A
bill to amend PROMESA to hasten the exit of the PROMESA oversight board may not have sufficient support to be passed into law, but the drive to terminate the oversight board’s mandate by commonwealth officials and their congressional allies is being seen as a credit negative, according to several sources familiar with the matter.
Six sources familiar with the matter said the drive to amend the law to end the oversight board’s mandate is a credit negative that will heighten creditor concerns and could hamper the commonwealth’s ability to access credit markets at reasonable rates. Four of these sources said that concerns about an early termination of the oversight board are most strong among long-term investors in Puerto Rico bonds, including traditional municipal bond funds and monoline insurers. One creditor source downplayed the impact of the bill, saying the oversight board would have to leave one day, and the commonwealth would have to run its own finances eventually.
Four of the sources said the bill’s proposed elimination of a requirement for Puerto Rico to achieve market access at reasonable rates is particularly troubling because it is a main objective of the law and will likely create an obstacle to achieving this essential goal. Despite the ability of Puerto Rico to float restructured
GO and
COFINA bonds and refinance outstanding
Puerto Rico Aqueduct and Sewer Authority debt, placing a new issue in the municipal market will be much more difficult, according to the sources.
One of these sources said issuing new Puerto Rico debt will be much more challenging than parties realize whether or not the oversight board stays in place. The commonwealth still needs to reform its tax system to eliminate unproductive incentives and meet funding needs, and the federal funding buoying the island economy will eventually run out, the source added.
Four sources said the oversight board should remain in place to ensure that commonwealth budgets remain balanced, with two of the sources noting that years of deficit spending is what drove Puerto Rico into bankruptcy in the first place. “The oversight board should stay in place until [the commonwealth] has access to the capital markets at reasonable rates just as Congress has legislated,” one of these sources said, asserting the commonwealth will not have such access for a “long time” because Puerto Rico bonds are really still a “junk” rather than a “viable” credit.
Two sources also noted that restructured GO and COFINA bonds as well as the contingent value instruments, or CVIs, were issued on the premise that the oversight board would remain in place to ensure fiscal discipline continues post-debt restructuring and budgets remain balanced. The CVIs make payments to investors when Puerto Rico’s sales and use tax, or SUT, outperforms targets established in a fiscal 2020 fiscal plan. One of the sources called the oversight board “the adults in the room” and said buy-side creditors want it to stay.
Puerto Rico’s restructured bonds broke for trading on March 17 after the commonwealth plan of adjustment took effect. Puerto Rico’s
$708 million 4% Series 2022A tax-exempt, general obligation current interest bond due 2046 traded down today to 91.5 to yield 4.8%, down from 99.07 to yield 4.1% on March 15, the effective date for the commonwealth’s plan of debt adjustment, according to EMMA. The bonds are
backed by the island’s irrevocable pledge of “the good faith, credit and taxing power of the commonwealth.”
Meanwhile, its $3.5 billion general obligation contingent value instruments due 2043, or GO CVIs traded Wednesday, April 13, in a range of 50 to 57, but with an institution size trade of $5 million, which is in line with the same price of 57 when they broke for trading on March 15, according to EMMA. As reported, payment on the CVIs comes from the SUT and is contingent on the “SUT Outperformance Condition.” The CVIs are subject to a lifetime $3.5 billion cap.
Three sources also said that creditor concerns could be exacerbated by recent spending proposals unveiled by commonwealth officials as the effort to terminate the oversight board’s mandate picks up steam. Gov. Pedro Pierluisi has announced a series of pay hikes for
public school teachers,
prison guards,
firefighters and
emergency medical technicians, while island lawmakers attempted to approve a pork barrel fund through a
revised fiscal 2022 budget resolution. The governor also unsuccessfully floated a proposal to use $200 million from a commonwealth emergency fund to subsidize Puerto Rico Electric Power Authority fuel costs in an effort to hold down electricity rates, which was
denied by the oversight board.
Despite increased concern, however, demand for Puerto Rico paper will likely remain strong, according to three creditor sources. With Puerto Rico bonds making up about 18% of the high-yield index, commonwealth paper is “impossible to ignore,” one of the sources noted.
Drive to Amend PROMESA
The proposed Territorial Relief Under Sustainable Transitions for Puerto Rico Act of 2022, or
the TRUST for Puerto Rico Act, filed
last week by U.S. Rep. Ritchie Torres, D-N.Y., is the latest attempt to amend PROMESA and does not appear to have sufficient support to succeed, according to four sources. Two of these sources said the current political environment - shaped by the war in Ukraine, inflation and the midterm Congressional election in November - provides additional obstacles to passage.
The bill changes PROMESA’s conditions for terminating the oversight board by eliminating a requirement that Puerto Rico achieves market access to and cutting a balanced budget requirement to two years from four years. The bill also appears to contemplate terminating the oversight board even while Title III or Title VI debt restructuring cases remain pending, as it outlines the transfer of oversight board authority back to the commonwealth for any Title III and Title VI cases pending at the conclusion of the oversight board’s mandate.
The initial PROMESA law was
passed in a hard-fought bipartisan compromise that conditioned the restructuring of Puerto Rico’s outstanding debt on the establishment of the oversight board to oversee commonwealth public finances. Resident Commissioner Jenniffer González is the only Republican to publicly back the current effort to amend PROMESA. The other Democratic co-sponsors are U.S. Reps. Nydia Velázquez, D-N.Y.; Darren Soto. D-Fla.; and Raúl Grijalva, D-Ariz., the chair of the U.S. House Natural Resources Committee.
Moreover, the U.S. Senate, despite strong reservations about the bill from both Democrats and Republicans,
decided to approve the U.S. House version of the legislation without debating the merits of the bill and entertaining amendments, despite opposition in the upper chamber, according to two of the sources. Gov. Pierluisi called on the U.S. Senate to amend PROMESA to “clarify” oversight board exit conditions during a February U.S. Senate Energy and Natural Resources Committee
hearing. U.S. Sen. Joe Manchin, D-W.V., reacted to the call by saying the federal government “stepped in” after Puerto Rico finances “got out of whack” and that federal officials “are going to have to show good cause or reasons for giving you the leeway again.”
Grijalva, who chairs the U.S. House Natural Resources Committee, has tried to amend PROMESA three different times without success. Grijalva floated a draft bill to amend PROMESA last year that did not progress, and he had previously
introduced in May 2020 the
Amendments to PROMESA Act, which would have prioritized funding for public healthcare, education, safety, pensions and the University of Puerto Rico by declaring them “essential public services.” The bill also would have created a publicly funded commission to audit Puerto Rico’s debt and granted the commonwealth government the option to discharge unsecured debt if it deems the financial burden to be excessive to the people of the island.
Grijalva previously circulated a “
discussion draft” of proposed amendments in July 2019. In October 2019 testimony before the House Natural Resources Committee Congress, oversight board and Puerto Rico Fiscal Agency and Financial Advisory Authority officials
warned that the changes could undermine progress on key goals of the law, including restructuring commonwealth debt and gaining back-market access for the government.
Oversight board member Justin Peterson, who has
called on Congress to legislate an early end to the oversight board, declined comment on the Torres bill, saying he is focused on the upcoming Puerto Rico Electric Power Authority, or PREPA,
mediation process. Both Peterson and Gov. Pierluisi have said the oversight board should complete its mission after PREPA and the Puerto Rico Highways and Transportation Authority, or HTA, restructurings are completed. Other oversight board members contend that additional fiscal management actions are needed at the commonwealth government level before the oversight board can end its mandate while ensuring the Puerto Rico government does not backslide into a second bankruptcy.
--John Marino, Seth Brumby