Puerto Rico’s Local Chapter 9, a Good Start

PR’s Local Chapter 9

Yesterday, Senators Nadal Power and Rosa Rodríguez filed a proposed act by which PR’s public corporations could reorganize its debts or even liquidate themselves. Essentially a local Bankruptcy Chapter 9. Both should be congratulated for having the moral fortitude to admit this must be considered. The preamble correctly indicates that state law may regulate those areas where Federal Bankruptcy law is silent or those entities excluded from the Bankruptcy Code, such as insurance companies or Puerto Rico’s municipalities and public corporations, expressly excluded via 11 U.S.C. § 101 (52). Moreover, the liquidation procedure of the P.R. Civil Code, Articles 1811-29, 31 L.P.R.A.  §§ 5171-5214 is totally obsolete since it dates back to the 19th Century.  In addition, the Preamble to this Act states that it is obsolete, making this a special law that preempts the more general law of the Civil Code.

The piece is a good start but lacks many of the necessary statutes that makes the Federal Bankruptcy Code a unique tool. Moreover, it should include the island’s municipalities, most of which are insolvent. In addition, it would make some sense for the law to require that some of the Commonwealth Courts be set for this type of procedure which will elicit massive litigation once it is started. Also, its judges should be especially trained in bankruptcy and dispute resolution since at this time the Puerto Rico bench is devoid of such knowledge. Now I will go to the specific areas that need to be added to the law. For your reference, I include English and Spanish versions but the statute states that the English version will prevail in case of doubt.

The law lacks a definitions section. The Bankruptcy Code has a long definitions section with more than fifty entries, see 11 U.S.C. § 101. For example, the proposed law does not define what is a public corporation, something which may cause further litigation and delay. The law should clearly define what entities are covered by the law.

Although the law specifies that the Court may grant a stay (Article 8(c)) it does not state the parameters pursuant to which it may be granted or even who can grant it. I believe there should be an automatic stay as in the Bankruptcy Code. Moreover, the law does not state who or even if, this stay, once granted, may be lifted. Anyone who litigates in Bankruptcy Court knows that a significant amount of the court’s time is consumed by this issue. Hence, it should be automatic on filing the petition and later any party in interest  could petition the court to do so under clear guidelines which should be in the law.

Article 2 of the law provides a procedure by which the Board of Directors or whomever has control over the corporation may make a declaration “declaring themselves eligible under this Act, subject to the process spelled out in Article 1. If the Governor so authorizes it, said resolution will be filed in the Court of First Instance (Superior Court).” Article 4 states that “[t}he resolution declaring eligibility under Article 2 shall state:

(1) the reasons why the public corporation is eligible under this Act and whether it is caused or not by lack of liquidity;

(2) recommendations as to the interim management of the public corporation;

(3) recommendations as to a plan for restoring solvency if possible, and complying with existing obligations and liquidation if necessary.

The information that is required by this section is de minimis. It should be that information required by the Bankruptcy Rules and Schedules D-H of the official forms. These include information of bank accounts, creditors, the corporate debtors, objections to creditors claims etc. Moreover, there is no procedure to object to the filing of the procedure, either voluntary or involuntary. Article 3 mentions that in an involuntary case there must be a public hearing; does that mean a hearing in Court or another type of hearing? When will the Schedules be filed in an involuntary proceeding? Not clear at all. In addition, in a Chapter 9, debtor is required to claim he has negotiated in good faith with his creditors to prevent the filing. Given the importance of some of the public corporations, this should be included in this Act.

