The Road to Hell is Paved with Good Intentions


Lin Manuel Miranda's 100 Miles Across

Lin Manuel Miranda’s 100 Miles Across

On Last Week With John Oliver last night, Lin Manuel Miranda and John Oliver made an impassioned plead in favor of Congressional help to Puerto Rico. Since I am not a fan of musical theater, my wife, who would give a kidney for tickets to Hamilton, had to explain who Lin Manuel was, I saw the video and recognize his incredible talent.  It is clear that they both are sincere in their plead for the island. It is also clear that they do not have all the information on the PR Debt Crisis.


The bad guys in their narrative are the hedge funds or as they call them, vulture funds. These are funds that go into distressed businesses or municipalities and buy their bonds at a discount. In the case, for example, of the Puerto Rico Government Development Bank bonds, they are selling at around 18 cents on the dollar. This is equivalent of a 34% interest rate. Of course, PR will likely default on them on May 1.


Hedge funds come in all colors and sizes. Some want to be paid 100 cents on the dollar, others are willing to take a haircut (a cut in the price and hence the interest rate paid) because they would still make money. For example, in the PR Power Electric Company’s deal, where bondholders are taking haircuts, there are hedge funds. Hence, to say they are the enemy is disingenuous.


Another misconception is Chapter 9. If you hear Mr. Miranda or Mr. Oliver, it seems the panacea to all of the island’s problems. However, Chapter 9 DOES NOT APPLY to the Government of Puerto Rico or to ANY state government. It applies to MUNICIPALITIES, which is defined as the more common cities of a state or its political subdivisions. In Puerto Rico’s case, much of the debt was issued by political subdivisions. Still, Chapter 9 does not provide much relief as I further explain.


According to the Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23.804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48.400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities, the GBD and its subsidiaries, the Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24.914 billion that could file for Chapter 9 protection, leaving $47.290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015.


Moreover, 11 USC § 109(c) requires that a municipality be insolvent in order to file for Chapter 9 protection. But COFINA is not insolvent. Hence, even if PR law allowed it to file, it could not. In addition, § 109(c) requires that the parties negotiate in good faith. Ms. Melba Acosta, head of the Government Development Bank testified in a case in February 2016 in Federal Court where WalMart was challenging a PR tax and admitted, under oath, that the FIRST time PR had met with its creditors was January 29, 2016. Hence, this good faith negotiation has not yet been met.


These and other reasons are why PR is pushing for a Super Chapter 9 where it would restructure all of its debt. That, however, has a snowball’s chance in hell of being approved since no STATE can do this and would be a terrible precedent for General Obligation bondholders. If Congress gives this to a territory, why would it not provide it to the states? And the 10th Amendment would not be a bar since it would mirror Chapter 9 by making it a state decision to take advantage of the law.


Another inaccuracy is the mention of firing teachers as a hedge funds idea. Happens to be that it is part of the Government of Puerto Rico’s Krueger report, which in typical IMF fashion, favors wholesale firing of employees and lowering of minimum wage. AGAIN, THIS IS NOT HEDGE FUNDS’ IDEAS BUT RATHER AN OFFICIAL GOVERNMENT REPORT. As to the hospital that had its electricity disconnected, there is no mention that the lack of government payments was what forced the default. PR’s Government claims it cannot pay its bond debt, but it is not paying its suppliers to the tune of $2 billion. In addition, there is no mention of the fact that the last 4 administrations have more than doubled the debt in order to finance its budgetary deficits or that the island has 120 public agencies. Nevertheless, Puerto Rico has been able to pay TENS OF  MILLIONS  to their restructuring advisors and spin-doctors without complain.  See:  Professional Services Contracts for the Government Development Bank 1/1/2013-4/26/2016 (And this is just for the Government Development Bank, does not include the TENS OF MILLIONS already spent over at PREPA, PRASA, and other agencies)

Finally, and more importantly, the fact is that the PR economy has not grown in quite a while. Without economic development, PR cannot pay its debt. At the center of this morass is the status, which Mr. Miranda seems to want to ignore. Interestingly, since the 1930’s Luis Muñoz Marín proclaimed that the status was not the issue but rather improving the economy. More than 70 years later the economy is worse than ever. The status IS the issue.


Puerto Rico is in dire problems, yes, and help is needed, yes, but as Sergeant Joe Friday used to say, “just the facts, just the facts.”




Previous Last Week With John Oliver where he mentioned Puerto Rico



  1. Excellent analisis, Barrister Mudd. But what were we to expect from a “comic” and a well-meaning but political ignorant writer of a rap musical drama about a foreigner who created the central banking system of America.


  2. Thank you for your information!!! Let’s get the facts straight first, and then we can seat down an talk!!! The government of the island has no credibility with both chambers of Congress, but they do have a very well organized and sophisticated public relations team!!! There’s millions of dollars for that with no problem!!!


  3. Good job reviewing Oliver’s piece. My two cents:

    A very interesting point on hedge funds’ willingness to take a haircut. I agree with you. I think that most of Puerto Rico’s bondholders, including traditional mutual funds, local retail investors, and S&L’s, are also hesitant to accept a haircut, as are most bondholders under any circumstances. I don’t think the hedge funds have proved less willing than any other category of bondholders so far and, as you mentioned, PREPA is a good example of that.

    I strongly disagree with your analysis with regards as to which entities the Commonwealth would authorize to file for Chapter 9, assuming Puerto Rico had access to it. I think that basing your analysis on the Recovery Act, which was passed almost two years is a mistake. Especially considering that you could use the Moratorium Act which was passed just recently. A lot has happened, mostly for the worse, in the two years since the Recovery Act. The Moratorium Act, and the administration’s unwillingness to pass amendments to exclude GO’s and COFINA, is better insight into the administration’s current belief on which entities it would authorize for Chapter 9. Your numbers should be recalculated to exclude GO’s (considering a regular Chapter 9) and COFINA (it’s not insolvent) but I believe most other issuers would qualify for relief under Chapter 9.

    I think it’s facetious to mention that the administration has spent tens of millions of dollars on restructuring advisors and put it in bold. Let’s be honest, it’s inevitable that any entity in a situation as distressed and complex as Puerto Rico’s will have to spend a lot of money on advisors. Considering that the Commonwealth’s consolidated budget is more than $25 billion, tens of millions is not that bad. Additionally, according to an administration’s budgetary document, it reduced professional services expenses by 18%, from $987 million in 2013 to $805 million in 2014 ( Granted this is not an audited financial statement but regardless I don’t think that’s a number that would available in the AFS. I also think that this $805 million figure is too high and can be reduced further without sacrificing the administration’s so-called essential services.

    I’ve written mostly about what I disagree with but ironically I agree with most of your analysis. So, great job!


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