Municipal bankruptcy expert James Spiotto warned a House committee this week that allowing Puerto Rico to cancel its unsecured debt would lead to higher borrowing costs in the future that would hinder its future economic recovery.
Another warning against debt cancellation also came from the attorney representing 23,000 members of the Service Employees International Union who work in the territory’s schools and hospitals.
Both were among the witnesses who spoke to the House Natural Resources Committee on Wednesday regarding possible amendments to the 2016 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).
Oversight Board Executive Director Natalie Jaresko also advised against debt cancellation at Natural Resources Committee hearing last week.
The 2016 law created an Oversight Board to restructure the territory’s debt, but critics who have highlighted perceived shortcomings in the law and want Congress to enact amendments.
“Democrats would have written a different law if we were in the majority,” Natural Resources Committee Chairman Raul Grijalva, D-Ariz., said last week at an earlier hearing on the possible amendments.
But any changes to PROMESA will require broad bipartisan support in the House because the Senate is not expected to write its own legislation.
Democratic Rep. Darren Soto of Florida said he is hoping a bipartisan agreement can be reached.
“I think the committee is very open-minded about what to do,” Soto told reporters Wednesday. “I think it’s more likely if we can get a bipartisan bill coming out of the House, that we can get something done.”
But the committee’s ranking Republican, Rep. Rob Bishop of Utah, made it clear that a draft provision allowing for cancellation of unsecured debt is a non-starter.
“The proposed amendments that have been floated around here are not going anywhere,” Bishop said at Wednesday's hearing. “If they are passed in the House, which I consider kind of iffy... they will never be discussed in the Senate and they will never be signed by the president.”
Spiotto, managing director of Chapman Strategic Advisors, told lawmakers that replacing debt restructuring with debt cancellation has no rationale or justification.
“What is important is not the elimination of debt, but the adjustment to what is sustainable and affordable,” Spiotto said.
The mean haircut in 180 recent sovereign debt restructurings was 38%, Spiotto said.
“Why is that important?,” he said. “Because Puerto Rico will need to go back to the market to borrow money for its infrastructure and other government services.”
The experience of Greece, Argentina, Brazil, Peru and others that canceled their debt was that they ended up paying more in the end. “At least 2% more per annum which equals on a 20-year bond at maturity on a 5% discount, 25% of the additional amount goes to additional interest,” he said.
Alvin Velazquez, associate general counsel for SEIU, offered another perspective on the inadvisability of canceling unsecured debt.
He told the story of Ramon Ortiz Carro, the founder of Unitech Engineering Group, who is owed $11 million for a public housing project he and his partners built 11 years ago.
“Mr. Ortiz was a proud employer, but has now had to let go of all 125 of his staff,” said Velazquez.
Unsecured creditors are currently scheduled to only receive 1.8 cents on the dollar while pre-2012 General Obligation bondholders are in line for a baseline recovery of 64% that could go as high as 89.4%, Velazquez said.
He noted that one of the chants that demonstrators used last summer when former Gov. Ricardo Rossello was under pressure to resign, translates in English as, “to clean out the filth you have to do an audit.”
The people of Puerto Rico want a truly independent audit of the debt, the SEIU attorney Velazquez said.
Jaresko last week told lawmakers that an audit is not needed because of the financial review completed last year by the international law firm, Kobre & Kim.
Velazquez said there have been productive results of the Kobre & Kim report, but it wasn’t an independent audit.
“They were not acting independently,” he said. “Quite the opposite. Legal ethics bound Kobre and Kim to zealously represent their client's interests, meaning the interests of the Oversight Board.”
