Puerto Rico Default




On Friday night we all went to bed thinking PREPA had obtained a new extension but woke up to the end of the Forbearance Agreement. On the one hand, PREPA says the bondholders wanted further guarantees before they lent it $115 million such as the approval of the Energy Board to the rate increase, which would take months without PS 1523 being approved. On the other hand, the bondholders blame PREPA for the break-up of negotiations.


What happened? What are the implications of what we know? Let’s see the history of this problem.


PREPA realized in June of 2014 that it would not be able to pay its bondholders in July. The Board brought the problem to the Governor and it decided to take the money to pay bondholders from reserves. This was a technical default of the 1974 PREPA Bondholders Agreement. Due to this, PREPA and its bondholders sat down to talk. On August 14, 2014, PREPA announced agreements with its creditors, the so-called “Forbearance Agreement”, which included that the company had to hire a restructuring officer that would be approved by the Forbearing Bondholders. As per the agreement, on March 2, 2015, PREPA was to deliver a business plan and the agreement was to expire on March 31. On March 30, PREPA announced a 15-day extension on the Forbearance Agreement. On April 15, it announced another 15-day extension and on April 30, 2015, one until June 4, 2015. On June 1, PREPA presented to bondholders the Recovery Plan but not to the public.


On June 5, PREPA announced another extension to the Forbearance Agreement until June 18, 2015. On June 18, another extension was announced until June 30, 2015. On July 1, 2015, an extension was announced until September 15. On September 2, 2015, PREPA announces agreement with 35% of its bondholders. On September 21, an extension was announced until October 1, 2015, which was again extended to October 15, which was again extended on October 23 until October 30. It was extended again until November 3. On November 3, the Restructuring Support Agreement (RSA) is announced and on November 10, 2015, Ms. Lisa Donahue testified before the PR Senate Energy Commission on behalf of the PREPA Revitalization Act, which implements parts of the RSA. The RSA states RSA that PREPA must make a rate review request from the PR Energy Board no later than December 21 and that the Legislature must approve the bill no later than November 20 2015. It also states that the rate increase must be in place on or before March 1, 2016 pages 31-32 of the RSA.

Since the bill, PS 1523, had been filed on November 4 and had 159 pages, the legislators, with good reason demurred. Subsequently, everyone assumed Governor García Padilla would call for an extraordinary but he refused. The RSA was extended to December 17 and then December 23 and finally to January 22. On December 23, PREPA announced an agreement with the monolines and now had 70% of bondholders on line with the RSA.

Continuing with these events, Ms. Donahue told the US Congress on January 11, 2016 that PREPA could not get a better deal in Chapter 9 or that its rates would go down under that regime starting at 1.07 minutes Moreover, she said PREPA would run out of money to pay for fuel and that there would be blackouts.  See also Ms. Donahue’s testimony at 1.19 minutes.

What does all this mean? Why has a deal with 70% of bondholders on board, vital to PREPA gone down the tubes? We don’t know yet but there are various possibilities. I have always believed PS 1523 did not have the votes to be approved in the House where a group of six leftists legislators could with three votes block any legislation. Also, the PR Legislature wanted to change the bill substantially. Obviously, this is not what bondholders wanted to hear.

Today, Governor García Padilla made a press release emphasizing the need for the PREPA bill to be approved, but he forgets he did not call for an extraordinary session to discuss the law in December, wasting precious time. In addition, he said, “Our legislature has requested more time to bring to the table other options, other proposals.” After 18 months of negotiations, it is surprising and irresponsible for the legislature to require time to bring about “other options, other proposals.” Good or bad, Ms. Donahue is the person designated by PREPA to do the negotiations, which were approved by the PREPA Governing Board. To change things now would mean months of negotiations and the distinct possibility that bondholders would not accept them.

The more we read of this press release, the more it is obvious that the Governor does not have control of his Legislature. Also, although the Governor acknowledges the need for the agreement due to the difficult situation with PRASA and the Government’s debt, he arrogantly says at the end of the press release “I warn creditors, at the same time, it is not time for pressure games. I accept reasons, not pressures.”

