STUMP » Articles » Puerto Rico Round-Up: Is Bankruptcy a Bailout? » 13 April 2016, 19:15

Where Stu & MP spout off about everything.

Puerto Rico Round-Up: Is Bankruptcy a Bailout?  

by

13 April 2016, 19:15

Let’s get the big news item first: Bill to Ease Puerto Rico Debt Crisis Introduced in House

Legislation to help Puerto Rico restructure its $72 billion in debt was introduced in the House of Representatives on Tuesday, as members sought to address the island’s financial crisis quickly without setting a precedent that troubled states might try to follow.

The text of the bill showed numerous revisions written in by hand, suggesting that lawmakers had engaged in last-minute efforts to balance competing interests. For months, Democrats have been calling on Congress to help Puerto Rico, warning of a humanitarian crisis, while many Republicans have expressed discomfort over any measure that might be seen as a taxpayer bailout.

The bill, which would give Puerto Rico certain powers that are normally available only in bankruptcy, is scheduled to be the subject of a hearing before the House Natural Resources Committee on Wednesday and receive final amendments on Thursday before being sent for debate on the floor of the House next week.

…..
Representative Sean P. Duffy, a Wisconsin Republican who supported earlier efforts to give Puerto Rico direct access to Chapter 9 municipal bankruptcy, introduced the bill on Tuesday. In particular, it would give the island the power to unilaterally discharge debt and to force creditors to accept settlements for less money than they were seeking.

Whoa. That does not sound like bankruptcy to me.

Let’s look farther:

The new bill also contains a provision that would ultimately let Puerto Rico impose the terms of a broad debt settlement even on holdout creditors. Normally, such legal powers are available only in bankruptcy. But Puerto Rico and its supporters in Congress and in the Obama administration have argued that without the power to force settlements on resistant creditors, the island is likely to be hounded by dissidents for years, much the way Argentina has been.

Opponents of the bill said on Tuesday that it was essentially Chapter 9 bankruptcy by another name. Matthew Kandrach, vice president of the 60 Plus Association, said the bill “draws on nearly every provision of Chapter 9 of the U.S. Bankruptcy Code, and gives a federally appointed ‘Oversight Board’ the authority to apply them retroactively.” Large numbers of investors bought Puerto Rico’s bonds while they were still rated investment grade and when the island was officially excluded from taking shelter in bankruptcy.

The draft bill would also halt most creditors’ lawsuits against Puerto Rico, another provision that is normally available only in bankruptcy.
….
In the meantime, Puerto Rico would be a pariah in the bond market, unable to borrow affordably. Because it is not a sovereign nation, it cannot seek help from such lenders of last resort as the International Monetary Fund. But lawmakers have also been worried about setting a dangerous precedent by giving Puerto Rico extraordinary tools to wipe out debt, fearing it would not be long before troubled states like Illinois came to Washington seeking the same thing.

Even in municipal bankruptcy, the muni entity does not get to unilaterally wipe out all obligations. The whole point of a real bankruptcy process is to allow for a settling of debts, overseen by a judge. There is independent judicial oversight, not some legislative body which gets to make its own rules.

But let’s put that aside for now.

SUPREME COURT CASE PENDING

There is a Supreme Court case that already had arguments in March that is related:

Issue: Whether Chapter 9 of the federal Bankruptcy Code, which does not apply to Puerto Rico, nonetheless preempts a Puerto Rico statute creating a mechanism for the commonwealth’s public utilities to restructure their debts.

It seems like this bill could have some bearing on this case… are they trying to pass this before SCOTUS rules?

SCOTUSblog posted its own analysis of the oral arguments:

With only three members of the Supreme Court taking a genuinely active part in a hearing Tuesday on Puerto Rico’s debt crisis, and with those three ultimately reinforcing each other’s arguments, it might have been thought it would be fairly easy for them to control the outcome of the case just among themselves. And if, as seemed quite likely, they could pick up a fourth vote, they could surely prevail, since only seven Justices were on the bench.

But the argument in Puerto Rico v. Franklin California Tax Free Trust and a companion case was a truly labored exercise, made considerably harder because Congress had not explained itself at all (let alone clearly) in 1984 when it decided to treat Puerto Rico differently in bankruptcy law. It seems that, as part of an overhaul of the federal bankruptcy code, Congress simultaneously shut Puerto Rico’s public utilities out of a right to sue for bankruptcy under federal law but forbade the Puerto Rico legislature to come up with its own debt-restructuring plan.

