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A suggestion from a U.S. Treasury official to protect Puerto Rico’s pension payments while also seeking cuts from all bondholders may be viewed as the latest sign that politicians favor retirees over investors in cases of municipal distress, Bloomberg News reported yesterday. Treasury Counselor Antonio Weiss said in prepared testimony yesterday that a failure to ensure payments from Puerto Rico’s pension system, which has more than 330,000 beneficiaries and is underfunded by $44 billion, would harm the commonwealth’s residents and damage its economy. Meanwhile, “all creditors must be at the table” to restructure the island’s liabilities to an affordable level, he said. It could “set a dangerous precedent,” said Peter Hayes, head of munis at BlackRock Inc., which oversees $110 billion of the debt. “Pensions are clearly down the capital structure in terms of hierarchy and repayment. So the political side of it is boosting them higher than bondholders.” Read more. 

In related news, Puerto Rico's largest mutual fund creditors are urging the cash-strapped island to honor debt owed to creditors of its sales taxing authority, to avoid a ripple effect they say could threaten other restructuring deals on the island, Reuters reported yesterday. Puerto Rico, facing $70 billion in debt, is trying to climb out of economic crisis by reaching consensual restructuring deals with various creditor groups. Among its obligations is about $17 billion in debt owed to creditors of its sales taxing authority (COFINA). In a letter on Wednesday to Puerto Rico's legislators, Franklin Advisers, OppenheimerFunds and the First Puerto Rico Family of Funds said the U.S. territory should protect COFINA debt. The funds have more than $10 billion combined invested in Puerto Rico, including a big stake in COFINA. In a debt restructuring proposal earlier this month, Puerto Rico's advisers proposed cutting various debt, including reducing COFINA debt by about 51 percent. Read more. 

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

A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders, the New York Times reported today. The proposal was being driven by evidence that Puerto Rico’s pension system is nearly out of money, leaving retirees who are dependent on it financially vulnerable. “The major problem is, the entire pension system is close to being depleted,” said Antonio Weiss, counselor to Jacob J. Lew, the Treasury secretary. “But 330,000 people depend on it. It’s unfunded, and they have to be protected.” Shielding retirees from pension cuts, the thinking goes, would not only protect thousands of older residents on the island, but it might also encourage younger retirees to stay there, rather than move to the United States mainland in search of new jobs and incomes. Out-migration is considered a prime cause of Puerto Rico’s financial tailspin, because it shrinks the island’s economy, leaving fewer people and fewer dollars to support the crushing debt. Puerto Rico is said to have about $72 billion of financial debt outstanding, most of it in the form of municipal bonds. By some estimates, it has incurred an additional $43 billion in unfunded pension obligations. Read more. 

Two House committees will be holding hearings today on Puerto Rico’s debt crisis. The first hearing, entitled “Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets,” will be held by the House Financial Services Subcommittee on Oversight and Investigations, at 10 a.m. ET. The Subcommittee is chaired by Rep. Sean Duffy (R-Wisc.), who is sponsoring H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.” The House Natural Resources Committee will also be holding a hearing at 10 a.m. ET entitled “The U.S. Department of the Treasury’s Analysis of the Situation in Puerto Rico.” The Natural Resources Committee is spearheading the effort to draft a bill on Puerto Rico in the coming weeks. The sole witness at this hearing will be Antonio Weiss, counselor to the U.S. Treasury Secretary.

In related news, Puerto Rico's largest mutual fund creditors are urging the cash-strapped island to honor debt owed to creditors of its sales taxing authority, to avoid a ripple effect they say could threaten other restructuring deals on the island, Reuters reported yesterday. Puerto Rico, facing $70 billion in debt, is trying to climb out of economic crisis by reaching consensual restructuring deals with various creditor groups. Among its obligations is about $17 billion in debt owed to creditors of its sales taxing authority (COFINA). In a letter on yesterday to Puerto Rico's legislators, Franklin Advisers, OppenheimerFunds and the First Puerto Rico Family of Funds said the U.S. territory should protect COFINA debt. The funds have more than $10 billion combined invested in Puerto Rico, including a big stake in COFINA. Read more. 

