Allowing Puerto Rico to restructure its guaranteed debt would have major repercussions for other states, according to attorney Andrew Rosenberg.
The Paul, Weiss, Rifkind, Wharton & Garrison partner made the comments at a seminar in New York Thursday sponsored by EMTA, an emerging market trade association.
If the U.S. government were to pass a law to allow Puerto Rico to restructure all of its debt, as the U.S. Treasury Department has advocated, there would be a "huge contagion risk," Rosenberg said. Illinois and New Jersey could quickly follow to ask for similar laws, he said.
If a law were to pass for Puerto Rico, borrowing costs for Illinois and New Jersey and other distressed states would go up, as investors saw greater risk of debt restructuring. And these increased borrowing costs could hurt the states' finances.
There would be U.S. constitutional issues with any legislation aimed at just giving Puerto Rico the right to restructure its debt, Rosenberg said. He cited the constitution's bankruptcy uniformity clause and the takings clause.
Finally, there would be practical problems in introducing a generalized bankruptcy law for Puerto Rico as evidenced in the history of the introduction of a U.S. municipal bankruptcy law in the 1930s. It took two years and two Supreme Court cases to bring about the prevailing municipal bankruptcy law.
Hector Negroni, co-chief executive officer at Fundamental Advisors, agreed that if Puerto Rico were allowed to break its general obligation pledge, than all United States GO credits would be questioned. The Obama administration's quest for Puerto Rico to be given the right to restructure its GO bonds is a "very destabilizing framework for the commonwealth and the administration to pursue."
United States government action has already slowed Puerto Rico's work to negotiate with its bondholders and take needed actions, said Gibson, Dunn and Crutcher partner Matthew McGill. For example, he said, when the U.S. Supreme Court agreed to hear a case concerning the legality of Puerto Rico's Debt Enforcement and Recovery Act (a bankruptcy law for its public corporations), Puerto Rico's legislature chose to slow its movement towards adopting a law sought by Puerto Rico Electric Power Authority creditors.
On a different topic, Rosenberg discussed legal issues over whether Puerto Rico's constitution allows the pledges of some sales and use tax revenues to the Puerto Rico Sales Tax Finance Corp. (COFINA).
Puerto Rico Commonwealth has about $ 18.1 billion of GO and guaranteed debt outstanding, according sources in Puerto Rico and information from JP Morgan. COFINA has about $15.2 billion.