There is no procedure in the law for the filing of proof of claim or what it must contain. The proof of claim is the means by which a creditor establishes his claim in a Bankruptcy Proceeding. Why is it important? Because it is vital for an orderly reorganization to know who is a creditor and how much is he owed. Moreover, it is not uncommon for debtors to forget a creditor who will then have to rush to file a motion explaining his claim. The procedure should be spelled out completely. Moreover, what is the effect of the filing of a proof of claim or the cut-off date to file it or to object to the claim.  In the Bankruptcy Code, the filing of the proof of claim is prima facie evidence of a claim’s validity. See Fed.R.Bankr.P. 3001(f). “Under this rule, a claim is presumed valid until an objecting party has introduced evidence sufficient to rebut the claimant’s prima facie case.” In re Inter-Island Vessel Co., 98 B.R. 606, 608 (Bankr.D.Mass.1988). A proof of claim will prevail over a mere formal objection. See, e.g., Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.) 993 F.2d 915, 925 (1st Cir. 1993) (“The interposition of an objection does not deprive the proof of claim of presumptive validity unless the objection is supported by substantial evidence.”).

A very important issue is attorney compensation. Since public corporations are not natural personas pursuant to PR law, they must act through and of attorneys before its courts. Attorneys are usually retained and paid by debtor BEFORE the filing of any bankruptcy papers and employees and attorneys on retainer could not represent the public corporation since there is an inherent conflict of interest since they may be creditors at a later date. Bankruptcy law requires that the compensation paid to the attorneys BEFORE the filing be disclosed. Moreover, attorneys and other professionals, indispensable to the reorganization effort have to have Court approval for their hiring and compensation. Provisions for the hiring and compensation of attorneys must be spelled out by the Act. In addition, the Act must specify how the public corporations are to make payments in the ordinary course of business and to whom. Also, there is no provision on how or if new credit can be secured, which is a necessary addition to the Act.

Once the resolution is filed, Article 7 of the Act states that “[t]he public corporation that has been declared eligible under this Act shall, while the proceedings go on, be administered by a Board of Receivers composed of 5 members. The Governor shall name 2 of the members with the advice and consent of the Senate, and the Court shall name 3. The Court shall establish the powers and duties and supervise the Board of Receivers and shall have the power to issue orders as necessary to execute its role.” Chapter 9 of the Bankruptcy Code, and Chapter 11, provide for the debtor to remain in possession administering the entity due to its large size and complexity This should be considered here and a procedure to remove them when necessary. Moreover, the Federal Bankruptcy system has the U.S. Trustees’ Office  responsible for overseeing the administration of bankruptcy cases and private trustees under 28 U.S.C. §586 and 11 U.S.C. §101, et seq. Its powers are clearly established by law. The PR Courts lack the knowledge and experience to know what powers receivers may have and should be clearly spelled out in the law. Moreover, Trustees in Bankruptcy court, no matter how complicated the case, handle the case with their staff. There is no need to involve 5 persons, much less 2 named by the Governor, who will be professional politicians to try to save his behind in the crisis. Also, it would take time to have the Governor do it. In addition, what procedure should be used to contest the power and actions of the Receivers? The Act is silent.

Another area that has always brought litigation in the Bankruptcy Code is the avoidance power of the Trustee or here, receivers. For example, any payment done 90 days before the filing of the petition or 1 year when it involves insiders (family, lawyers, etc.) would be considered a voidable preference. Also, the Act is silent about the rejection of executory contracts (rentals and union contracts, for example). The Act only generally states that the Court may, under certain circumstances, impair contracts. Since the main reason for this Act is to deal with bond holders, the procedure should be spelled out completely.

The Act is totally silent as to creditors’ committees, a very common and necessary feature of Bankruptcy proceedings. Provisions to this effect should be added.

Although the Act mentions a plan, which obviously has to spell out the reorganization, there are no timetables for its filing or what its contents must have. This is a necessary amendment to the Act, as well as a more clearly defined timetable of things to do.

No plan can function without a clear understanding of the type of creditors involved in the procedure. In Bankruptcy proceedings some creditors will be secured, some with preferences, even none secured may have different debts maturing at different times and some that will be impaired by the plan and others that won’t. The Act needs to deal with this and determine the order of payment.

