Puerto Rico’s unsecured debt cancellation faces new wave of criticism

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City bankruptcy expert James Spiotto warned a House committee this week that allowing Puerto Rico to write off its unsecured debt would cause borrowing costs to rise in the future, hampering its future economic recovery.

Another warning against debt cancellation also came from the lawyer representing 23,000 members of the Service Employees International Union who work in schools and hospitals in the territory.

Both were among witnesses who addressed the House natural resources committee on Wednesday about possible changes to the Puerto Rico Monitoring, Management and Economic Stability Act, 2016 (PROMESA).

Supervisory Board chief executive Natalie Jaresko also advised against debt cancellation during the Natural Resources Committee hearing last week.

The 2016 law created a supervisory board to restructure the territory’s debt, but critics who have pointed to perceived shortcomings in the law and want Congress to enact amendments.

“Democrats would have written a different law if we had a majority,” Natural Resources Committee Chairman Raul Grijalva, D-Arizona, said last week at a previous hearing on possible amendments.

But any change to PROMESA will require broad bipartisan support in the House, as the Senate is not supposed to write its own legislation.

Florida Democratic Representative Darren Soto said he hopes a bipartisan deal can be reached.

“I think the committee is very open-minded about what to do,” Soto told reporters on Wednesday. “I think it’s more likely that if we can get a bipartisan bill out of the House, we can do something.”

But committee-ranking Republican Rep. Rob Bishop of Utah has made it clear that a draft provision allowing for the cancellation of unsecured debt is a no-starter.

“The proposed amendments that have been put forward here are not going anywhere,” Bishop said at Wednesday’s hearing. “If they are passed in the House, which I consider a little uncertain … they will never be discussed in the Senate and they will never be signed by the President.”

Spiotto, chief executive of Chapman Strategic Advisors, told lawmakers that replacing debt restructuring with debt cancellation has no rationale or justification.

“What is important is not the elimination of debt, but the adjustment to what is sustainable and affordable,” said Spiotto.

The average haircut in 180 recent sovereign debt restructurings was 38%, Spiotto said.

“Why is this important? “, he said. “Because Puerto Rico will have to go back to the market to borrow money for its infrastructure and other government services.”

The experience of Greece, Argentina, Brazil, Peru and others who forgave their debt is that they ended up paying more. “At least 2% more per annum, which equates to a 20-year bond maturing at a 5% discount, 25% of the additional amount goes to additional interest,” he said.

Alvin Velazquez, deputy general counsel for SEIU, offered another perspective on the inappropriateness of canceling unsecured debt.

He told the story of Ramon Ortiz Carro, the founder of Unitech Engineering Group, who is owed $ 11 million for a public housing project that he and his partners built 11 years ago.

“Mr. Ortiz was a proud employer, but he now had to lay off his 125 employees,” Velazquez said.

Unsecured creditors are currently only expected to receive 1.8 cents on the dollar, while pre-2012 bondholders are in line for a 64% benchmark recovery that could reach 89.4%, Velazquez said.

He noted that one of the chants that protesters used last summer when ex-governor Ricardo Rossello was under pressure to resign, translated in English as “to clean up the dirt you have to do an audit”.

The people of Puerto Rico want a truly independent debt audit, said SEIU lawyer Velazquez.

Jaresko told lawmakers last week that an audit was not necessary due to the financial review carried out last year by international law firm Kobre & Kim.

Velazquez said there had been productive results from the Kobre & Kim report, but it was not an independent audit.

“They were not acting independently,” he said. Quite the reverse. Legal ethics oblige Kobre and Kim to zealously represent the interests of their clients, that is, the interests of the Supervisory Board.


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