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

Two House committees will be holding hearings on Puerto Rico’s debt crisis tomorrow. The first hearing, entitled “Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets,” will be held by the House Financial Services Subcommittee on Oversight and Investigations, at 10 a.m. ET. The Subcommittee is chaired by Rep. Sean Duffy (R-Wisc.), who is sponsoring H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.” The House Natural Resources Committee will also be holding a hearing at 10 a.m. ET entitled “The U.S. Department of the Treasury’s Analysis of the Situation in Puerto Rico.” The Natural Resources Committee is spearheading the effort to draft a bill on Puerto Rico in the coming weeks. The sole witness at this hearing will be Antonio Weiss, counselor to the U.S. Treasury Secretary.

In related news, Franklin Resources Inc. plans to close the $147 million Double Tax-Free Income Fund, whose strategy of plowing more of its assets into Puerto Rico than any other municipal-bond fund turned it into one of the worst performers, Bloomberg News reported today. After the fund shriveled when investors pulled out money, Franklin is asking those remaining to exchange their shares for a piece of the $8.3 billion High Yield Tax-Free Income Fund, which has far less exposure to the island. “It parallels the life cycle of Puerto Rico in the debt markets,” said Matt Fabian, a partner at Municipal Market Analytics, a research firm based in Concord, Massachusetts. “As the island becomes increasingly insolvent, investing strategies dependent on the island also become insolvent.” Read more. 

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

Two House committees will be holding hearings on Puerto Rico’s debt crisis on Feb. 25, according to a press release from Rep. Pedro Pierluisi (D-P.R.). The first hearing, entitled “Puerto Rico’s Debt Crisis and Its Impact on the Bond Markets,” will be held by the House Financial Services Subcommittee on Oversight and Investigations, at 10 a.m. ET. The Subcommittee is chaired by Rep. Sean Duffy (R-Wisc.), who is sponsoring H.R. 4199, the “Puerto Rico Financial Stability and Debt Restructuring Choice Act.” The House Natural Resources Committee will also be holding a hearing at 10 a.m. ET entitled “The U.S. Department of the Treasury’s Analysis of the Situation in Puerto Rico.” The Natural Resources Committee is spearheading the effort to draft a bill on Puerto Rico in the coming weeks. The sole witness at this hearing will be Antonio Weiss, counselor to the U.S. Treasury Secretary, according to the press release. 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 may suspend principal and interest payments on its bonds in less than three months as the island struggles to cover health and safety programs, Bloomberg News reported yesterday. The potential halt on debt-service payments comes as the commonwealth’s Government Development Bank faces a $422 million debt payment May 1. Puerto Rico and its agencies owe investors $2 billion on July 1, including $805 million for general-obligations, according to data compiled by Bloomberg. The island is debating whether to make the debt payments because it doesn’t have the funds to continue providing essential services, Grace Santana, chief of staff to Governor Alejandro Garcia Padilla, told reporters Wednesday in San Juan. The island warned in its debt-restructuring proposal released earlier this month that it may need to stop making such payments if it can’t reach a deal with investors to restructure its debt by May 1. Read more. 

In related news, U.S. officials held a roundtable discussion at the White House on Tuesday about the "worsening" fiscal crisis in Puerto Rico, as the Obama administration continues to press Congress to act on the issue, Reuters reported. The meeting with Puerto Rican labor leaders and business executives featured briefings from Treasury Secretary Jacob Lew and Secretary of Health and Human Services Sylvia Burwell. Lew told meeting participants that Puerto Rico has already had to take extreme emergency measures like borrowing from its pensions to stay afloat and the island will face additional strain in May and June, when more than $2 billion in debt payments come due. Read more. 

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

The already complicated quest for a resolution to Puerto Rico’s debt crisis became more complex with the sudden death on Saturday of Supreme Court Justice Antonin Scalia, whose passing could influence a pending Supreme Court case on the island’s debt, MorningConsult.com reported today. On March 22, the court will hear oral arguments in Puerto Rico v. Franklin California Tax-Free Trust, which will determine if Puerto Rico’s legal system can restructure debts and arbitrate debt disputes through its own bankruptcy process. Currently, it doesn’t have the authority under chapter 9 of the Bankruptcy Code to do so. The case has been merged with a companion case, Acosta-Febo v. Franklin California Tax-Free Trust. The case deals with about $20 billion of Puerto Rico’s $72 billion in debt, all of which was incurred by its three major public utilities. In Puerto Rico’s petition asking the high court to take up the case, the petitioners said there is “no basis to conclude that the exclusion of Puerto Rico from chapter 9 represents a limitation on the Commonwealth’s power to create its own mechanism for restructuring the debts of its public utilities.” Read more. 

