MESSAGE
| DATE | 2017-05-05 |
| FROM | ruben
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| SUBJECT | Subject: [Hangout of NYLXS] Puerto Rico is bankrupt
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http://www.reuters.com/article/us-puertorico-debt-bankruptcy-analysis-idUSKBN18022T
Puerto Rico bondholders in for bumpy bankruptcy ride
By Nick Brown | NEW YORK
If Puerto Rico’s record-setting bankruptcy follows the template of other
municipal restructurings, general obligation bondholders may be in for a
long ride, despite constitutional guarantees on their debt.
The federal financial oversight board for Puerto Rico on Wednesday
pushed the U.S. commonwealth into a court-sanctioned restructuring
process akin to U.S. bankruptcy, known as Title III. Similar filings for
the island’s public agencies could be coming soon.
Puerto Rico will use the court processes to restructure much of its $70
billion debt load and $49 billion in pension liabilities. This dwarfs
Detroit’s 2013 filing, which at $18 billion in bond and pension debt was
until now the largest-ever U.S. municipal bankruptcy.
The island's constitution guarantees the debt of GO, or General
Obligation, bondholders, while other debt, known as COFINA, is backed by
revenue streams from tax proceeds.
But in past bankruptcies, that has not meant much.
In five of six recent public bankruptcies in which the debtor defaulted
on bonds, pensioners walked away with full recovery, while bondholders
took haircuts, according to data from Moody’s Investors Service. Among
those settlements, Harrisburg, Pennsylvania, bondholders took a
reduction in the value of their investments by an average of about 25
cents on the dollar, according to Moody's, while in Stockton,
California, the haircut was 50 percent.
Even in Detroit, where pensioners suffered losses of about 18 percent,
bondholders on average took home only 25 cents on the dollar, the
Moody’s data shows.
“If the market hasn’t taken this dynamic into account by now, you can
imagine they will after Puerto Rico, given its enormous scale,” said
bankruptcy expert Drew Dawson, a professor at the University of Miami
School of Law.
Among Puerto Rico creditors, GO and COFINA debt are viewed as the two
safest bets for decent recoveries.
GO holders seemed to have an advantage out of court, where
constitutional debt is seen as sacrosanct. Puerto Rico offered a
restructuring that favored GO bonds over COFINAs. [L1N1I109O]
But the opposite may be true in bankruptcy, which prioritizes debt
backed by a revenue stream, like COFINA, ahead of unsecured debt.
“Bankruptcy totally changes the priority for those two bonds,” said
George Schultze, hedge fund manager and head of Schultze Asset
Management, which does not hold Puerto Rican debt.
Moody’s has rated the commonwealth's GO and COFINA debt on equal
footing, forecasting recoveries for both between 65 and 80 cents on the
dollar, and ahead of debt from Puerto Rican agencies like the Government
Development Bank, which it sees as recovering less than 35 cents.
“There is no precedent to really resolve which one is the stronger
between GO and COFINA,” said Tim Blake, a managing director at Moody’s,
noting that Title III was uniquely created under last year’s Puerto Rico
rescue law, PROMESA.
Dawson said it is a tough call, but negotiating leverage “seems to have
shifted, in the context of bankruptcy, to favor COFINA.”
GO holders, to be sure, could try to challenge the legality of COFINA’s
lien on the tax revenues. But contrasting statements between COFINA and
GO holders may give a sense of each side’s confidence in the bankruptcy
process.
Susheel Kirpalani, a lawyer for a COFINA investor group, on Wednesday
called the filing “sound public policy.” All along, COFINA holders have
favored the bankruptcy route.
But Andrew Rosenberg, a lawyer for a GO bond group, said “the economy of
Puerto Rico will be put on hold for years” in a bankruptcy.
CREDITOR LEVERAGE
Creditors may have some leverage to petition a judge to toss the case,
arguing that the oversight board did not meet PROMESA’s requirements to
file a Title III.
PROMESA requires good-faith negotiations toward an out-of-court deal
before any filing, as well as to establish “procedures necessary to
deliver” audited financial statements for any entity entering bankruptcy.
Some Puerto Rican agencies still have not published such statements, and
creditors have griped for months that the oversight board has not done
enough to encourage compromises outside of court.
“We would agree there is a case to be made here” for dismissing the
case, Keefe Bruyette & Woods analyst Chas Tyson told investors in a note
on Wednesday.
Rosenberg said the oversight board blocked his group’s last-minute
restructuring deal with the island in order to push it into bankruptcy,
a claim a board spokesman quickly denied.
Another key issue that remains in limbo for debt holders is what the
island defines as an "essential service." Under Puerto Rico's
constitution, it cannot cut repayments to GO creditors except to
maintain essential services.
All told, “this will be a field day for litigation, including over who
has priority and whether the bankruptcy is even authorized,” said
Schultze. “It could even go to the Supreme Court.”
(Additional reporting by Tracy Rucinski in Chicago)
FILE PHOTO: A person carries a Puerto Rican national flag during a
protest against the government's austerity measures as Puerto Rico faces
a deadline on Monday to restructure its $70 billion debt load or open
itself up to lawsuits from creditors, in San Juan, Puerto Rico May 1,
2017. REUTERS/Alvin Baez
FILE PHOTO: A person carries a Puerto Rican national flag during a
protest against the government's austerity measures as Puerto Rico faces
a deadline on Monday to restructure its $70 billion debt load or open
itself up to lawsuits from creditors, in San Juan, Puerto Rico...
REUTERS/Alvin Baez
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