That is a bit odd. Perhaps a new bill would provide clarity.

Later in the analysis:

In that part of the 1984 bankruptcy revision at issue before the Court, Congress also chose to treat the District of Columbia government as unfavorably as it did Puerto Rico in dealing with local debt crises. And, while it went entirely unmentioned during Tuesday’s hearing, those who are in the know about how Congress has generally reacted to the two jurisdictions say that the lawmakers believe that the two governments are quite incapable of fiscal discipline.

Yeaaaaah, there’s a reason for that. Let’s leave DC be for a bit, but take a look at Puerto Rico.

QUICK EXPLAINER AND LONGER HISTORY

Here’s a nice little explainer from the WSJ:

Congress begins considering legislation Wednesday that addresses Puerto Rico’s debt crisis. Here’s a look at seven frequently asked questions:

How did Puerto Rico end up with so much debt?

The island’s economy has been in recession since 2006, and Puerto Rico’s government borrowed aggressively to balance its budget. It has around $70 billion in debt, up from $24 billion in 2000. To skirt debt-sustainability requirements, it devised new bond issues with competing security pledges.

Today, many creditors lament the island’s deep political dysfunction that they say has failed to properly collect taxes or rein in a bloated public sector. But these problems are not new and some investors were willing to tolerate them for years because they believed that the island’s economic problems would eventually turn around. Also, unlike other municipal bonds, Puerto Rican debt is exempt from local, state and federal taxes, which made them an attractive investment during an era of low yields.

You can go read the rest.

For convenience, here are a few of my own posts on Puerto Rico’s plight, in reverse chronological order:

ADVOCACY ALREADY GEARS UP

Somebody sent me a link to this 30-second video:

I checked out the Youtube channel, and saw there was another video from a week ago:

Hmmm. So who is this Center for Individual Freedom?

Founded in 1998, the Center for Individual Freedom is a non-partisan, non-profit organization with the mission to protect and defend individual freedoms and individual rights guaranteed by the U.S. Constitution.

The Center seeks to focus public, legislative and judicial attention on the rule of law as embodied in the federal and state constitutions. Those fundamental documents both express and safeguard society’s commitment to individual freedom, not only through specific protections such as the Bill of Rights, but also through structural protections that constrain and disperse governmental authority.

In addition, the Center seeks to foster intellectual discourse by bringing together independent thinkers to examine broad-ranging issues of individual freedom in our global society. While the Center is decidedly for individual freedom, scholars and legal authorities who share that same basic philosophy differ as to the application of those principles in the complex world in which we live. The Center strives for balanced debate that encourages conflict resolution where there is tension between the rights of individuals and the requirements of government, as well as between individuals.

…..
Based in Alexandria, Virginia, the Center for Individual Freedom is a nonprofit, 501©(4) corporation that relies on private financial support from individuals, associations, foundations and corporations.

Hmmm. Who are the people involved?

Name Position
Jeffrey L. Mazzella President
W. Thomas Humber Founder
Renee L. Giachino Corporate Counsel and Sr. Vice President
Virginia E. Sagredo Senior Vice President
Timothy H. Lee Senior Vice President of Legal and Public Affairs
Ben Boychuk Contributing Editor

I am unfamiliar with these names. But I find it interesting that there’s only two videos in their YouTube channel.

I found this earlier piece on them:

The latest came last week from an organization called the Center for Individual Freedom, created more than a decade ago by former tobacco industry executives who sought to counter government restrictions on smoking.

Interesting.

OTHER TAKES

Here’s the WSJ editorial on the matter:

General-obligation bondholders would recover 80 cents on the dollar while investors owning sales-tax backed bonds would receive 57% and most other creditors would get about 50%. While the recovery ratio purports to account for the bondholders’ seniority, unsecured pensioners with lower-level claims wouldn’t be touched. This is imprudent and unfair.

Puerto Rico’s $46 billion unfunded pension liability is its single largest debt. The government pension funds are projected to run out of cash by 2019. Pension payments from the general fund would then exceed annual debt service under the proposed restructuring.

Like Illinois and other liberal states, Puerto Rico has shortchanged its pensions while buying the votes of its Brahmin public-employee class. In 2003 and 2007, politicians created new public-worker retirement entitlements including Christmas, summer and medication “bonuses” (in addition to their subsidized health benefits).

As I wrote in a prior post, it’s pretty clear that pensions get precedence over bondholders.

