Lew Steps Up Pressure for Quick PROMESA Passage

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WASHINGTON – Treasury Secretary Jack Lew added to the pressure for quick passage of a Puerto Rico rescue bill in a letter to the Senate leadership on Monday, even as some public finance professionals maintained the bill is unnecessary and could be harmful for the commonwealth.

Lew sent his letter to Senate Majority Leader Mitch McConnell, R-Ky., and Senate Minority Leader Harry Reid, D-Nev., saying the Senate "should take up the matter immediately" before "a critical deadline Puerto Rico's leadership has publicly highlighted for months."

The commonwealth has a roughly $2 billion debt payment due Friday, about $800 million of which is on constitutionally backed general obligation bond debt. Puerto Rico Gov. Alejandro Garcia Padilla has made clear the territory will default on the payment, which would lead to creditor lawsuits seeking repayment. If the lawsuits are successful, a judge could immediately order the commonwealth to use its funds to pay for debt instead of essential services like health, education, and public safety, something the governor has resisted.

The House bill, called PROMESA, contains a provision that would put a moratorium on creditor lawsuits that were filed between December of last year and the date the bill is enacted. However, Lew said if Congress pushes the date of enactment past July 1, the possibility is left open for a court order forcing payment of the debt.

"Even a retroactive stay on litigation passed by Congress a few days later would not reverse such a court order," Lew wrote. "Creditors are hoping to gain the protection of legal judgments as quickly as possible, and this could impair Puerto Rico's chances of getting on a path to stability and eventual growth."

PROMESA additionally would create a seven-member oversight board that would have the power to require balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of the commonwealth and its entities.

The bill would have to pass the Senate without any amendments to have a chance to be enacted before creditors would have time to sue. Any amendments would have to wait for House consideration, which couldn't come until that body returns from a recess on July 5.

Some Democratic senators have said they would like the opportunity to offer amendments, and Reid said last week that some of his colleagues were seriously concerned about the bill. Sen. Bob Menendez, D-N.J., has said, among other things, he would like to see the Puerto Rican government have more of a say in who sits on the oversight board.

Menendez and others have not ruled out trying to delay the bill to allow for more time for consideration, according to media reports. There have also been reports that McConnell may push the PROMESA vote in the Senate as late in the week as possible to limit the time senators have to amend it.

Some public finance professionals like Richard Sigal, counsel with Fox Rothschild in New York, still maintain the commonwealth would be better off abandoning the legislation and solely working toward restructuring within the public finance market.

Sigal's background with restructuring began when he was retained to help construct a remedy for New York City's fiscal problems in the 1970s. His work resulted in Municipal Assistance Corp. debt and gave him experience with restructuring when union and bond creditors concerns were at play, as they are in Puerto Rico, where unfunded pension liabilities are about $46 billion. He also served as bond counsel for Puerto Rico's 2006 COFINA debt, which securitized sales tax, and was underwriter's counsel for a proposed transaction that would have securitized Puerto Rico's additional petroleum tax in 2014.

"The market is and was and always will be the best discipline of the structure of a municipal entity" even if it may be a bit messy or not as quick as some would like, Sigal said.

"I'm old school and old school is still good school," he added. "The good school has been completely missed in this deal."

He said that if the Senate were to pass PROMESA and its provisions were to become effective immediately, it is hard for him to understand how Puerto Rico would ever be back in the municipal market again, unless it had Treasury enhancement. Additionally, he said there is still doubt about the accuracy of the fiscal facts that Puerto Rico and the administration have been working with because there haven't been independent audits done.

Instead, Sigal suggests that Puerto Rico either abandon the congressional solution or include a provision that would delay its implementation until one year after passage, with implementation then contingent on the governor and legislature requesting it. That timeline would rely on creditors accepting a standstill agreement with Puerto Rico that would give the territory temporary relief from some payments. The arrangement would allow either of the two candidates for governor, both of whom oppose PROMESA, to try to work through the problem themselves using the public finance market and without federal intervention, according to Sigal.

"Based on my expertise and understanding of how to structure the resources of Puerto Rico and given a standstill agreement … I am confident that the public finance market will be there to cover this liquidity crisis and restore [Puerto Rico's] credit," Sigal said. "The commonwealth is not insolvent and it is a charade to act like it is when debt holders have offered the leeway on debt payments to cover essential services."

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