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THURSDAY, MARCH 3, 2016
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current 11.5% sales & use tax, has second priority. Meanwhile, the island’s more than 330,000 public pensioners represent yet another competing claim and Nuveen notes that “preserving pension security” is among the top priorities for the Alejandro García Padilla administration. “We believe the government will attempt to keep pensions free from impairment and prioritize these payments above debt service, regardless of current statutes that prioritize debt service ahead of annual pension costs.” In fact, Treasury’s proposed restructuring plan also seeks to protect payments to pensioners, “a notion which is not likely to make many friends in the Republican-controlled Congress,” Hanson said.
BRINGING IN THE
HOLDOUTS For the past few months, both federal and local government officials have been raising their voices on the need for a restructuring mechanism, not only to have a regime to orderly settle intercreditor claims, but also to bind potential “holdouts,” or minority creditors that fail to agree to terms under a restructuring deal struck with a creditor majority. Meanwhile, another possibility could be the use of collective action clauses (CACs), which have been already brought to the table as yet another alternative to the Puerto Rico debtrestructuring issue, as previously reported by Caribbean Business (Feb. 25). The implementation of CACs could allow
the government to bind holdouts if it reaches a debt-restructuring deal with a majority of its creditors. Sources have said CACs already boost support among various creditor groups, while government officials agree it could help within the holdout creditors’ context, although Plan A continues to be achieving a broad restructuring regime from Congress. “Without some mechanism to bind holdout creditors, either through some form of bankruptcy or a broader collective action clause that would allow a majority bondholder vote to impose terms on holdouts, Puerto Rico is destined for years of litigation,” Nuveen states in its report. While pushing for the Obama administration’s territorial-clause bankruptcy regime, Treasury’s Weiss said without access to such restructuring authority “that brings all creditors to the table, it is overwhelmingly likely that holdouts will prevent voluntary negotiations from reaching a successful conclusion.” He added Treasury is indeed worried about the compounding effects of litigation and inability to conclude an agreement, which could turn a voluntary solution to a decade-long crisis. Yet, many believe potential congressional action could be far away from granting broad restructuring powers to the commonwealth, amid concerns over the Puerto Rico government’s fiscal practices and a lobbying battle among competing interests on Capitol Hill. “We continue to believe that Puerto Rico gets some bankruptcy
“Puerto Rico and its creditors are on the same ship. We are going to sail safely to shore together, or we are going to sink together.” —Resident Commissioner Pedro Pierluisi protection from Congress, but continued discussions about extraordinary measures—such as collective action clauses, territorial bankruptcy or Super Chapter 9—ought to be viewed as red herrings against the backdrop of what Congress wants to do,” Hanson said. Resident Commissioner Pedro Pierluisi told Caribbean Business that Congress is looking into a board that would have a role in the commonwealth’s debt restructuring. “But it is clear that it would have to be a restructuring that has the support of a majority of creditors,” he said, adding the board would oversee and mediate in the negotiation process of Puerto
Rico and its creditors. “It is the same as a collective action clause, but through a board, achieving an agreement reached with the majority, and then going to court to make it binding,” Pierluisi said. When asked if it would cover all Puerto Rico debt, as the García Padilla administration advocates, the resident commissioner believes this needs to be further discussed. “I’m one of those who think that constitutional debt, particularly GOs, should be treated differently. This should be [treated] in a consensual manner, purely based on negotiations,” he told this newspaper following the governor’s recent State of the Commonwealth message.
CONGRESSIONAL
ACTION As House Speaker Paul Ryan’s (R-Wis.) March 31 deadline to act on the Puerto Rico issue quickly approaches and a string of hearings takes place, some GOP members are still mulling when action should be taken and what exactly it should include. During last week’s House Natural Resources Committee hearing, Puerto Rican Rep. Raúl Labrador (R-Idaho) told Treasury’s Weiss that he didn’t agree “on every one of your solutions,” while adding Congress was leaning more toward implementing fiscal oversight, and not so much toward debt-restructuring powers. Meanwhile, Chapter
9 won’t cut it for Treasury, as it would only cover public corporations, roughly a third of the island’s $70 billion debt load. While La Fortaleza recently said it still supports Pierluisi’s bill that seeks to include Puerto Rico under Chapter 9, it has been increasingly echoing the broadrestructuring-regime discourse. The commonwealth’s voluntary debt exchange offer also covers GOs, which would fall outside Chapter 9’s scope. In addition to restructuring authority, Treasury believes a strong, independent oversight board could be established, while simultaneously Continues on page 18