Letter to the editor

Why Puerto Rico bondholders' `victory' in court may prove costly

The real purpose of last year’s lawsuit by some of Puerto Rico’s largest creditors challenging the constitutionality of the PROMESA Oversight Board appointments was to get their Title III cases thrown out of court. In reversing Judge Swain’s ruling upholding the constitutionality of the Board appointment process, the First Circuit rejected the creditors’ desired remedy and left all of the Board’s work to date, including the Title III cases, undisturbed. That is the overarching result of their ruling last week.

Kent Hiteshew

Nevertheless, with the First Circuit’s remedy requiring that the Board be reconstituted within 90 days with all seven members nominated by President Trump and confirmed by the U.S. Senate, creditors are now reportedly anticipating a more “creditor friendly” Board.

But we've been down this road before. Creditors were very confident that the original Board appointments in 2016 would favor their interests because they were able to convince House and Senate Republican leaders to design PROMESA so that they would have effective control over Board member selections. Indeed, the current Board is comprised of a majority of Republican nominated members (4-3). However, as these Board members rolled up their sleeves and analyzed the data, they consistently and unanimously concluded that Puerto Rico’s debt is unsustainable and filed Title III cases for nearly all its major debtors. Since those early days of promise, creditors have been sorely disappointed with, and critical of, the Board. In fact, it is widely known that they unsuccessfully lobbied the Trump White House very hard to remove at least one of the members "for cause."

I suspect that any subsequent composition of Board members — no matter how they are appointed — will study the same facts and will come to largely the same conclusions about the prospects for Puerto Rico's future economic growth and budget surpluses and the sustainability of its debt.

The bigger risk is that the President and U.S. Senate won’t be able to install new (or existing) members within 90 days and the Board’s work will come to an effective halt, at least temporarily. This would only encourage Puerto Rico’s Governor and Legislature to continue to resist necessary fiscal and economic reforms and drag out the debt restructuring timeline, both of which would only delay Puerto Rico’s fiscal and economic recovery and eventual termination of the Board’s oversight powers.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico
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