Now lets discuss procedural matters. The Bankruptcy Code has many sections, but there are Federal Rules of Bankruptcy Procedure and even Local Rules of the Bankruptcy Court that need to be taken into account for this Act. Will one judge be able to handle all cases of one particular public corporation which include labor, environmental, torts, debt collection, etc.? Moreover, what happens when the Court issues a determination on a certain small but important aspect of the case? Can it be reviewed by the Appellate Courts as an Appeal or will it be a certiorari? Can a certiorari even be considered for such a case? The Act is silent as to these important issues. Also, will this procedure be eligible for the Puerto Rico Rules of Complex Litigation, which has different rules than those of Civil Procedure? The Act should address this question.

In addition, what effect will this Act or the Court’s orders have on environmental or other administrative claims by local agencies (we know it won’t have any on Federal Agencies)? Can the Court impair them or reverse them? Also, the Act does not make it illegal to accelerate debt due to bankruptcy or to in any way impair debtor and it should be considered.

There are other areas where the law is silent. If there is a claim that is not liquidated, a tort damages claim not adjudicated, can the Court, in imitation of 11 U.S.C. § 502(c)(1) estimate the amount? After the case is commenced, will payments to Social Security, pensions and others continue? Under what circumstances? Will the Retirement Administration be eligible for this proceeding? What happens if a creditor is not notified and only learns of the proceeding after the plan has been approved? The Senators and their staff should carefully review the Bankruptcy Code and its Rules, especially 3000’s and 6000’s. Also, the Act provides for liquidation but does not provide any details of how to do it.

Finally, some jurisdictional issues not mentioned in the Preamble of the Act. The Act would not have the ample police power of the Federal Government to stay actions by Federal Agencies and it cannot enjoin federal courts. However, even in cases where the Federal Court has exercised its jurisdiction in a Constitutionally valid way, the case may still be sent state court via Burford v. Sun Oil Co., 319 U.S. 315 (1943) or Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959) type abstentions. In addition, the case in Federal Court could be dismissed for reasons of comity, see, Smith v. Bayer Corporation, 131 S.Ct. 2368  (2011).  Finally, since the idea is to hand a type of discharge to the public corporations of their debts, does PR have to power to impair obligations of those who are not its residents? Can PR give a discharge to debts owed by those who do not live here? In Stellwagen v. Clum, 245 U.S. 608-615 (1917) the Court stated that “[I]t is settled that a state may not pass an insolvency law which provides for a discharge of the debtor from his obligations, which shall have the effect of a bankruptcy discharge as to creditors in other states, and this although no general federal bankruptcy act is in effect.” The questions need clear answer. As I said in the beginning, this is a laudable effort, but much more is needed.

Risks Factors Related to the Bonds Explained/Factores de Riesgos Relacionados a los Bonos Explicados

El Preliminary Official Statement del 6 de marzo de 2014 expone importantes aspectos de la nueva emisión de bonos de PR. Primero, ¿que es el Official Statement? Según el Municipal Securities Rule Making Board y su filial electrónica Electronic Municipal Market Access, el “official statement, prepared by or on behalf of a municipal issuer in connection with a new issue of municipal securities, describes the essential terms of the bonds, including whether and on what terms the bonds can be redeemed prior to maturity, the sources pledged to repay the bonds, the issuer’s covenants for the benefit of investors, and much more.”    Ya que la emisión de bonos esta fijada para el 11 de marzo, PR está  obligado a emitir este documento aunque solo tengamos una versión preliminar,

Sin embargo, la misma revela asuntos de gran importancia que el gobierno de PR no nos dice.  Aunque el documento tiene 250 páginas, en la página 5 del documento comienza la discusión de los RISK FACTORS, algunos de los cuales señalaré aquí.

