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A recent American Enterprise Institute commentary said that a cramdown process will penalize those not responsible for the fiscal problems confronting Puerto Rico, weaken commonwealth incentives to adopt fiscal and governance reforms and increase future borrowing costs for the island and for the overall municipal bond market. Additionally, cramdown will encourage future intransigence on the part of everyone and increase rather than reduce the politicization of the municipal bond market, according to the commentary. In contrast, under a compromise solution, a collective action provision would be implemented for each class of claims, according to the commentary. Under such a compromise, the commonwealth would have the power to bind holdouts within a given creditor class once a majority or supermajority of the creditors in that class (weighted by the value of holdings) agrees to a proposed restructuring of the debt. Such collective action approaches have proven effective at driving competing interests toward reasonable compromises in debt restructurings, but the commonwealth has resisted this approach thus far because it does not involve the sort of cramdown that bestows huge advantages upon the debtor.

Puerto Rico Governor Alejandro Garcia Padilla’s declaration of a state of emergency at the Government Development Bank to halt the erosion of the bank’s dwindling cash by allowing withdrawals only to fund health, public safety and education services is raising the risk for creditors as the island heads toward default, Bloomberg News reported today. Garcia Padilla announced on Saturday that he declared the emergency period for the Development Bank, which lends to the commonwealth and its municipalities and serves as the island’s fiscal agent, so that it can continue supporting essential services. That decision allows the governor to change the bank’s structure to save its remaining assets and begin a receivership process as its economy shrunk. The bank, created in 1942, will now move into a new era after advising Puerto Rico and its agencies on borrowings and crafting debt sales to pitch to mainland investors. The commonwealth is seeking to reduce a $70 billion debt load after years of borrowing to cover budget deficits. Read more. 

In related news, legislative staff members in Washington, D.C., were said to be close to completing a revised bill that would give Puerto Rico extraordinary powers to wipe out debt under close federal supervision, the New York Times DealBook blog reported on Friday. The House’s draft bill still contains certain provisions that creditor groups have been fighting, and Natural Resources Committee aides said further refinements were likely. The committee is scheduled to take testimony on the rescue package on Wednesday, and aides said they hoped to send a finished bill to the House on Thursday. The package still calls for Puerto Rico’s financial affairs to come under the supervision of a federal oversight board and to shed debt in a bankruptcy-like federal court proceeding after meeting certain requirements. Now, however, the composition of the oversight board is less certain. Officials in Puerto Rico objected strenuously last week to what they saw as the colonialist overtones of an oversight board whose voting members would all be selected by the president. Read more. 

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 playing brinkmanship with creditors by threatening a default that could reverberate through financial markets and the refugee state of Florida, according to an editorial in today’s Wall Street Journal. Congress may need to save the island from itself, if only to minimize the collateral damage, according to the editorial. Puerto Rico Governor Alejandro Garcia Padilla on Wednesday signed legislation authorizing him to declare a moratorium on the commonwealth’s $72 billion debt. This would trigger a default as soon as May when a $422 million payment on Government Development Bank debt comes due. Puerto Rico and its public agencies owe another $2 billion in July. The moratorium upends negotiations with creditors and throws a wrench — perhaps deliberately — into Congressional deliberations over how to help the island manage the crisis, according to the editorial. In a better situation, Puerto Rico’s 18 public debt issuers, 20 some creditor committees and government unions would agree to a restructuring without federal intervention. But creditors possess competing claims, bond covenants conflict, and public agencies have intermingled funds. Puerto Rico appears unwilling to act in good faith when left to its own devices, according to the editorial. Read more.(Subscription required.) 

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

Investors in Puerto Rican bonds are pushing competing agendas in Washington, D.C., over whether the struggling U.S. territory should be allowed to force debt cuts on creditors, ahead of new draft legislation expected this week from House Republicans, Reuters reported yesterday. The opposing views among Puerto Rico's stakeholders highlight the complexity of the island's fiscal crisis, where creditors of 18 different public debt issuers could face drastically different fates depending on how their claims are prioritized. Puerto Rico, with $70 billion in total debt and a 45 percent poverty rate, faces economic collapse without a solution to its debt. Governor Alejandro Garcia Padilla yesterday signed local legislation letting him declare a moratorium on any debt payment as he deems necessary, ahead of a potential default by the island's Government Development Bank on a $422 million payment due May 1. Last month, the Republican-led House Natural Resources Committee drafted a bill to put the island's finances under a federal control board and facilitate debt restructuring talks. If those talks failed, Puerto Rico or its agencies could restructure debt under rules similar to U.S. bankruptcy law, including in certain situations via "cramdown" — forcing cuts on creditors that do not agree to them. The cramdown measure did not sit well with some creditors who believed a Puerto Rico restructuring should be subject to creditor votes. Read more. 

ABI Resident Scholar Prof. Melissa Jacoby speaks with Prof. Charles Tabb about his research on bankruptcy and the Fifth Amendment's "takings" clause to current legislative proposals for remedying Puerto Rico's debt crisis. Click here to listen. 

