Treasury Official’s Speech Draws Ire From Assured Guaranty’s CEO

WASHINGTON – Assured Guaranty's chief executive officer is blasting the Treasury Department for pushing for bankruptcy protection for Puerto Rico, claiming the effort is blowing up utility authority negotiations with creditors and bondholders, as well as hurting the territory and alarming the municipal bond market.

The "open letter" by Assured president and CEO Dominic Frederico singles out Antonio Weiss, counselor to Treasury Secretary Jack Lew, for his Dec. 9 remarks to the Peterson Institute, complaining he is making "incorrect" statements and "polictiz[ing] the issue with the spector of a congressional bailout funded by the U.S. taxpayer."

"The destruction that could be caused by your misdirected efforts, could forever impact the financing capabilities and the financial stability of Puerto Rico, its citizens, and potentially the $3 trillion municipal market," Frederico said in the letter to Weiss.

Treasury officials declined to comment on the letter.

Assured Guaranty had about $5.1 billion of net par exposure to Puerto Rico and $12.4 billion in total claims-paying resources as of Sept. 30, the latest available information from the insurer.

Frederico was responding to Weiss' comments about the need for congressional action on Treasury's four-part plan to help Puerto Rico. The plan includes expanding Chapter 9 bankruptcy protection to the entire commonwealth, not just its public authorities as others have suggested, in return for the creation of a federal oversight body. It also seeks action by Congress to reform Puerto Rico's access to federal healthcare programs and extend the Earned Income Tax Credit, as well as provide funding to update and modernize the commonwealth's antiquated accounting and disclosure practices.

Puerto Rico is currently struggling with about $72 billion in debt and its government has already implemented claw back procedures to divert revenues from some lower priority bonds in order to make payments on its constitutionally backed general obligation bonds.

At the same time, the U.S. Supreme Court agreed earlier this month to review a local law that would give the island's public authorities access to bankruptcy-like restructuring capabilities. Two lower courts ruled the law is pre-empted by federal bankruptcy law but Puerto Rico appealed to the high court. The commonwealth, whose public authorities are not granted Chapter 9 protections under federal law, is arguing that it should not be left out of the federal law but also have the same federal law prevent it from trying to fix the exemption.

Frederico said the portion of the Treasury plan that calls for a federal restructuring regime through Chapter 9 is advocating for a retroactive change in law that would be unfair to investors.

"Had Puerto Rico been eligible to file under Chapter 9 at the time these bonds were issued, investors would have priced that risk into the bonds, and Puerto Rico would have had to pay higher interest rates," he said. "There is no justification for initiatives that would retroactively undermine the Puerto Rican constitution and the legal right and remedies that were the basis on which bondholders agreed to provide financing for the island's development."

The plan also conveniently ignores the large number of bondholders "who will be unlawfully and materially damaged through a failure by Puerto Rico to put its obligations above its short term political motivations," he said.

Some U.S. states, he warned, "might demand the same rights to impair obligations that are proposed for Puerto Rico, further harming the other states that have taken responsible steps to manage their fiscal affairs."

Weiss used creditor negotiations with the Puerto Rico Electric Power Authority, which have gone on for about 18 months, as a cautionary tale in his speech and a reason why the commonwealth needs access to a bankruptcy regime to bring creditors to the table.

The characterization of PREPA's creditors being the reason for a lack of an agreement is unfair to the ad-hoc group of bondholders that have been negotiating with PREPA in good faith since 2014, Frederico said.

"Not only is PREPA not a cautionary tale, but the real cautionary truth is that Chapter 9 is messy, expensive and unpredictable," he said, citing the roughly $180 million in bankruptcy professionals' fees Detroit had to pay during its bankruptcy. "To portray any creditors as 'unyielding' in order to help the Puerto Rico governor gain support for a destructive super Chapter 9 tool is inaccurate and counterproductive," he said.

Frederico claimed that by Nov. 25, a "framework business agreement" had been approved by the two primarily monolines and officials and advisors of the Puerto Rico Electric Power Authority and Government Development Bank. "The agreement included commitments for additional financing from monoline creditors, increasing PREPA's liquidity and putting it on a path towards modernization and efficiency," he said.

But during the Dec. 1 Senate Judiciary Committee hearing, PREPA and the commonwealth "declined to acknowledge this concrete progress," Frederico said, adding, "As a direct result, we believe, of these sustained hopes for bankruptcy in Puerto Rico, PREPA and GDB representatives have since re-opened negotiation on what they had previously labeled as a 'Final' term sheet agreement."

PREPA officials declined to comment on the letter.

Republican members of Congress have said they would like to see more financial information from Puerto Rico, which has not produced an audited financial report for the past two years, before moving forward on legislation to aid the commonwealth. Weiss called the need for such information before helping a "myth" and said "even without fiscal year 2014 audited financials, the magnitude of Puerto Rico's problems, and the need for action, are clear."

Frederico responded in his letter by arguing the financials are important, especially after Gov. Alejandro García Padilla has made comments in the past that Puerto Rico has a history of hiding information to look more attractive to the market.

"Puerto Rico must be discouraged from failing to consummate negotiations in the vain hope that a Congressional bailout will provide the island with a simple tool to cram down losses on investors, including many 'main street' investors that have pledged a long-term investment in Puerto Rico and the future of its people," he said.



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