On his first official visit to the Puerto Rico, Treasury Secretary Jacob J. Lew said the financial crisis on the island was deepening and he urged Congress to act quickly to give the government the power it needs to restructure all of its debt, the New York Times reported today. “The people of Puerto Rico are sacrificing,” Lew said. “But unless that sacrifice is shared by creditors in an orderly restructuring, there is no path out of insolvency and back to growth.” He met with Gov. Alejandro García Padilla and senior Puerto Rican legislators, as well as leaders from business, labor and civic groups. Lew said that he believed there was still time to restore growth on the island, but the longer the restructuring process took, the harder it would be for the island to recover. Read more.
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New Jersey Governor Chris Christie (R) yesterday rejected legislation intended to shore up the finances of Atlantic City, a move that could hasten the state’s takeover of the struggling casino hub, Bloomberg News reported yesterday. Christie vetoed a bill that would have established fixed payments from casinos instead of levies based on real-estate values, which would prevent tax appeals that strain the city’s finances. He declined to take action on bills that would have diverted some gambling funds to the city. Without those measures, the city will run out of cash in April, according to a report released Friday by Kevin Lavin, the emergency manager appointed by Christie. Atlantic City’s fiscal crisis was precipitated by the closure of a third of its casinos in 2014 as competition from neighboring states eroded its onetime dominance over gambling on the East Coast. The city’s gaming revenue last year was less than half its 2006 peak of $5.2 billion. Bankruptcy is now a possibility, said Mayor Don Guardian. "If the state is not able to come up with the funding we need within the next few weeks, we will have no choice but to declare bankruptcy," he said in a statement Tuesday. The state’s Local Finance Board must approve any filing.
Atlantic City, the distressed New Jersey gambling hub, should consider privatizing its fire-fighting services and convention center and find ways to make more money off its drinking water utility, the city's emergency manager said in an updated fiscal rescue plan, Reuters reported on Friday. The report comes one year after Governor Chris Christie appointed Kevin Lavin as emergency manager. Lavin's report, which also calls for additional layoffs, follows an initial assessment last March. New Jersey taxpayers have so far spent $2.62 million on Lavin and his team of accountants, restructuring lawyers and a mediator, according to invoices obtained and reviewed by Reuters through public records requests. "I'm glad the emergency manager has, after spending millions of dollars in no-bid contracts and wasting months of time, concluded what we all know: that Atlantic City government is broken and needs to be fixed immediately," Senate President Steve Sweeney said in a statement. Sweeney is now pushing for a full state takeover of Atlantic City operations that would strip elected officials of nearly all power. Lavin said in a statement that over the past year his office and city stakeholders have "kept the city from falling into financial ruin" by tackling a $100 million budget deficit.
Four months after announcing a grueling five-year plan for reducing the island’s vast debt and reviving economic growth, Puerto Rico’s top economic officials said yesterday that they had been too optimistic and revised the plan for the worse, the New York Times reported today. When the government first released its five-year plan last September, it warned creditors that it would need $14 billion of debt relief over that period, because it did not have enough money to pay them the total amount due, $28 billion. Officials said yesterday that they now expected to need a $16 billion break from creditors. The officials said they had run updated forecasts for 10 years as well, and things did not get much better. Over the full 10 years, they said, they would need $24 billion worth of reductions in the total $63 billion in principal and interest that various branches of government owed creditors. Read more.
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Long-awaited legislation to overhaul Detroit's troubled school district by splitting it in two was introduced yesterday and could commit state lawmakers to spending up to $770 million over 11 years on the restructuring proposal that faces uncertainty in a bailout-averse legislature, the Associated Press reported yesterday. The Michigan Senate bills, which were finally proposed more than eight months after Gov. Rick Snyder (R) first unveiled the concept, do not yet identify the funding source needed to retire Detroit Public Schools' operating debt and launch a new district in July. The legislation also does not include the Republican's proposal — backed by a coalition in Detroit — to create a commission that would hire an officer to potentially close poor-performing public schools, regardless of whether they are traditional ones or independent charters. The district is burdened by debt, falling enrollment, inadequate buildings and low morale among employees whose recent absences have closed schools. It has been under state financial management for almost seven years.
The CEO of one of Puerto Rico's largest insurers fired back at his critics, talking about the decision to sue Puerto Rico after its recent debt default, and warning of the "dreadful" impact that granting the commonwealth access to U.S. bankruptcy laws could have on its citizens and the broader markets, CNBC.com reported yesterday. Puerto Rico's senior officials have been desperately asking U.S. lawmakers to grant the island access to chapter 9 bankruptcy protection in order to restructure its some $70 billion in outstanding debt — a move that Ambac CEO Nader Tavakoli maintains is misguided. Alejandro García Padilla, the governor of the commonwealth, as well as Puerto Rico's bankruptcy professionals and public relations experts are placing all their bets on getting chapter 9 access, Tavakoli said. Calling that path "dreadful" and "a horrible idea for the people of Puerto Rico," Tavakoli says that a chapter 9 filing would lead to lengthy litigation and hundreds of millions of dollars in incremental expenses. He maintains that it would also put the island's integrity and ability to access capital markets in the future on the line. Read more.
