Puerto Rico governor submits bill to overhaul debt issuance

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Puerto Rico Gov. Wanda Vázquez, in the midst of the territory's record-setting restructuring, submitted a bill overhauling laws on future issuance of debt.

Vázquez said Tuesday the bill was submitted to the legislature in response to the Oversight Board’s filing of a plan of adjustment for commonwealth debt and pensions, which the board submitted at the end of September. The plan of adjustment said the government needed to change its debt practices.

The proposed law comes more than three years after the federal government passed the Puerto Rico Oversight, Management, and Economic Stability Act to deal with the island’s inability to pay $72 billion of debt and $44 billion in net pension liabilities.

“Given the possibility and need for the government to soon re-enter the capital markets and consistent with our public policy, this law establishes uniform and responsible processes for the issuance of any future debt,” the governor said.

"These reforms are necessary if the commonwealth has any chance of new bond issuances garnering market acceptance," said Howard Cure, director of municipal bond research at Evercore Wealth Management. "Preventing deficit financing and scoop and toss practices are a good first step although the bill does make exceptions for 'emergencies' however that is defined.

"It should also be noted that while there is an attempt at reform, the Oversight Board is still trying to invalidate $6 billion of general obligation debt issued in 2012 and 2014," Cure said. "Will there be provisions about validating this prior debt or, could there be attempts at future invalidation based on economic circumstances? Also, the market still doesn’t know if this bill has legislative support.

"In the meantime, the governor and the board are still trying to pay $60 million in Christmas bonuses so it is understandable if the market questions the sincerity of these reforms," Cure said. He referred to annual payments to government workers that have been a sore point with investors since the commonwealth defaulted on its debt.

A holder of Puerto Rico bonds said that the governor’s action was a step in the right direction. However, the current local constitution has restrictions on all debt that is “paid.” This wording should be shifted to all debt that is guaranteed, he said.

Vázquez said she had discussed the Debt Issuance Responsibility Law with Senate President Thomas Rivera Schatz and Carlos Méndez Núnez.

The law is meant to restrict future debt issuance, she said in a press statement. The law only allows debt to be used for capital improvements, prohibits debt issuance with maturities beyond 30 years, and specifies that all debt must include the start of principal repayment within two years.

According to the bill, debt refinancings will only be allowed if they lower the commonwealth’s interest payments or if they help its cash flow in response to a natural or other major disaster.

The bill says that Puerto Rico’s Fiscal Agency and Financial Advisory Authority will have approval authority on all debt issuances from Puerto Rico’s instrumentalities.

Puerto Rico’s constitution states that no debt shall be issued so that annual payment to bondholders would exceed 15% of the average annual income that the Treasury received in the two prior fiscal years. The new law will clarify the definition of “income” to avoid Puerto Rico practices of the past that may have followed the letter of the law but were wide of its spirit.

The 30 year limit on maturities won’t extend to the debt of the instrumentalities.

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