Risks Related to the Commonwealth’s Financial and Fiscal Condition. Riesgos relacionados a las condiciones Financieras y Fiscales del ELA

The Commonwealth may be unable to honor its obligation to pay debt service on the Bonds. “El ELA puede que no pueda pagar el servicio de la deuda de estos bonos o su principal”   – Esta es una terrible admisión para una emisión de bonos que yo y otras personas entendemos no va a ser pagadas;

Actions by the rating agencies, such as the recent downgrades of the Commonwealth’s credit ratings to non-investment grade, could raise the Commonwealth’s cost of borrowing, which could affect the Commonwealth’s ability to borrow in the future and may have other adverse effects on the Commonwealth’s financial condition. “Las acciones por las acreditadoras de bajar la clasificación de los bonos a chatarra puede afectar el porciento de interés a pagar por el ELA, afectar su habilidad para tomar prestado en el futuro y afectar adversamente sus condiciones financieras  futuras”   – En otras palabras, vamos a pagar intereses BIEN ALTOS por esta emisión;

The Commonwealth’s liquidity has been adversely affected by recent events, and it may be unable to meet its short-term obligations. “La liquidez del ELA ha sido afectada adversamente y puede estar imposibilitado para pagar sus obligaciones de corto plazo”   – A lo que esto se refiere es que debido a los problemas económicos del ELA, el gobierno ha optado por conseguir financiamiento a través de bancos y el repago de estos préstamos es por ende más rápido;

If the Commonwealth is unable to obtain sufficient funds from this and other future debt offerings, it may not have sufficient liquidity to meet its obligations as they come due. “Si no puede obtener suficientes fondos de esta y otras emisiones futuras, el ELA puede no tener suficientes fondos para pagar sus obligaciones a medida que maduren”    – Terrible admisión en cualquier dimensión. Contrario a lo dicho por Bhatia y Perelló, el documento dice claramente que PR emitirá más deuda después de esta, aunque no sea del GO, el cual se agota “supuestamente” con esta emisión;

GDB, the principal source of short-term liquidity for the Commonwealth, has been adversely affected by recent events and it may be unable to provide necessary financing to the Commonwealth. “El GBD (Banco Gubernamental de Fomento en inglés), la fuente principal de liquidez del ELA a corto plazo, ha sido afectado negativamente por eventos recientes y puede no poder proveer el financiamiento necesario al ELA”  -Como si no lo supiéramos ya. En esencia, el GBD ha estado pagando las deudas del ELA y ahora esta descapitalizado. Esta emisión repaga esos préstamos pero no es suficiente para que el Banco este saludable.

Significant financial and fiscal challenges facing the Commonwealth’s instrumentalities may adversely affect the Commonwealth’s financial and fiscal condition. Los significativos retos financieros y fiscales que enfrentan las instrumentalidades del ELA pueden afectar sus condiciones fiscales y financieras

The Commonwealth’s very high level of debt may affect the performance of the economy and government revenues. “El alto nivel de deuda del ELA puede afectar el desempeño de la economía de PR y los recaudos del gobierno”  – Sencillo, a mayor pago de deuda, más de los recursos de la isla van a ese repago y menos a la inversión y el gasto;

If the Commonwealth’s financial condition does not improve, it may need to implement emergency measures that may include a restructuring, moratorium or other actions affecting creditors’ rights. “Si la condición financiera del ELA no mejora, puede que tenga que implementar medidas de emergencia que pueden incluir restructuración, moratoria, u otras acciones que afecten los derechos de los acreedores”   – Aquí claramente se dice que si la condición financiera del ELA, que depende mayormente de los recaudos de Hacienda, los cuales han ido bajando con respecto al 2012-2013, habrá impago que requerirá reestructuración, moratoria u otras medidas. Exactamente lo que yo he dicho múltiples veces y causó el voto explicativo de los senadores Rosa, Nieves y Fas ante la emisión de bonos. En este renglón se indica que aunque PR no es elegible al Capítulo 9 de Quiebras federal, esto podría cambiar con un cambio de la ley federal o se puede implementar legislación estatal a estos efectos. Algunas personas me indican que ley local de quiebras esta o ya terminada o por terminarse para ser radicada.

