Court decision may lead to friendlier Puerto Rico Oversight Board

Puerto Rico bondholders may gain an Oversight Board more sympathetic to their interests after a federal court decision altering the method of approving board members and requiring their replacement within 90 days.

Triet Nguyen, managing partner at Axios Advisors, said the current board could be replaced by mid-May, though the court’s 90-day period might be extended for appeals.

nguyen-triet-newoak-larger

“We believe this sets the stage for a Republican-led effort to replace the entire board when its members' term ends in August,” said Nguyen. “To the extent that the current board has been quite creditor-unfriendly, as evidenced by its support for an overly pessimistic fiscal plan, one can only hope a new board will be more respectful of creditors' rights or at least will adhere more closely to PROMESA's original intent.

“Of course, there is always a chance that the existing board members will try to use the remainder of their terms to advance their agenda, but that's not likely in our opinion. Of course, the ruling will probably end up in front of the U.S. Supreme Court upon appeal,” Nguyen continued.

On Friday the U.S. Court of Appeals for the First Circuit ruled that presidential appointments to Puerto Rico's Financial Oversight and Management Board are subject to the Appointments Clause of the Constitution. This says the U.S. Senate must approve presidential appointments of powerful federal officials.

The ruling did not overturn any of the board’s past actions and gave 90 days for the board to be reconstituted.

President Donald Trump could nominate all seven current members to continue serving at least through the end of their current term which ends in late August. He could choose an entirely different slate of members to serve for three years. Or he could follow a combination of these approaches.

In his Control Board Watch blog Puerto Rico Attorney John Mudd said Trump would have a hard time getting the Senate to approve the same members. “This may mean more debt payment … more intervention with the Puerto Rico government.”

In the U.S. Senate, “Only 51 votes are needed for the new members,” and Republicans have 53, Mudd said. “In any event, I don’t see a filibuster unless a candidate is someone extreme.”

BTIG bond insurer analysts Mark Palmer and Giuliano Bologna said in a written research piece, “We believe it would be difficult for the board’s current members to be confirmed by the Republican-controlled Senate.”

“While we view the ruling as a positive for Assured Guaranty, Ambac Assurance, and MBIA [which have exposure to Puerto Rico bonds], we also acknowledge a few caveats.” One caveat Palmer and Bologna pointed to was that there will likely be an appeal to the Supreme Court of the U.S. If heard, the high court would likely confirm the circuit court’s opinion, they said.

Their second caveat was Trump’s statement in the weeks following Hurricane Maria in September 2017 that Puerto Rico’s debt would have to be wiped out. The president’s attitude would be counterbalanced by the need for the nominees to be palatable to the Senate’s Republican majority, they said.

Kent Hiteshew, who was involved with the creation of PROMESA while a member of the Obama administration, said the impact would be more modest. "Even if SCOTUS does not reverse the First Circuit's ruling, I think its impact is likely to be minimal. With only six months remaining on the terms of the original board members, President Trump already had the option of (re)appointing all of the existing/new members under PROMESA subject to Senate confirmation. This decision simply mandates that option.

“Most importantly, relying on the ‘de facto officer’ doctrine, all of the board's work to date, including the Title III cases, has been left undisturbed," Hiteshew continued.

AllianceBernstein Municipal Credit Analyst John Ceffalio said, “The court’s decision has injected new uncertainty and more Washington, D.C. politics into the ongoing restructuring. The president’s selections of the board are a wild card and he and the Senate are likely to be heavy lobbied by some bondholders.

“This decision will likely cause further delays in restructuring general obligation, Puerto Rico Electric Power Authority, and other Puerto Rico credits,” Ceffalio continued.

Palmer and Bologna said, “Since the court ruled that the Oversight Board was a federal entity, we believe that [the] decision could encourage bondholders in arguing that the U.S. is liable for their losses.”

After Trump’s nominations, the U.S. Senate Committee on Energy and Natural Resources, which has jurisdiction over territorial issues, may hold hearings on the nominations unless the Senate Judiciary Committee is deemed to have jurisdiction because the Oversight Board is involved with Puerto Rico’s bankruptcy.

Trump has been slow to make many of his presidential nominations to judicial and cabinet positions. The Senate has been slow in considering many of those appointments because Democrats, who are in the minority, have used procedural measures to delay votes.

If Trump’s nominees to the board are controversial, one or more senators could further delay the confirmation.

In addition, some Democratic and Republican senators unhappy with how the oversight board has operated could use the confirmation process to lobby for changes to PROMESA.

Consultant Jeffrey Farrow, who was a White House adviser on Puerto Rico during the administration of President Bill Clinton, said Tuesday he doesn’t think there’s enough support in Congress to amend PROMESA.

U.S. House Natural Resources Committee Chairman Raúl Grijalva (D-Arizona) said, “I don’t believe this ruling necessitates reopening PROMESA as a whole. My first inclination is to see whether the ruling is appealed and await the ultimate outcome of the legal process. Before anything else happens, we need to know whether there’s a group of board members that needs Senate confirmation and whether that confirmation will be forthcoming.”

On Tuesday the board released a statement saying: “The U.S. Court of Appeals for the First Circuit was clear in its decision from February 15, 2019 that the Oversight Board’s work on fiscal accountability, transparency and controls remains uninterrupted.” The board said it would continue to enforce prohibitions on budgetary reapportionments without board consent as well as the board’s other budgetary resolutions.

The appeals court issued its opinion on three cases that were being considered together. The litigants were a group of investment funds, a union at the Puerto Rico Electric Power Authority, and Assured Guaranty bond insurer.

On Tuesday Assured Guaranty Managing Director Robert Tucker said, “We view the First Circuit’s decision — which is the fifth time in a row that the District Court overseeing Puerto Rico’s Title III proceedings has been overturned — as an opportunity to fulfill PROMESA’s stated goals for Puerto Rico: achieving fiscal responsibility and regaining access to the capital markets. By improving transparency, fiscal governance and accountability, and by promoting consensual agreements between creditors and the government that respect creditors’ rights, the new Oversight Board can provide a critical step towards swiftly resolving the debt restructuring process, achieving long-term economic growth and restoring capital markets access.”

For reprint and licensing requests for this article, click here.
PROMESA Commonwealth of Puerto Rico Puerto Rico Infrastructure Financial Authority Puerto Rico Public Buildings Authority Puerto Rico Electric Power Authority Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico
MORE FROM BOND BUYER