They have with regards to even the Detroit bankruptcy, where the cut the retirees and employees took was much less than the haircut bondholders got.

Pension obligation bonds in the San Bernardino bankruptcy are getting cut, but the pensions?

No.

So yes, the available cash will be going to pay the pensions before bonds get paid. But that’s a limited kind of bailout — unless somebody is going to be shoving additional cash beyond what they have, I’m skeptical that PR will be able to keep paying the pensions.

Dave Sirota looks at the financial groups that are trying to influence this bill:

Over the last few years, hedge funds and mutual funds have bought up large tranches of Puerto Rico’s bonds at cut-rate prices, hoping the island will pay back its debts in full, thereby giving those financial interests a big payout. That gamble, however, has relied in part on the bet that the island will make draconian cuts to social services and worker pensions and use the savings to pay back 100 cents on the dollar to its Wall Street creditors — a bet, in other words, that Congress will prevent the island from simply erasing some of its debt through the kind of bankruptcy protections that are afforded U.S. cities.

To that end, federal lobbying records show that major banks, bond insurers and hedge funds spent millions last year to try to shape bankruptcy proposals for the island. Two so-called dark money groups linked to the billionaire Koch brothers and Republican strategist Karl Rove are also working to influence the debate over Puerto Rico’s debt.
….
Several people identified as donors to the Koch network could lose money should the island territory’s government obtain bankruptcy rights. If Puerto Rico is allowed to retroactively change the rules of their bond obligations, its bondholders — like any creditors after a bankruptcy — could get back only part of the money they were owed.

You can go to his article to read more. I definitely don’t have much sympathy for the vulture hedge funds. I also am not pleased with the mutual funds that threw in PR bonds to boost yields.

That said, the vulture funds bought those bonds off someone else, thinking that their own lobbying & lawerly oomph would get them more from a financially distressed entity.

If there were certainty that no such oomph would protect muni bond holders, which are primarily individuals, then no vultures would swoop in. They would simply get defaulted on. A non-zero recovery amount is better than zero.

One protects rights for all, whether or not one likes the people being protected, because there are all sorts of secondary consequences. You decide that you don’t like vulture hedge funds, so screw them, who cares about a legal bankruptcy process… then people you do like, such as retirees who are trying to eke out income on what they thought was a safe investment, also get hurt. So think carefully.

HURRY UP AND WAIT

But while this bill was put out there, it doesn’t really seem like there’s a fire under Congress’s butt:

Legislation to help Puerto Rico avoid a default in a few weeks has been put on hold by House lawmakers.

House Natural Resources Committee Chairman Rob Bishop (R-Utah) announced Wednesday evening that he was delaying indefinitely a markup for a Puerto Rico relief bill that had been unveiled one day prior.

In a statement, Bishop blamed the delay on the Obama administration, which he said was still trying to change the language.

While there’s a lot of money at stake for specific individuals with respect to Puerto Rico, there is the prospect of states (and Chicago) doing this sort of thing in the future.

There’s a reason those vids call it Super Chapter 9 — this goes beyond the regular municipal bankruptcy process. The thing is, there is serious federalism issues in trying to do an actual state bankruptcy in federal court. That’s really touchy.

But both Democrats and Republicans aired gripes with the legislation at Wednesday’s hearing. Many conservatives argued allowing Puerto Rico to rework its debt obligations set a bad precedent and amounted to a bailout of bad financial management by island officials.

Meanwhile, many Democrats argued the control board was too powerful, and also had concerns with additional provisions in the bill aimed at winning over Republicans.

Congressional leaders are trying to pass a Puerto Rico bill soon, as the island has a May 1 debt payment that it will likely be unable to make.

Yeah, but they’ve already been not paying bonds, so what’s one more payment missed?

This is not necessarily a partisan issue. A lot of politicians are going to be wary about letting a governmental entity semi-under their control just default on their bonds and say tough noogies.

Because what happens to all the other governmental entities that want to continue to borrow?

Even when essentially bankrupt, Puerto Rico was able to borrow at interest rates I wouldn’t be able to get (if I were borrowing that much money. Hell, I wouldn’t be able to borrow that much money.) The people lending the money had seen various laws passed, whether federal or Puerto Rican, would protect their legal rights in the case of financial distress.

If those protections are thrown away too easily, it won’t just be Puerto Rico unable to borrow more money.

Compilation of Puerto Rico posts

The State of the States: a Compilation


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