debt crisis, but the island’s leaders may not be as happy with the potential outcome as the investors holding its securities, Bloomberg News reported today. Driving the process are Republicans, who control both chambers and say that the island has proved it’s not able to manage its finances and needs an external authority to ensure it cuts expenses and deficits. Democrats, essential to passing a bill in Senate, insist on giving Puerto Rico access to an orderly, court-supervised process allowing it to cut its debt. “What may pass may be a mixture of both, possibly a control board with some sort of restructuring access, some leeway in allowing them to restructure some of their debt,” said Shaun Burgess, a portfolio manager at Cumberland Advisors Inc. in Sarasota, Fla. “The island needs some real management and structural help and not just the ability to cram down or restructure their debt.” Read more.

In related news, Sen. Elizabeth Warren (D-Mass.) is tying a long-brewing battle over the Puerto Rico financial crisis to an energy bill currently before the Senate, The Hill reported today. The Massachusetts Democrat is offering an amendment to a wide-ranging energy reform bill from Sen. Lisa Murkowski (R-Alaska). Warren's proposal would help temporarily protect Puerto Rico from debt collectors until April 1. Democratic Sens. Richard Blumenthal (Conn.), Kirsten Gillibrand (N.Y.) Bob Menendez (N.J.), Chris Murphy (Conn.), Bill Nelson (Fla.) and Charles Schumer (N.Y.) are backing Warren's amendment. The senators argue that "a temporary stay on litigation is essential to facilitate an orderly process for stabilizing, evaluating, and comprehensively resolving" Puerto Rico's crisis. A vote on the amendment hasn't been scheduled, but trying to link the two issues would place a deeply partisan fight into an otherwise uncontroversial energy bill. Read more. 

Additionally, the House Natural Resources Subcommittee on Indian, Insular and Alaska Native Affairs will hold a hearing tomorrow at 11 a.m. ET titled “The Need for the Establishment of a Puerto Rico Financial Stability and Economic Growth Authority.”

Experts gather this week San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here to register! 

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

When Chicago’s city council this month delayed voting on a bond sale sought by Mayor Rahm Emanuel, the elected leaders questioned whether they should go deeper in debt to pay about $100 million to unwind derivative trades, according to a Bloomberg News analysis today. “My fear is that these products designed to offer savings are going to saddle us with two decades of payments,” said Chicago Alderman John Arena, who joined with others to hold up consideration of the deal. States, cities and counties across the U.S. haven’t found a way to skirt the fees they still face from interest-rate swap deals that cost them billions since credit markets unraveled in 2008. Chicago alone has paid $250 million to break the contracts, which banks had the right to cancel after its credit rating was cut to junk by Moody’s Investors Service in May.

Puerto Rico plans to propose a debt exchange to investors today, offering to swap existing bonds for two new types of securities to help the U.S. commonwealth alleviate its debt burden, the Wall Street Journal reported today. Both classes of debt would delay payments, allowing Puerto Rico time to make fiscal adjustments and spur economic growth: One would eventually pay interest at 5 percent, while the other would carry a value determined by the island’s fiscal health. Bondholders would be offered the first class of debt in amounts based on the relative legal priority of their holdings. Investors would then receive enough of the second class to make up the difference between that amount and the face value of their bonds. The first class would have interest payments beginning in 2018, rising to 5 percent in 2021, and principal due starting in five years. Payments on the second class could begin in 10 years, with creditors receiving up to 25 percent annually of commonwealth revenue that exceeds current projections. Read more. (Subscription required.) 

In related news, the House Natural Resources Subcommittee on Indian, Insular and Alaska Native Affairs will hold a hearing on Tuesday at 11 a.m. ET titled “The Need for the Establishment of a Puerto Rico Financial Stability and Economic Growth Authority.”

Experts gather next week San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here to register! 

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