The Commonwealth may be unable to reduce its fiscal year 2014 deficit and balance its General Fund budget for fiscal year 2015. “El ELA puede no poder reducir su déficit del 2014 o balancear su presupuesto general para el 2015”  – Yep

After the issuance of the Bonds, the Commonwealth may not have sufficient capacity under constitutional debt limitations to continue financing its operations with general obligation debt. “Luego de esta emisión de bonos, el ELA puede no tener suficiente capacidad bajo la Constitución para financiar sus operaciones por deudas de obligación general”   – Yo voy más allá ya que entiendo que esta emisión probablemente se pasa del límite constitucional.

The Commonwealth may continue to pledge its good faith, credit and taxing power to guarantee bonds and notes issued by certain of its instrumentalities. “El ELA puede continuar comprometiendo la fe, crédito y poder de imponer impuesto para garantizar los bonos y notas que emiten sus instrumentalidades”   – Se citan opiniones del Secretario de Justicia a estos efectos pero todos sabemos que las mismas son, en su mayoría, acomodaticias a los intereses del gobierno de turno. Muchas no valen ni el papel en que están escritas. Me parece que no es una situación correcta legalmente pero que importa. Lo importante es que PR seguirá endeudándose.

The Constitution of Puerto Rico may be amended to increase the debt limit and allow the Commonwealth to incur additional general obligation debt. “La Constitución de PR puede ser enmendada para incurrir en deudas mayores”   – Esto es altamente probable ya que para enmendar la Constitución se necesitan 2/3 partes de ambas cámaras y el PNP no esta dispuesto a ello. Además, según las encuestas de ENDI, el Pueblo no quiere más deuda. El mismo documento indica que no hay garantías de que la Constitución se pueda enmendar.

The Commonwealth may not be able to make the necessary General Fund budget adjustments to pay interest on the Bonds. “ELA puede no hacer los ajustes necesarios en su presupuesto para pagar el interés de los bonos que se emiten”  – El documento claramente indica que parte de lo que se recibe de la emisión va a pagar el interés de los mismos. Además, indica que en este y el próximo presupuesto hay apropiaciones mínimas para su pago. Más aún, aparentemente, PR va a capitalizar el pago de intereses para comenzar a hacerlo en 1-3 años, efectivamente dejando el tostón para la próxima administración. Igualitos que Aníbal Acevedo Vilá.

If the Commonwealth is unable to obtain financing through the issuance of tax and revenue anticipation notes, it may not have sufficient resources to maintain its operations. “Si el ELA no puede obtener financiamiento a través de la emisión de notas de anticipo de recibos de impuestos, puede no tener suficientes fondos para operar”  – El ELA recibe la mayoría de su ingreso en la segunda mitad del año fiscal, i.e., enero-junio. Entre tanto, tiene momentos de falta de liquidez que se resuelven a corto plazo con la emisión de “tax and revenue anticipation notes” o sea préstamos a corto plazo garantizados con el ingreso futuro de impuestos. Este documento pone en duda si la banca local podrá seguir prestando a PR en estas circunstancias.

The Commonwealth is dependent on a small number of corporate taxpayers to generate a significant amount of the Commonwealth’s tax revenues. “El ELA depende de un número pequeño de contribuyentes corporativos que generan un número significativo de sus ingresos contributivos”  – Esto es de lapidaria importancia. Bajo el impuesto a las foráneas, cuya constitucionalidad esta en duda, PR recibió 21.6% y 19.7% en los años 2012 y 2013 de esas corporaciones. Este impuesto fue pagado por 27 grupos de contribuyentes afiliados, de los cuales 6 contribuyeron el 75% de los fondos. En tanto y en cuanto estos grupos muden o reduzcan sus operaciones, estos ingresos disminuyen o desaparecen. Además, luego del 31 de diciembre de 2017, este impuesto desaparece y reemplaza con una forma modificada de ingreso, que nadie sabe que es. Como no sabemos que será, nadie sabe si será suficiente para cubrir los gastos del ELA.

