Bond holders and analysts criticized Puerto Rico's proposed debt payment moratorium as the House of Representatives in San Juan weighed the plan, saying it would bog down the territory in constitutional challenges.
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For government guaranteed debt, the government would pay interest if it were due prior to July 1. After that date it would be paid according to the governor's decision. After July 1 the government would not pay any principal.
For non-guaranteed debt, there would be no principal payments made during the moratorium, unless the funds are already held by the trustee. The interest may or may not be paid, at the discretion of the governor.
In addition, the measure says all debt payments due during the moratorium but not paid would be paid at the end of the moratorium.
Chapman Strategic Advisors managing director Jim Spiotto said the bill, if passed, could face multiple lawsuits.
Article VI, section 8 of Puerto Rico's constitution reads, "In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid, and other disbursements shall thereafter be made in accordance with the order of priorities established by law." This passage has generally been interpreted to apply to the commonwealth's general obligation and guaranteed debt.
With regards to a debt payment moratorium, it is helpful to consider the experience of New York City in the mid-1970s, Spiotto said. In 1975 the city declared a moratorium on its debt payments. About two years later a state court found the moratorium invalid based on the state constitution.
It is unclear how long it would take for courts to rule on any challenge to Puerto Rico's moratorium, Spiotto said.
While a debt moratorium is "half the loaf." Puerto Rico needs it in the context of a federally-appointed control board and a comprehensive Congressional plan for helping Puerto Rico.
Puerto Rico's attempt to pass a debt payment moratorium "underscores [to Congress] the need to get something done sooner rather than later," Spiotto said.
Puerto Rico's nonvoting representative in Congress Pedro Pierluisi released a statement that denounced the Puerto Rico Senate's vote as being against Puerto Rico's constitution. "This legislation will only result in the filing of costly litigation against Puerto Rico and will eliminate opportunities to negotiate in good faith with our creditors," he said.
Pierluisi is a leader of the New Progressive Party in Puerto Rico, which advocates statehood for Puerto Rico. He is running to be the NPP's nominee in the island's November gubernatorial election.
"It is no coincidence that the governor has abruptly sought overnight adoption of debt moratorium legislation at the very moment large general obligation bondholders were arriving on the island to pursue a consensual restructuring deal with Puerto Rico's political leaders, other than the governor," said Andy Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison LLP, an advisor to the Ad Hoc group of Puerto Rico's General Obligation bondholders. "The governor has spent the last nine months rebuffing all overtures by the GO holders. In fact, the consensual deal that is being proposed by GO holders would give Puerto Rico additional liquidity by, among other things, deferring substantial principal payments. Most importantly, this consensual deal avoids a July 1 default on constitutional debt."
The bill seeks to "modernize" the receivership provisions for the Government Development Bank for Puerto Rico, which is undergoing a financial crisis. It would be up to the governor rather than one of Puerto Rico's judges to decide whether to appoint a receiver for the GDB.
The bill would open the door to the creation of a “bridge bank” during an emergency period to handle the GDB’s loans that remain strong.
If the GDB were to fail, "it would be extremely difficult, if not impossible, for a single court to sort out the demands of all the creditors and bondholders, and there is no practical way to coordinate among all of the federal and local regulators responsible for overseeing all of GDB's businesses," said REOF Capital managing director Antonio Fern-s Sagebién. "The size and scope of GDB's businesses and the existing stress on the Puerto Rico economy would have made the consequences of GDB's failure catastrophic, stressing the need for quick effective actions, especially in the current context of the absence of a resolution authority."
The bill would create an authority to oversee the restructuring of all of Puerto Rico's debt.
The bill says the legal justification of its actions are based on what it claims is the government's responsibility to look out for the lives, health and welfare of Puerto Ricans.
Puerto Rico's House was debating the debt payment moratorium after the Senate approved it 19 to 6 in a 2:50 a.m. vote. As of 2:30 p.m. Tuesday the Puerto Rico House was still considering the measure.
According to Municipal Market Data senior market strategist Daniel Berger, Puerto Rico general obligation debt has been trending weaker on the secondary market since March 23. On that date Puerto Rico 8s maturing in 2035 had an average price of 71.47 cents on the dollar. As of 2:15 p.m. on Tuesday they were pricing at 66.05 cents on the dollar.