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

Puerto Rico took steps yesterday toward a unilateral moratorium on all government debt payments, rejecting efforts in Washington to allow it to restructure only under close federal supervision, the New York Times reported today. The Puerto Rican Senate authorized a declaration of emergency and a debt moratorium at around 3 a.m., after hours of debate. The island’s House of Representatives was debating such a measure late Tuesday but had not yet voted. Any bill would need to be signed by the governor, Alejandro García Padilla. The sudden moves seemed likely to complicate efforts in Washington, D.C., to enact a rescue package for Puerto Rico. The House Natural Resources Committee, which has been drafting the rescue in consultation with Democrats in Congress and the Treasury Department, said that it still planned to issue an updated version today, despite Puerto Rico’s action. The rescue involves sensitive constitutional issues, and the drafters have been trying to strike a balance between Democratic and Republican Party priorities. So far, the lawmakers in Congress have called for sending a federal oversight board to Puerto Rico, auditing all major branches of government there, promoting fiscal reforms and eventually providing certain restructuring tools that are normally available only in bankruptcy. Read more. 

ABI Resident Scholar Prof. Melissa Jacoby speaks with Prof. Charles Tabb about his research on bankruptcy and the Fifth Amendment's "takings" clause to current legislative proposals for remedying Puerto Rico's debt crisis. Click here to listen. 

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

Hedge funds holding debt in Puerto Rico’s Government Development Bank sued to stop the island’s key fiscal entity from making payments to local government agencies as it faces a growing cash shortage and the prospect of insolvency, Bloomberg News reported yesterday. The funds, which include affiliates of Brigade Capital Management, Claren Road Asset Management and Solus Alternative Asset Management, accused the bank in a lawsuit filed yesterday in San Juan federal court of seeking to “prop up” local agencies at the expense of other creditors. The situation may imperil restructuring efforts for the bank, which its regulator says is facing a cash shortfall of as much as $1.3 billion in June. Puerto Rico, which is negotiating with creditors to reduce a $70 billion debt load, has “had every incentive to cannibalize” the bank to “meet its own liquidity needs through preferential transfers even if such transfers make it impossible to restructure” the bank, the hedge funds said in the complaint. Read more. 

ABI Resident Scholar Prof. Melissa Jacoby speaks with Prof. Charles Tabb about his research on bankruptcy and the Fifth Amendment's "takings" clause to current legislative proposals for remedying Puerto Rico's debt crisis. Click here to listen. 

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

Assured Guaranty Ltd. is seeking financial information from Puerto Rico, and is looking to Washington, D.C., for help, Bloomberg News reported yesterday. The bond insurer, which guarantees repayment on about $3.8 billion of commonwealth securities, sent a letter on Wednesday addressed to Cleary Gottlieb Steen & Hamilton LLP, which is representing Puerto Rico in its attempt to restructure $70 billion of debt, detailing multiple requests for information. The letter signed by Bruce Stern, Assured’s executive officer, was also sent to U.S. Treasury Secretary Jacob J. Lew, House Speaker Paul Ryan and other federal lawmakers working on legislation to address the island’s fiscal crisis. Assured says that it has failed to receive complete financial information that it is entitled to as insurer of commonwealth securities after repeated appeals during the last 18 months, beginning with a request for Puerto Rico Highways & Transportation Authority maintenance agreements in September 2014. Assured is also seeking current balances for accounts that repay Highways debt and Puerto Rico Convention Center District Authority bonds after the two agencies began using reserve funds to make their Jan. 1 debt-service payments. Assured needs the data to plan for possible draws on its insurance policies, Stern wrote in the letter.

ABI Resident Scholar Prof. Melissa Jacoby speaks with Prof. Charles Tabb, the Mildred Van Voorhis Jones Chair in Law at the University of Illinois College of Law, about his article prepared for the ABI-Illinois Symposium on Chapter 11 Reform in 2014 titled "The Bankruptcy Clause, the Fifth Amendment, and the Limited Rights of Secured Creditors in Bankruptcy." Tabb, ABI's Spring 2014 Resident Scholar, applies his research on bankruptcy and the Fifth Amendment's "takings" clause to current legislative proposals for remedying Puerto Rico's debt crisis. Click here to listen. 

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

Puerto Rico’s Government Development Bank, whose regulator says faces a cash shortfall of as much as $1.3 billion in June, will continue to operate on its own — for now, Bloomberg News reported yesterday. The bank, which lends to the commonwealth and its municipalities, is insolvent, Puerto Rico’s Commission of Financial Institutions, the bank’s regulator, concluded in its most recent report on the GDB’s finances. That determination allows the island’s Treasury Secretary to ask a court to appoint a receiver to oversee the GDB. It’s a move the administration won’t make at this time, Jesus Manuel Ortiz, a spokesman for Governor Alejandro Garcia Padilla, told reporters yesterday in San Juan. “We are constantly monitoring the liquidity of the GDB and no receiver will be named in the short term,” Ortiz said. Read more. 

The House Natural Resources Committee has released draft legislation — with the acroynym PROMESA — in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. ABI Resident Scholar Prof. Melissa Jacoby details PROMESA's restructuring provisions for Puerto Rico in a CreditSlips blog post. 

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