It almost seems that the Governor, PREPA and their advisors have decided to scuttle the agreement in order to push Congress for a Chapter 9. It was clear that this agreement belittled the need for PR to have access to bankruptcy. By playing the blame game, PR could be hoping to move a reluctant Congress. The problem with that is that now creditors can claim that PREPA did not negotiate in good faith, a requirement of Chapter 9, see, 11 U.S.C. § 109(c). Bondholders accepted haircuts, offered to provide money, granted several extensions to continue negotiating, all to naught. In any event, this situation will make the eligibility issue a mayor battle if Chapter 9 was authorized for PR.

Question is, what now? Bondholders could decide to buckle and accept PREPA’s refusal and continue negotiating a deal until July when the company must pay over $400 million in bonds as well as over $700 million to banks for fuel purchase. On the other hand, bondholders could get tough and file on Monday a request in federal court for the appointment of a receiver to run PREPA and get paid. Or they could do both. Who wins? The lawyers involved in the litigation. Let’s see what happens.

The Economist and PR: Some things are not right

The Economist and PR: Some things are not right


This week The Economist wrote two articles on PR, both with dubious statements, which need correction and analysis. In the first article, “The bill will come due” The Economist argues for providing PR with Chapter 9 protection. The article calls arguments of moral hazard against Chapter 9 unfair because “Congress itself lumbered the island’s economy with its biggest burdens. It is Congress, after all, that imposed America’s minimum wage on Puerto Rico.” Actually, the Government of PR lobbied for minimum wage to apply to PR for many years before it was implemented. Of course not everyone agreed at the time but the workers rejoiced. It continues saying “Congress has also set some welfare payments at relatively high levels. And, again, Congress imposed costs on Puerto Rico by banning foreign vessels from carrying goods between American ports, making it unnecessarily expensive to ship anything to or from the island.” PR, however, receives much less on welfare than the states and the Jones Act applies to Hawaii and Alaska, and the last time I checked, they are doing much better than PR.


As to emigration, it is Paul Krugman’s position that that is what Puertorricans should do. Moreover, emigrants will not be a burden but rather a asset for the US. Just ask Central Florida.


The Economist also says “Without Congress’s help, a long and messy court battle, accompanied by worsening economic conditions, widespread hardship and mass emigration, seem inevitable.” It seems that The Economist, like most of the US media, don’t understand what a Chapter 9 is or that Judge Rhodes’ handling of the Detroit case is atypical of these procedures. Most bankruptcy cases of this nature have thousands of adversary proceedings, which are lawsuits within the bankruptcy case and in general they are very messy. Also, the cases can take many years. In the San Bernardino more than three years have elapsed without a plan being approved by the Court.


In the second article “When the Salsa Stops” also contains missteps. Yes, Governor García Padilla did say it did not have enough money to pay its debts and defaulted on $58 million dollar debt in August, 2015, for the first time, not as the article say January 4, 2016. And the article fails to explain that in July 2015, it paid many, in August, 2015 $667 million, in December 2015 $397 million and in January $902 million. Therefore, a default of little over $100 million since his claim in June is nothing.


It then goes on to say that the US “granted its residents citizenship in 1917, just in time to draft 20,000 of them for the First World War.” This is a popular but incorrect factoid. Puertorricans would be subject to being drafted as aliens during WWI and in any event, most, like my Grandfather Justo González, were volunteers. Puertorricans have served with great distinction in the US armed forces in all of its wars, including the Banana wars Haiti and the Dominican Republic in 1915. We even had soldiers in the punitive expedition of 1916 on Pancho Villa.


It is true that “in 1952 the island became a self-governing “commonwealth”, subject to American law but excluded from federal income taxes and from voting representation in Washington.” What it does not say is that it was a self-governing territory since at least 1948 when Puertorricans got to elect its own governor. It had been electing its legislature since 1917. Moreover, no territory has voting representation in Washington.


