Puerto Rico creditors want senators to ensure oversight board complies with PROMESA

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WASHINGTON -- A group of creditors is urging two U.S. senators to use whatever tools they have, including their ability to push for hearings, to ensure the Financial Oversight and Management Board for Puerto Rico is complying with PROMESA and refraining from hurting bondholders.

The Ad Hoc Group of Puerto Rico General Obligation Bondholders made its request in a letter sent to Sens. Thom Tillis, R-N.C., and Tom Cotton, R-Ark., both of whom are members of the Senate Banking Committee. The letter is the third involving the senators and Puerto Rico this month.

Tillis and Cotton sent a letter to the oversight board on April 7, expressing similar concerns from creditors and asking that the oversight board give details about how it and Puerto Rico Gov. Ricardo Rosselló’s fiscal plan comply with PROMESA. The board responded to the senators on April 25, arguing that its approval of the fiscal plan fully complies with PROMESA. The board said it has repeatedly met with creditors who seem unwilling to engage in debt negotiations unless the board adopts a fiscal plan that contains “frothy” and optimistic assumptions that enlarge Puerto Rico’s “economic pie.”

The GO bondholders said in this latest letter that despite the board’s assertions that it has held numerous meetings and has been open to negotiations on the debt and fiscal plan, creditors’ comments have been ignored. Creditors are not demanding that the board “adopt ‘frothy’ assumptions that would ‘enlarge the pie,’” they said.

“Rather, creditors are demanding that the oversight board justify – based on the revenue assumptions contained in the fiscal plan – how the board has allocated the existing ‘pie,’” the GO group wrote. They claimed some sections of the plan misallocate funds, like setting aside roughly $600 million per year for unidentified expenses. The oversight board is in place to ensure Puerto Rico is properly planning for all its expenses, making funds for unidentified expenses useless, the creditors wrote.

They told the senators that the oversight board’s response fails to address the core questions the senators raised in their original letter and instead “confirms that the oversight board has little interest in following the law as Congress intended.” The group asked the senators to “use all available tools at your disposal (including congressional hearings, if necessary) to ensure that PROMESA remains on track to achieve Congress’ goal of restoring fiscal responsibility and returning the commonwealth to the capital markets.”

One area of particular concern for the bondholders is the board’s treatment of debt repayment priorities. Puerto Rico’s Constitution, they wrote, states that when resources are insufficient to cover the commonwealth’s obligations, constitutional debt, which includes GOs, must be paid first.

The fiscal plan approved by the board instead does the opposite and first calculates the money needed to pay for all of the commonwealth’s non-debt expenses and then uses the remaining portion of revenue to calculate what funds can go toward debt service, the creditors argued. They gave an example showing debt payments would face a 78% reduction under Rosselló’s plan while pension expenses would only be reduced by only 10%.

The oversight board, in its letter to the senators, said the language in PROMESA only encourages it to “respect” the constitutional priorities and liens of the debt.

The board added that the term respect, “provides flexibility and is different than the words Congress used for other fiscal plan requirements, such as to ‘ensure’ the funding of essential public services, ‘provide’ adequate funding for public pension systems, and ‘provide’ for the elimination of structural deficits.”

The creditors said the board’s stance in essence shows it is taking the position it can ignore PROMESA “entirely because they perceive a semantic difference between the words ‘respect’ and ‘comply.’”

The GO creditors also wrote that the fiscal plan relies on underestimated revenues over its ten-year outlook. The bondholders said the commonwealth was already 4.1% above its projected revenue for the end of March. Despite that, the fiscal plan would continue to use the same system that is over-estimating projected revenues for the next ten years, they said.

The fiscal plan additionally includes a much lower ratio of debt service to revenues than is appropriate, the group wrote. The plan would have Puerto Rico pay $787 million in average annual debt service for all debt over the next ten years, or about 6.4% of local revenues per year. That compares to yearly GO debt service to net revenue ratios of 12% for Connecticut and 15% for Utah. The creditors added that World Bank/International Monetary Fund guidelines say that even the poorest countries, which don’t have as developed economies as Puerto Rico, can sustain 18% to 22% ratios.

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