Puerto Rico's attempt at a quick and consensual debt restructuring may quickly dissolve into legal chaos, analysts said.
At a meeting in New York City on Monday afternoon, Government Development Bank for Puerto Rico president Melba Acosta called for a consensual restructuring of its debt with its creditors. At the meeting GDB consultants presented a report arguing for the necessity of taking difficult fiscal adjustments, structural reforms and debt restructurings.
Since Puerto Rico cannot rely on Chapter 9, each of its securities could require a separate lawsuit, leading to legal chaos, said Evercore director of municipal research Howard Cure.
"A quick and consensual debt restructuring is in the interest of Puerto Rico and its citizens; however, I don't think it is likely," said Michael Ginestro, director of municipal research at Bel Air Investment Advisors. "With so many different creditor classes, each with their own interests and liens, each class will argue their position and be evaluated differently. Legal arguments will take time to work through and recovery rates will differ, and without HR 870 [which would allow Puerto Rico's public utilities and municipalities to apply for Chapter 9 bankruptcy], those arguments could take even longer."
OppenheimerFunds and bond insurer Ambac have already threatened lawsuits if Puerto Rico changes the terms of its bond payments.
In writing about Monday's investor meeting, Municipal Market Analytics managing director Matt Fabian said in MMA's Weekly Outlook that sovereign debt restructurings can take years and the "trailing litigation" years more.
Arent Fox partner David Dubrow said usually in bond indentures, changes in principal, interest rate or maturity rate require the consent of all bondholders, meaning a group of 60% or even 99% of them cannot impose a change on the rest. That is why holdout creditors can gain significant leverage outside of bankruptcy, he said.
In the last few weeks Puerto Rico has talked about exchanges of securities, voluntary and possibly not so, as possibly coming in the next few months. If there is an exchange, Fabian wrote, "holders with earlier maturing bonds (where the commonwealth most needs cash flow relief ) or who are willing to exchange short term haircuts for long term, less quantifiable enhancements (Joe Louis Arena, anyone?) will be apt to outperform their peers, all else being equal." In Detroit's bankruptcy the city gave one of the bond insurers, Financial Guaranty Insurance Company, developable land near the Joe Louis Arena to compensate for its bond losses.
In recent weeks Puerto Rico government officials have also spoken of either a moratorium on bond payments or extending bond maturities by several years.
In modern history the only bond payment moratorium was the one for New York City in the mid-1970s, a bond attorney noted.
As one of the conditions for federal help for the city, in November 1975 the federal government insisted that holders of the city's securities either exchange them for 10 year Municipal Assistance Corp. debt or to accept a three-year moratorium on payments. In November 1976 the New York Court of Appeals threw out the debt moratorium. There may be lessons in how the court treated that moratorium on how courts would treat any Puerto Rico moratorium, the bond attorney said.
"Underneath it all, Puerto Rico is just looking for cover from the public and the various creditor classes, and using this academic study via a public forum as a blue print to do it," Ginestro said. "These public forums are a way for Puerto Rico to build their case publicly for HR 870 to Congress."
On Tuesday morning Puerto Rico's 8s general obligation bonds rallied to about $72 from $70.35 on Monday, according to Markit. On Monday Puerto Rico's debt advisor said the Puerto Rico Aqueduct and Sewer Authority should be able to make its bond payments without modifications. Its bonds gained as much as $6 in price on Tuesday morning from Monday.
On Tuesday Standard & Poor's downgraded the GDB's senior notes to CC from CCC-minus and kept a negative outlook on the debt.