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Senate Minority Leader Harry Reid (D-Nev.) is asking Republicans to set up a task force to reach a deal on Puerto Rico's financial crisis, The Hill reported today. The Democratic leader sent a letter to Majority Leader Mitch McConnell (R-Ky.) asking that he work with Democrats to create a panel of approximately six to eight senators who would be responsible for coming up with legislation by the end of February. "I am confident that six weeks is sufficient to form a bipartisan Senate Task Force on Puerto Rico, negotiate a legislative package that includes a debt restructuring component, and ultimately bring this comprehensive proposal before the Senate," Reid wrote in the letter, which was released on Tuesday. Lawmakers have struggled to reach an agreement on how to tackle the island territory's growing debt crisis, after the issue wasn't included in an end-of-the-year spending bill. Speaker Paul Ryan (R-Wis.) pledged that the House would take action in early 2016. Senate Democrats have, separately, introduced legislation to protect Puerto Rico from creditors until March 31, Ryan's deadline. But Democrats also want Puerto Rico to be given access to bankruptcy courts so that it can restructure its debt, an idea that has gained pushback from key Republicans, including Sen. Orrin Hatch (R-Utah), who chairs the Finance Committee. Read more.
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Puerto Rico’s troubled electric monopoly, mired in about $9 billion of debt, stands to run out of money by midsummer if its hard-won plans to restructure fall through — something that could happen this month, a top official of the utility told a congressional panel yesterday, the New York Times reported. Before all that debt can be restructured, the Puerto Rican legislature must first pass an enabling law — a law that, among other things, would lead to the island’s first increase in the base rate for electricity since 1989. The legislature has about 10 more days to do that, according to the restructuring schedule, but already some lawmakers in San Juan are saying they will oppose the bill. “I like to be an optimist, but it will be a challenge,” said Lisa J. Donahue, the AlixPartners managing director who is working as the chief restructuring officer of the Puerto Rico Electric Power Authority (PREPA) at a House Committee on Natural Resources subcommittee hearing. Asked what would happen to the deal without legislative approval, Donahue said: “It would fall apart.” The deal involves an exchange of debt, with creditors accepting new bonds with an investment-grade rating and a face value 15 percent less than the junk-rated PREPA bonds they now hold. The new bonds would also have a slower payment schedule and a lower interest rate. On its existing debt, PREPA has a little more than $1 billion in principal and interest due before June 30. Without the increase in electricity rates, and other provisions of the restructuring plan, it will not have enough cash to pay. Read more.
In related news, Puerto Rico officials are scheduling meetings with creditors as soon as today to begin talks on restructuring its $70 billion of debt, Bloomberg News reported yesterday. The U.S. territory expects to host at least two meetings in the New York offices of its law firm Cleary Gottlieb Steen & Hamilton LLP over the next two weeks to present the proposal to restructuring advisers representing its creditors. Representatives of at least five investor groups have been coordinating with Puerto Rico’s consultants to organize the meetings. Puerto Rico is under pressure to persuade lenders to agree to a restructuring accord before July 1, when it must make a $2 billion payment. A commonwealth agency failed to pay $35.9 million it owed Jan. 4 after the administration used revenues pledged to certain types of bonds to meet other obligations. That prompted bond insurers Ambac Financial Group Inc. and Assured Guaranty Ltd. to file a lawsuit seeking to prevent the island from diverting revenue in what’s known as a clawback. Read more.
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New Jersey Senate President Steve Sweeney said yesterday that the state should take over Atlantic City and, if it does not, he would support a bankruptcy filing for the gambling hub, Reuters reported yesterday. Sweeney and two other state senators said they planned to introduce legislation that would give the state even more control of the city's financial management. Sweeney did not provide further details yesterday. The city must already have its budget and hiring approved by a state board, has a state monitor and is overseen by Emergency Manager Kevin Lavin, appointed by Governor Chris Christie nearly a year ago. Sweeney said more control is necessary because Mayor Don Guardian and the city council have not done enough to reduce the size of government, despite layoffs that have already occurred. The legislature has been finalizing legislation calling for casinos to make set payments in lieu of taxes. That is aimed at stabilizing Atlantic City's tax base, which has been eviscerated by casinos' declining value because of competition from neighboring states. Lawmakers are growing tired of working on that and other measures to help Atlantic City while suggestions that would reduce costs or create revenue — such as selling the city's water utility — remain unrealized, Sweeney said.
Puerto Rico’s main electricity provider can’t pay $1.13 billion due to creditors between now and July 1 without approval of an unprecedented debt-restructuring agreement reached at the end of December, according to Lisa Donahue, the agency’s chief restructuring officer, Bloomberg News reported today. The obligations are more than twice the amount of cash that the Puerto Rico Electric Power Authority, known as PREPA, has on hand, she said in a written statement to a Congressional committee meeting today on the island’s expensive and outdated electricity system. “PREPA will not be able to make up the difference with revenue from operations during this period,” said Donahue, who is a managing director with restructuring adviser AlixPartners. Donahue is appearing before a U.S. House committee that is examining the electricity system of the commonwealth, whose government defaulted on $37 million of bond payments this month. With about $70 billion of debt, more than any state but California and New York, Puerto Rico Governor Alejandro Garcia Padilla has said the island can’t afford to repay what it owes. Read more.
For more on today’s House Natural Resources Subcommittee on Energy and Mineral Resources’ hearing titled “Exploring Energy Challenges and Opportunities Facing Puerto Rico,” please click here.
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