A reduction of federal grants may significantly affect the Commonwealth’s ability to provide many important services and may force the Commonwealth to allocate resources that would otherwise be used to pay debt service to the provision of such essential services. “Una reducción de recursos federales puede disminuir significativamente afectar la habilidad del ELA para proveer importantes servicios y puede forzar al ELA a redirigir recursos que se utilizarían para el pago de deuda a proveer servicios esenciales”  – Esto es claro, pero sabemos que el Gobierno tiene mucha grasa y si se hacen las cosas bien se puede evitar esto. ¿Pero cuando el Gobierno de PR hace las cosas bien?

The Commonwealth’s education costs represent a very high percentage of its budgetary expenditures, and the Commonwealth has had difficulty controlling such costs. “Los costos de educación del ELA son un alto percentage de los gastos del presupuesto y el ELA ha tenido dificultad controlando esos gastos.”  – Esto es otra cosa que todos sabemos. Sin embargo, es bueno que se señale.

The Commonwealth’s healthcare costs represent a very high percentage of its budgetary expenditures, and the Commonwealth may be unable to continue to fund such healthcare costs. “El costo de servicios de salud del ELA es un alto porciento de sus gastos de presupuesto y el ELA tal vez no pueda continuar pagando estos gastos”  – Los gastos de Mi Salud vienen de fondos no recurrentes del Gobierno Federal que expiran en el 2019. Ante esa situación, si no hay una reanudación de estos fondos, el ELA tal vez tenga que recortar sus servicios.

The Commonwealth’s retirement systems have a significant unfunded actuarial accrued liability and a very low funding ratio, and recent reforms do not address these problems. “Los fondos de retiro tienen significativas deudas actuariales que no están “funded” y un “funding ratio” bien bajo y las recientes reformas no manejaron estos problemas”  – Contrario a los reclamos de Bhatia y García Padilla, no se salvaron los retiros con las reformas que se hicieron. El documento señala que una porción significativa del presupuesto es el pago a los fondos de retiro y si tiene que contribuir más, habrá menos dinero para el servicio de la deuda.

The constitutionality of the Teachers Retirement System reform has been challenged and the reform could be declared unconstitutional by the Puerto Rico Supreme Court. “La Constitucionalidad de la reforma del Retiro de Maestros has sido cuestionada y la reforma puede ser declarada inconstitucional por el Tribunal Supremo de Puerto Rico”  – Esto es claro y ahora mismo, con el Juez Feliberti, que proveyó un critico 5to voto al caso del Retiro de los Empleados del ELA y el retiro del Juez Presidente, otro voto favorable, pautado para el 12 de abril, la posible votación basada en el último caso puede ser 4-3 en contra de la Constitucionalidad de la medida. Sin embargo, mis fuentes me indican que hay medidas que traerían $400 millones más al retiro sin la reforma. Veremos que pasa.

Risks Related to the Commonwealth’s Economy. Riesgos relacionados a la economía del ELA

 The Commonwealth’s economy has been contracting and, absent future real growth, may be unable to sustain the Commonwealth’s outstanding debt. “La economía del ELA ha estado en contracción y asunte crecimiento future real, puede no poder sostener la deuda del ELA”  –  Todos sabemos esto y el documento menciona que si esto sigue, el ELA puede tener que tomar medidas drásticas.

If the population of the Commonwealth continues to decline, the Commonwealth’s economy will be adversely affected and may not produce sufficient tax revenues to sustain the Commonwealth’s outstanding debt. “Si la población del ELA continua bajando, su economía se verá afectada adversamente y podría no producir suficientes ingresos por impuestos para sostener la deuda del ELA”  – Esto también es harto conocido y no parece haber manera de pararlo.

The Commonwealth’s macroeconomic data may not accurately reflect the performance of the economy of Puerto Rico. “La data macroeconómica reciente puede que no refleje correctamente el desempeño de la economía de Puerto Rico”  – Recientemente la Junta de Planificación admitió que su data puede estar equivocada y que el crecimiento de la economía de PR puede ser mayor o menor. Otro fracaso total del Estado Libre Asociado.

