THE PUERTO RICO GOVERNMENT AND THE MARKETS

Puerto Rico for years has been saying that it will pay all its debts. Governor García Padilla told Bloomberg news (quite incorrectly) that Puerto Rico’s Constitution required the payment of all debts. In January, 2013, the Administration was under pressure from members of its own party to repudiate a lease agreement of Luis Muñoz Marín Airport and the Governor refused, saying that Puerto Rico honored its agreements. That was the administration’s mantra until very recently.

Right after the Mach 2014 record setting bond emission of $3.5 billion in General Obligation Bonds, came rumors of debt restructuring, PS 993 by Senator Angel Rosa, a PR bankruptcy law was filed. The contracts of Puerto Rico with Cleary Gottlieb, Proskauer Rose and Millco Advisors, all firms with restructuring and bankruptcy experience, were registered with the Comptroller’s office. All of a sudden, restructuring was the buzz-word for PR bonds. The Administration kept insisting that these firms were hired to prevent restructuring and denied it would happen.

Then in May of 2014, for no apparently valid reason, Treasury Secretary Melba Acosta decided to unilaterally determine that a closing agreement with Doral of 2012 was invalid. Doral had to sue the Treasury department in order to have it declared valid and at this writing the Appellate Court reversed a determination for the controversy to be heard in Hacienda in an Administrative Proceeding. Now it will be heard in a Court and the Government has the burden of proof. We await final decision.

On June 25, 2014, the Governor, through Senator Bhatia, filed the new PR bankruptcy law and got it approved the same day. On June 28, 2014, it was signed into Law 71 and that same night, Franklin and Oppenheimer filed their challenge in Federal Court.

Irrespective of whether the law is constitutional, a good idea, or simply a back stab to investors, the plain truth its that it aims to change the contractual obligations of payment of principal, interest, or both, by the island’s public corporations. No creditor likes the debtor to unilaterally change the payment terms, be it a moratorium on payment or outright haircuts. They hate it so much that crediting agencies and the markets have punished all of PR’s bonds, including GO’s. What is the reason for their wrath? They now believe that PR will restructure its GO’s and give as a reason that now PR has abandoned its mantra of we will pay everything to we will pay something at some time. It seems that the Governor and its team does not understand the basic business idea of TRUST. Right now, the markets don’t TRUST the Puerto Rico government and no amount of press conferences or conference calls will change that. Let’s see if the Government will learn its lesson.

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