In related news, Puerto Rico's government said that it had "substantial doubt" about its ability to operate long-term, and cited a threat to public services if its Government Development Bank misses debt payments, in a draft of long-delayed fiscal year 2014 financial data released yesterday, Reuters reported today. The 366-page draft, which has not yet been audited, follows criticism from some U.S. lawmakers and financial creditors that Puerto Rico has not been transparent with its finances. The U.S. territory is mired in economic crisis, facing a 45 percent poverty rate and a dwindling tax base as locals flock to the mainland United States. It is hoping for help from Congress in resolving its $70 billion debt load. "The commonwealth's management believes that there is substantial doubt as to the ability of the primary government" and other governmental entities "to continue as a going concern," the report said. Puerto Rico said it expects to miss at least some of its July 1 general obligation (GO) debt payment — about $800 million, according to a debt schedule obtained by Reuters — even with the benefit of so-called "clawbacks" wherein revenues earmarked for other debt are redirected to pay GO debt. The report said Puerto Rico faced a $49.2 billion deficit as of June 30, 2014, $2.5 billion higher than in 2013. 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's House of Representatives yesterday approved a bill aimed at overhauling the island's troubled power utility PREPA, pushing the agency a step closer to finalizing a deal with creditors to restructure more than $8 billion debt a day before a key deadline, Reuters reported yesterday. Fixing PREPA's debt is seen as an important step in resolving an overall $70 billion debt load in Puerto Rico, and the utility has struck agreements with creditors on a debt exchange in which bondholders would accept 15 percent cuts to repayments. The creditors' support, though, is premised on passing legislation aimed at stabilizing PREPA's finances and governance. The House passed the bill, known as the PREPA Revitalization Act, yesterday, according to a webcast of the vote, following passage by the Puerto Rican Senate on Wednesday. However, because the House introduced amendments, the bill must return to the Senate for approval before Governor Alejandro Garcia Padilla can sign it into law. Read more. 

In related news, questions about the PREPA’s procurement of oil are part of a much larger mandate the Senate has taken on — determining how the authority became mired in more than $9 billion in debt it says it cannot pay, according to a New York Times analysis today. The debt troubles could not be more pressing, as the legislature faces a deadline on Tuesday for a vote on the authority’s plan for renegotiating that debt. While it is clear that the authority’s financial downfall is complex and multifaceted, the question of whether it bought dirty oil while billing customers for clean oil stands out as one of the most charged issues it is facing. If true, the accusations would go beyond errors in judgment and amount to a decades-long fraud. “It was a scheme,” said Abraham Ortiz, a lab director at Puerto Rico’s power authority, “and it went on for years.” 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’s government is trying to convince hundreds of wealthy investors to move to the U.S. territory, hoping they could help lift it out of a deepening economic crisis, the Associated Press reported today. Officials hosted a meeting for investors yesterday to promote local tax incentives aimed at luring the wealthy. New York hedge fund billionaire John Paulson, who recently bought some of Puerto Rico’s most upscale resorts, said that solving the island’s fiscal situation is essential to encouraging more investment. Paulson declined to say how much he has invested in Puerto Rico and acknowledged that he doesn’t own any of the island’s staggering $72 billion public debt. Puerto Rico already has convinced other millionaires and billionaires to move to the island with measures approved in recent years that exempt people from taxes on any capital gains accrued after they move to the island. But critics question whether the amount of jobs created and real estate bought has been enough to boost the economy. Read more. 

The latest ABI podcast features ABI Resident Scholar Prof. Melissa Jacoby talking with sovereign debt experts Profs. Mitu Gulati of Duke University School of Law and Anna Gelpern of Georgetown University School of Law about Puerto Rico's spiraling financial distress. Gulati and Gelpern compare Puerto Rico's financial situation to other recent sovereign debt crises, and examine current restructuring proposals for Puerto Rico. 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.