Risks Related to the Bonds. Riesgos relacionados a los bonos

 Bondholders may face delays enforcing their remedies under the Bonds, and the availability of some remedies is not certain. “Los bonistas puede encontrar retrasos en implementar sus remedios bajo los bonos y la disponibilidad de algunos remedios no es seguro”   – Esto se refiere a lo provisto por el Artículo VI, secciones 2 y 8 y los retrasos usuales en los Tribunales. No hay mención en esta sección de la renuncia del ELA a su soberanía bajo la 11ava Enmienda Federal ni a su sumisión a los Tribunales de Manhattan.

There is no collateral securing the Bonds, and the Bonds cannot be accelerated upon a default. No hay colateral asegurando los bonos y estos no pueden ser acelerados en caso de impago- Creo que las implicaciones son obvias

Holders of the Commonwealth’s general obligation debt may not attach the Commonwealth’s property. “Los tenedores de bonos de obligación general no pueden embargar propiedad del ELA”  – La Constitución del ELA establece que los fondos públicos solo se pueden usar para usos públicos y por lo tanto no se pueden embargar. En esta emisión el ELA no renunció a esta protección, aunque creo que no podría aún si quisiera.

Although the Bond Resolution provides that the laws of the State of New York apply to the Bonds and the Commonwealth consents to any action or proceeding arising out of the Bonds or the Bond Resolution being brought in New York state and federal courts located in Manhattan, any such court may decline to hear suit if it concludes that other applicable law prevents it from hearing the suit. “Aunque el “Bond Resolution” establece que las leyes del estado de New York aplican a los bonos y que el ELA consciente a que cualquier acción o procedimiento que deriva de los bonos o el “Bond Resolution” sea presentado en los Tribunales federales o estatales de Manhattan, cualquiera de esas cortes puede negarse a ejercer sus jurisdicción”  – Esto lo que quiere decir es que aún si se radican casos en Tribunales Federales o estatales de NY, estos, por múltiples razones de abstención, jurisdicción limitada, etc. Ver, por ejemplo esta entrada a este blog 

Although the Bond Resolution provides that the laws of the State of New York apply to the Bonds, it is unclear how a court would apply New York law in the context of the Bonds and to what extent a judgment from a New York court may be enforced in Puerto Rico. “Aunque el “Bond Resolution” provee para la aplicación de la ley de New York a los bonos, no es claro como una corte en New York la aplicaría en el contexto de los Bonos y si cualquier sentencia de New York podría ser ejecutable en Puerto Rico”   – Esto lo que quiere decir es que no hay decisiones en NY sobre la aplicación de la ley de ese estado a una emisión de bonos de PR. Lo segundo es sobre el full faith and credit que se le daría a cualquier sentencia de NY en PR. A la verdad no entiendo la duda cuando la jurisprudencia es clara que casi la única defensa contra ello es falta de jurisdicción, ver,   Treinies v. Sunshine Mining Co., 308 U.S. 66 (1939).

A purchase of the Bonds is suitable only for purchasers that can bear the risks associated with the potential limited liquidity and price declines of the Bonds. “La compra de esto bonos es solo para aquellos que pueden que puedan asumir los riegos asociados con la potencial falta de liquidez y baja de los precios de los bonos”  – En arroz y habichuelas, no hay garantías de si quieres vender estos bonos, no tengas pérdidas. Ya que creo que va a haber impago, esto es bien importante.

The Commonwealth has not complied with its continuing disclosure obligations on a timely basis, and failure to comply may limit the Commonwealth’s access to the capital markets. “El ELA no ha cumplido con su deber continuo de revelar en tiempo razonable y este incumplimiento puede limitar el acceso del ELA a los mercados de capital”  – Esto es bastante obvio, incluyendo los estados financieros consolidados auditados para el 2013 que se suponía salieran en septiembre de 2013.

