OppenheimerFunds Threatens Suit over Puerto Rico Restructuring Plans

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Puerto Rico faces a fight from one of its biggest bondholders as it seeks to reduce debt service payments for several years.

OppenheimerFunds Rochester announced Tuesday its intention to defend the bond promises in a press release. When Puerto Rico introduced a bankruptcy measure for its public corporations in the summer of 2014, the firm along with Franklin Funds successfully sued to have it overturned. Puerto Rico appealed this case to a higher court, where it is still being considered.

Gov. Alejandro García Padilla on Monday said he'd created a Working Group for the Economic Recovery of Puerto Rico, led by Chief of Staff Victor Suárez, Government Development Bank President Melba Acosta, Secretary of Justice César Miranda, and the Presidents of the Senate and House, Eduardo Bhatia and Jaime Perell-. The group will begin conversations to achieve a consensus on the restructuring of Puerto Rico's public debt.

"The ultimate goal is a negotiated moratorium with bondholders to postpone debt payments a number of years, so that the money can be invested here in Puerto Rico." García Padilla said in a speech, delivered in Spanish.

The official English translation didn't include the word moratorium. According to a staff member in the governor's office, Acosta said Tuesday morning that the government was not seeking a complete moratorium on debt payments.

In the next week or two Acosta will be meeting with bondholders and people in the bond industry in New York City and Washington, D.C. to discuss restructuring of the bonds, the staff member said. Acosta is still trying to figure out "how to approach" different groups of Puerto Rico bondholders.

While there is about $72 billion of total outstanding Puerto Rico public sector debt, it remains to be seen how much of this the governor and his administration wants, or is practically able, to negotiate. Some of the debt is held by completely independent cities. Other debt is held by largely independent public corporations. As for the commonwealth government's debt proper, there is no bankruptcy process for the governor to try to use.

García Padilla spoke in the aftermath of a report issued by economic consultants on Monday, "Puerto Rico — A Way Forward," that said that the commonwealth government could not pay all of its debt even if it took strong measures to cut spending and increase revenues.

"All the measures we have taken in the last two years reflect our willingness to pay and, had we not taken them, we would not be in a position today to request restructuring," the governor said. "We have done all that was within our power, but, as the report makes clear, the next step must be to ensure more favorable terms for the repayment of our debt."

On Monday, before the governor's speech, but after he made his support for restructuring known, Natalie Cohen, managing director of Wells Fargo Securities, said, "I agree that Puerto Rico's current trajectory is unsustainable and lack of immediate action will only make their situation more painful to resolve. I thought the ['Puerto Rico — A Way Forward'] report was balanced and shows that without action, there is a financing gap of $3.7 billion in 2016, growing substantially in future years as Affordable Care Act reductions and loss of Act 154 benefits disappear (about 20% of General Fund revenues)." Act 154 is a tax on foreign corporations in Puerto Rico and accounting changes are expected to cut this line of revenue in coming years.

In a response to the governor's speech, Senate Pres. Eduardo Bhatia said, "I have long anticipated this moment. Restructuring the debt has always been the right way but it is not an easy road. I constantly referred to the 3 Rs: reducing costs, increasing revenues, and restructuring the debt."

 

On Tuesday morning, Standard & Poor's downgraded Puerto Rico's GO debt to CCC-minus from CCC-plus, citing the commonwealth government's diminished liquidity, constrained market access, and embrace of a report endorsing debt restructuring. S&P also downgraded a variety of other Puerto Rico government and authority securities to CCC-minus. The outlook is negative.

OppenheimerFunds, one of the largest holders of Puerto Rico public sector bonds, responded to the governor's plans Tuesday with a statement that said, "OppenheimerFunds Rochester and other creditors have offered Governor Alejandro García Padilla and Puerto Rico numerous creative and viable solutions to the current fiscal situation facing the island's public power authority. We strongly believe the commonwealth has the ability to provide essential services to its citizens, grow the economy and repay what bondholders are due. We are disheartened that Gov. García Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds."

OppenheimerFunds continued, "We expect Puerto Rico to act within the tenets of the law, including the commonwealth's constitution, and are ready to defend the previously agreed to terms in each and every bond indenture."

Cumberland Advisors managing director John Mousseau said he thought it was important that the island's general obligation debt not be touched. This was because, first, Puerto Rico had said the GO debt was sacrosanct and, second, if Puerto Rico defaults on its GO debt this may lead foreign investors in United States federal debt to question investments in things like Sallie Mae and even the federal government itself. They may lighten their holdings of this debt, he said.

In his Monday night speech García Padilla said that "Puerto Rico — A Way Forward" was the first thorough analysis and projection of the commonwealth's fiscal situation for 10 coming years. The report paints a "harsh reality" in which the public debt would be "unpayable" unless it is cut, he said.

"The past administration could deal with these problems by sweeping them under the rug, leaving the solutions for later, and taking out more loans," the governor said. "Now, it is time to face these problems and solve them once and for all…. As the report states, even if we increased taxes and cut back spending, the magnitude of the problem is such because of the weight of the debt we carry, that it would solve nothing."

"It is time that those who lent to us also come to the table of sacrifices, at which we are already seated, so that later we can all together share the fruits of those sacrifices," he said.

García Padilla didn't endorse all of the report's recommendations. He said he rejected its call for either eliminating the minimum wage on the island or cutting it by two thirds. Cutting the minimum wage is a "nonstarter" politically, said Advantage Business Consulting president Vicente Feliciano.

However, the governor agreed with the report's calls for local legislation to make Puerto Rico more economically competitive and said he would seek changes to the federal welfare system to improve the island's economy.

According to the governor, the Working Group formed this week will create a long-term fiscal agenda by Aug. 30 aimed at:

"Establishing the parameters for a five-year fiscal plan; proposing additional cuts in spending — including cuts in some services — to avoid an increase in taxes; restructuring the Department of Treasury to increase the efficiency of income gathering; promoting alliances with the private sector to provide some of the services that are today provided by the public sector, such as the successful projects like the Moscoso Bridge, the airport, and the highway to Arecibo; radically changing the way in which we work with government finances and economic statistics, to establish greater transparency and credibility; guaranteeing our citizens' essential services and our pensioners a just income; [and] creating a fiscal board which, outside political considerations, will guarantee the continuity and honor of the commitments agreed upon by us during the restructuring process.

"This board must carry out its responsibilities in an uninterrupted fashion and outside of electoral cycles."

Finally, the governor said he would seek passage in Washington of Chapter 9 eligibility for Puerto Rico's public corporations, a more equitable distribution of Medicare payments, and the end of the Jones Act, which increases costs of shipping to and from the island.

In other Puerto Rico news, Reuters reported Tuesday that the government planned to make its full $645 million GO bond payment on Wednesday.

The deadline for Puerto Rico to approve a budget is 11:59 p.m. Tuesday. In the last few days the Senate and House of Representative versions were reconciled. As of 5:30 p.m. Tuesday it was waiting for the governor's signature, according to a House staff person.

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