The article continues saying “If Puerto Rico were either an independent country or the 51st state, it could abrogate its central-government debt, because states cannot be sued in federal court. As an “unincorporated territory”, it may not enjoy this privilege.” This is hogwash. States cannot be sued in federal court for collection of moneys due to the 11th Amendment of the US Constitution. Happens to be that PR is considered a state for purposes of this Amendment, see, Vaquería Tres Monjitas, Inc., v. Irizarry, 587 F.3d 464, 478 (1st Cir. 2009), cert denied, 131 S.Ct. 2441 (2011). In addition, no state, including for these purposes PR, can abrogate its debt. The Constitution says “No State shall…pass any…Law impairing the Obligation of Contracts….” ARTICLE I, SECTION 10, CLAUSE 1. Moreover, it would also run afoul of the Fifth Amendment prohibition of takings of property without just compensation.


It also states “Fortunately, a solution could be forthcoming. The Treasury Department has proposed a mechanism that would allow a restructuring of the constitutionally guaranteed debt.” This approach has been rejected by all Republican Congressional leaders and could also run afoul of the Constitution. “The Congress shall have Power To…establish…uniform Laws on the subject of Bankruptcies throughout the United States….” ARTICLE I, SECTION 8, CLAUSE 4. Not only would a law permitting a territory but not a state to file for Chapter 9 protection for all its debts be potentially unconstitutional, but it would politically untenable in Congress. Senator Hatch’s Financial Control Board is more probable and would address the reforms that are necessary to address what really caused PR to get to this situation, i.e. spending instead of producing.


We are used to much better reporting from the Economist than these two.


Desde hace meses se ha especulado sobre cuanta de la deuda pública de PR esta en manos boricuas. He escuchado desde tan bajo como 25% hasta tan alto como 50%. Irrespectivo del porciento, lo que es innegable es la falta de acción de esos bonistas locales, sean institucionales o individuales, para participar en las negociaciones de la AEE o de las obligaciones del gobierno central. Según el Nuevo Día, las cooperativas al fin se dieron cuenta de la crisis y están buscando abogados y asesores financieros en preparación de lo que viene.

Es imperativo que se entienda que un impago de cualquier bono de PR va a afectar adversamente a las cooperativas. En el caso de la AEE, esta exige una moratoria por 5 años y que durante este periodo, el porciento de interés se reduzca a 1%. O sea, que por 5 años, los bonistas no van a recibir ingreso de esa fuente. Como indica Bond Buyer, citando a Triet Nguyen, uno de los mejores analistas financieros en USA y muy conocedor de la situación Boricua, esta táctica de moratoria permea la negociación de la isla. Además, se nos indica que la negociación la lleva a cabo no Melba Acosta si no Millstein & Co., con su director ejecutivo Jim Millstein y la firma de abogados Cleary Gottlieb Steen & Hamilton.

Un impago de PR podría llevar a la insolvencia de alguna de las cooperativas, dependiendo del tamaño y extensión del impago. Los depósitos de los cooperativistas de las de ahorro y crédito están asegurados hasta $250,000 por la Corporación para la Supervisión y los Seguros de las Cooperativas, mejor conocida como COSSEC. Pero nuevamente, esta es parte del Gobierno de PR que esta, a todas luces, insolvente y pone en duda la capacidad de poder proveer la liquidez que los cooperativistas necesitan. Excepto para las cooperativas federales, no existe entidad de USA que las aseguren.

Además de todo esto, existe la posibilidad de los directores y oficiales de las cooperativas sean responsables bajo diferentes teorías legales por la compra de deuda del Gobierno de PR, especialmente aquella reciente y sin fuente de repago, como la del Banco Gubernamental de Fomento (47% del total de la deuda que tienen las cooperativas según el Nuevo Día).

Es importante notar que de ser necesario acudir a los Tribunales, las cooperativas y sus dueños carecen de la diversidad de ciudadanía necesaria para ir al Tribunal Federal y tendrán que ir al Tribunal de Primera Instancia. Para eso necesitan abogados locales diestros en el asunto financiero, de los que no hay muchos. Por ende, contraten el abogado pronto para poder intervenir en cualquier negociación de forma efectiva.