The Commonwealth’s former auditors have not been engaged to perform any procedures on the Commonwealth’s Annual Financial Report, which is incorporated by reference into this Official Statement. “Los ex-auditores del ELA no se les ha pedido que hagan nada relacionado a su Estado Financiero Anual, que es incorporado por referencia en este “Official Statement” ”  – Para efectos de una emisión de bonos, esto le hubiese dado continuidad y solidez a la emisión. Pero al Gobierno “le vale”.

A lo que dice este informe, hay que añadir información que salió hoy en Barron’s  sobre la emisión. La misma será con madurez de 21 años y vida promedio de 17 años, ya que PR retirará parte de la deuda antes de su madurez (sinking fund). Tendrá un interés de 9% o cerca de ese número. No debemos celebrar mucho que sea más bajo de lo esperado ya que mientras menos años para pagar, menos interés. Además, a 9%, PR estaría pagando $270 millones al año en intereses.  Veremos que pasa la semana entrante.

Response to Ms. Cate Long Regarding Mr. Felix Salmon’s Article

Mr. Felix Salmon from Reuters has come up with a very interesting and thought provoking piece on PR defaulting on its bonds. The gist of his piece is “The point here is that the concept of seniority doesn’t really make a lot of sense when you’re not operating in the context of a formal bankruptcy regime.” Obviously, he is referring to the seniority of the new $3.5 billion issue but more information is required to really understand the situation.

PR’s debts are owed by the Commonwealth of Puerto Rico (Estado Libre Asociado in Spanish), the different public corporations, some of which can invoke 11th Amendment protection and some that cannot and the Municipalities. As such, none of these debts has any seniority, EXCEPT the following: General Obligation bonds issued pursuant to Article VI, sec. 2 of the Commonwealth’s Constitution  These bonds, however, are only around $16.233 billion of the $70 billion owed by the island. See slide 56 of the GBD’s presentation to bondholders of October 15, 2013  They are senior debt because the Constitution states that they must be paid BEFORE any other debt, which includes other bonds, guarantees and even salaries. The Constitution also provides a cause of action to bondholders to sue in the PR Treasury Secretary for payment. Hence, it is clearly a first lien. Hence, there is some seniority in GO bonds if PR law applies. Doubt there will be one in New York. The type of waiver of sovereignty contemplated by the PR Legislature is not exclusive jurisdiction in New York Courts but rather a concurrent jurisdiction with any other court with jurisdiction, i.e., PR Commonwealth Courts or the United States District Court for the District of Puerto Rico. Why is this important? Simple, if PR believes it is close to default it can file in the Commonwealth Courts a suit for declaratory judgment in order to determine if the waiver is valid, if PR law or New York law is applicable to the emission, etc. Knowing PR courts, it will be years before bondholders get their money back. Moreover, don’t count on the Puerto Rico Federal District Court for help. Given the issues I have mentioned, abstention via Railroad Commission v. Pullman Co., 312 U.S. 496 (1941); Burford v. Sun Oil Co., 319 U.S. 315 (1943) or Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25 (1959), sending any removal back to Commonwealth Courts. Of course, that would require footwork Governor García Padilla, himself a lawyer, has never shown.

I concur with Mr. Salmon that any debt adjustment will be cumbersome without bankruptcy law, but since the Bankruptcy Code cannot protect PR or its public corporations or municipalities, the local legislature could write its own version of Chapter 9 and liquidation procedures. Bondholders will cry foul but modernly, states are given leeway to alter contractual obligations. See, United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011); Trinidad v. ELA, 2013 TSPR 73 and Domínguez Castro et al. v. E.L.A. I, 178 D.P.R. 1 (2010), cert denied, Domínguez Castro v. Puerto Rico, 131 S. Ct. 152  (2010).

I believe it would be best if PR would not take this loan, admit it cannot pay what it owes and negotiate some type of amnesty or debt reduction but since this government wants to be reelected, it will not happen this year. A final note, as I am writing, the press reports there is great reluctance from the PR House of Representatives on approving the limited waiver of immunity the Senate approved, even when it had done so before. Will keep you posted.