WASHINGTON –President Obama signed the Puerto Rico relief bill Thursday, paving the way for the appointment of an oversight board and the first steps in what legislators and observers agree will be a long process of bolstering the commonwealth's fiscal health.
The bill, called PROMESA, passed the Senate late Wednesday by a 68-30 vote and the House by 292 to 127 on June 9. It mandates a seven-member oversight board that will 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 in a federal district court as a last resort, if voluntary negotiations fail.
The passage comes a day before Puerto Rico is expected to default on a $2 billion debt payment, $800 million of which is on constitutionally backed general obligation debt. The default probably would trigger creditor lawsuits, but one portion of PROMESA puts a temporary moratorium on debt-related litigation. The moratorium covers litigation filed between December of last year and the later of Feb. 15, 2017, or six months after the board is established.
There are also provisions that would allow extending the moratorium's expiration date even further if the oversight board or a federal court determines it is necessary.
Municipal strategist Alan Schankel wrote in the Janney Daily Fix that PROMESA's moratorium on litigation "offers an immediate benefit to the commonwealth."
However, Anna Gelpern, a Peterson Institute for International Economics fellow, said she thought the law did little to preempt inter-creditor disputes because the stay "is not forever" and different creditors have different contractual rights.
John Mousseau, director of fixed income at Cumberland Advisors Inc., welcomed the bill's passage as a way to bring clarity to a situation where there has been a "real lack of crisp leadership" from Puerto Rico's governor.
"It'll allow a sorting out process," he said. "It doesn't mean you won't have some defaults but you are going to get people talking meaningfully."
He compared the upcoming efforts to improve Puerto Rico's fiscal situation to trying to end a war.
"You get to a ceasefire and the end of hostilities and then … you get to rebuilding the war-torn countries, which in this case is the Puerto Rico financial landscape," Mousseau said. "It is a multi-step process."
The second step in the process will be pursuing necessary economic growth initiatives and possibly creating a framework for Puerto Rico to refinance its debt with bonding power that comes through PROMESA, according to Mousseau. He said he would not characterize the board playing a role in helping the commonwealth refinance as a bailout, but rather leading it down a more constructive path.
Howard Cure, director of municipal bond research at Evercore Wealth Management, also said some of his biggest questions center on Puerto Rico's long term fiscal health and how debt and pension obligations will be treated during restructuring.
"Long term, I'm just not that optimistic about what the board could do other than alleviate some immediate pressure," Cure said. "From a bondholder perspective, because the pension fund is so underfunded, pensioners really have an advantage."
Dick Larkin, director of credit analysis at Stoever Glass & Co., said "the passage of Puerto Rico's PROMESA rescue law could reform finances and debt for the long term stability of the island, or merely be a mechanism to adopt measures of expediency that solve today's crisis but grow into continued crisis for years to come."
Many federal legislators with ties to Puerto Rico, including Pedro Pierluisi, Puerto Rico's nonvoting representative in Congress, and Rep. Nydia Velazquez, D-N.Y., applauded PROMESA's passage, with Pierluisi saying he is "firmly convinced that it is the best legislative solution to a terrible problem." However, they say Congress's next step is to pass pro-growth legislation for the territory.
Treasury Secretary Jack Lew agreed, commending Congress for passing the legislation, but saying he believes "there is still much work to be done."
Gov. Alejandro García Padilla acknowledged the law is not perfect, saying: "The cost of not doing anything would have been devastating."
"Today we take back our country; with the approval of PROMESA we begin to take our island from creditors and return it to the people," he said.
While many are focused on the long term prospects for Puerto Rico, others are focused on the more immediate issue of naming the seven members of the oversight board as well as the board's executive director, tasked with guiding the body's work. Six of the seven board members will be appointed by congressional leaders and the seventh member will be appointed by the president. Sources vary in their predictions of when the board will be fully appointed, but the bill requires it be up and running by mid-September.
Daniel Hanson, an analyst with Height Securities, said in a commentary on Thursday that the composition of the board will determine the ultimate levels of recoveries on Puerto Rican securities.
"It is our belief that candidates have been vetted for a considerable period and the various offices with appointment [power] have a strong sense of who they would like to see on the board," Hanson wrote.
He included a list of 22 potential board members, broken down into "likely candidates," "less likely candidates," and "unlikely candidates." The likely candidates included: Anthony Williams, a former Washington DC mayor; George Pataki, the former governor of New York; and Jose Ramon Gonzalez, an executive at the Federal Home Loan Bank of New York and a former Puerto Rico banking executive. Other previously reported possibilities like former New York lieutenant Gov. Richard Ravitch and Kevyn Orr, the former city manager for Detroit, were included in the unlikely candidates section.
Puerto Ricans and their local leaders have been skeptical of the powerful board.
Puerto Rico House President Jaime Perell- Borrás said he was unhappy Congress appointed the control board as a superior authority over the island's government. He added, "I would have liked PROMESA to have provided us with the tools for sustained economic development."
"Now it is our responsibility to collaborate with the fiscal control board to fulfill expeditiously its objectives … so as to soon return to the markets and restore the self-government injured by this federal legislation," Perell- continued.
Puerto Rico Sen. Pres. Eduardo Bhatia Gautier was more hostile to PROMESA.
"The approval of the project 'PROMESA' represents a huge economic, political and social challenge for Puerto Rico," he said. "Even though it does create an orderly and necessary regime to meet Puerto Rico's unpayable debt, it represents political contempt for the democratic will of our country."
He called for collaboration with it when it made sense but combativeness to defend Puerto Ricans interests when appropriate.
"The political dimension of PROMESA must not be taken lightly," Advantage Business Consulting President Vicente Feliciano said. "Washington, D.C., voted for the U.S. president that imposed the Federal Control Board [on it in the mid-1990s]. Detroit voted for the Michigan governor that imposed the emergency manager. In the colony of Puerto Rico, the government of the people, by the people and for the people is lacking."
Puerto Rico's association of attorneys had offered free legal representation to those committing civil disobedience against the board.
Puerto Rico president of the Chamber of Commerce José Vázquez Barquet said the commonwealth's business sector is in favor of PROMESA. The bill is imperfect, he said, but added "the only way to get out of this situation is improving the economy."
With this in mind, the chamber is focused on PROMESA's set up of a taskforce for economic initiatives. By Dec. 31 the taskforce must submit its recommendations for improving Puerto Rico's economy to the control board. It must submit its highest recommendations by Sept. 15.
Vázquez Barquet says he is hopeful that Congress will pass measures to help Puerto Rico's economy.