Ted Hampton, the senior credit officer responsible for coverage of Puerto Rico at Moody's Investors Service, discusses the Puerto Rico Oversight, Management and Economic Stability Act. How will the new law affect bondholder recoveries; who is likely to be on the PROMESA board; and could the law have implications for states that run into credit crises?
HAMPTON: We think PROMESA will have a positive impact on bondholder recoveries largely for two reasons. First, it averts the potential for a legal morass. Second, we think it'll stabilize or maybe even improve Puerto Rico's economic base over time. Let me just expand on that a little bit.
On July 1st, Puerto Rico, for the first time, defaulted on its constitutionally supported general obligation bonds. That event, had PROMESA not been enacted, certainly would have kicked litigation in the high gear. In fact, there was already one suit that had been filed by GO bondholders prior to the 1st of July when they missed that roughly 800 million of debt service.
On the economic front, we believe that simply having a federal framework for debt restructuring and fiscal reform in place will improve the economic climate. Part of the oversight boards mandate will be to look at steps that can be taken to improve Puerto Rico's economy. That's really important given the economic decline we've seen in Puerto Rico in the last decade.
We know there will be seven members. They will be appointed by the president, mostly from a list provided to him by congressional leaders. These members will have to have some kinds of relevant skills such as in municipal finance or law. One of them will have to have a primary residence or place of business on the island. Other than that, we don't really know a lot and we don't have a point of view on the political breakdown of the board's makeup.
We know most of all that it will be an independent board. Anyone who's currently an elected official in Puerto Rico or even a government employee is not going to be eligible for appointment to the board. The Governor of Puerto Rico will have a non-voting seat on the board, but essentially this will be an outside board. I think that the members of the board will certainly play a very important role in how effective the whole PROMESA effort is. We have to wait and see who they are.
I think that's very unlikely. Our system of government is one where states rights are pretty clearly defined, and that's essential to how our federal system operates. The 10th amendment to the constitution, for example, says, "That any power is not specifically allocated to the federal government fall to the states." The notion that any branch of the federal government could have an oversight role with respect to a state in crisis is unprecedented and would go against that basic concept.
Territories on the other hand like Puerto Rico are very different. If you look at the constitution Article 4, Section 3, the so-called Territories Clause says, in its somewhat antiquated language, "That Congress shall have the right to pass any needful rules and regulations with respect to these territories." Clearly, Puerto Rico can be and is under control of Congress in a way that states are not. We don't see PROMESA as a precedent for some oversight of a state government or some debt restructuring of the state government.
The obvious one that leaps to mind in terms of state powers that Puerto Rico lacked, is access to Chapter 9 of the Bankruptcy Code. Now, of course, states themselves cannot restructure in bankruptcy, but they can authorize insolvent units to do so. If Puerto Rico had not been excluded from Chapter 9 of the Bankruptcy Code, by this time we probably would have been on the way to a number of bankruptcy restructurings under Chapter 9 for Puerto Rico's public corporations and municipalities. That's one obvious weakness that Puerto Rico had in confronting its fiscal challenges when you compare it to US state.
Another background weakness that we have to acknowledge is lack of voting representation in Congress. Puerto Rico has a non-voting resident commissioner in Congress. He can vote in committee proceedings but not actually vote for legislation. Arguably, this lack of representation in Congress has led to Puerto Rico being significantly disadvantaged under a number of federal programs like Medicaid. As PROMESA progresses, I think those kinds of things will be looked at more carefully.