Congressional Hearings Grapple with Puerto Rico’s Fiscal Train Wreck

The Puerto Rican capitol continues to lobby US Congress as US bond insurers initiate litigation (Wikimedia)
The Puerto Rican government continues to lobby the US Congress, as bond insurers initiate litigation. (Wikimedia)

EspañolOn Tuesday, a US House committee held the first Congressional hearing on Puerto Rico’s fiscal woes since the US territory defaulted on a portion of its debt obligations earlier this month. The hearing follows House Speaker Paul Ryan’s call for Congress to find a “responsible solution” to the island’s monetary concerns by March 31.

Creditors of Puerto Rico’s approximately US$70 billion in debt — more than any US state, excluding New York and California — are keeping a close eye on Washington as the debate begins to swirl inside Capitol Hill.

Tuesday’s hearing primarily introduced congressmen to the challenges surrounding the commonwealth’s electricity system, but did not touch on other issues confronting the island. Lisa Donahue, the chief restructuring officer of Puerto Rico’s largest electricity provider, testified at the hearing and indicated that the Puerto Rico Electric Power Authority (PREPA) will be unable to make its next debt payment in the amount of US$1.13 billion due on July 1.

Donahue’s ominous projection comes on the heels of the commonwealth’s default this month on US$36 million of agency bond payments, forcing insurance companies that guarantee these bonds to cover the shortfalls. The agencies tied to the default include infrastructure authorities, like the Puerto Rico Highways and Transportation Authority, the Puerto Rico Convention Center District Authority, and the Puerto Rico Infrastructure Financing Authority (PRIFA).

Through an executive order on November 30, Puerto Rico Governor Alejandro García Padilla redirected funds originally intended for these lower-ranked bonds, commonly referred to as the clawback, in order to make a large debt service payment to creditors of general obligation bonds. The general obligation bonds, says the governor, are granted the highest payment priority according to the Puerto Rican Constitution.

In response, bond insurers filed a lawsuit in the US District Court of Puerto Rico asserting that the government’s clawback was illegal, since it had sufficient funds.

“One key precondition is that the revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately US$9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately US$1.85 billion,” Ambac Financial Group Inc., one of two bond insurance companies party to the lawsuit, along with Assured Guaranty Ltd., said in a released statement.

While the court decides whether or not García Padilla’s actions were illegal, the clawback provides the Puerto Rican government with some breathing room prior to the next set of large bond payments (US$2 billion) scheduled in July. During this time, Padilla hopes he and his officials can lobby Congress on a variety of legislative solutions, most notably, Chapter 9 bankruptcy, which is currently unavailable to the commonwealth.

On January 8, Governor Padilla addressed the bond insurers’ lawsuit: “This latest development will force a race to the courthouse, and with no legal framework to handle this impending litigation crisis, both the commonwealth and its creditors will soon face the opposite of due process and rule of law,” he said.

“Congress has ignored Puerto Rico’s crisis and instead allowed the island’s 3.5 million American citizens and their creditors to enter into chaos.”

While bankruptcy is the preferred congressional remedy of the Puerto Rican administration, and of most Democrats on the Hill, creditors fancy a “federal control board” as a means to oversee expenditures and curb budget deficits. However, Republicans in Congress, by and large, have been reluctant to back a bankruptcy provision to date.

The House committee is expected to hear testimony on the the federal control board option in a hearing scheduled for January 26, according to a Democratic spokesperson.

Tuesday’s hearing drew attention to the problems facing Puerto Rico’s electricity system, which Donahue claims is inefficient and costly. Measures have been taken to reduce costs, however they remain inadequate to confront their fiscal deficits.

At the end of December, the utility company reached an agreement with creditors and bond insurers to restructure its US$8.2 billion debt. The agreement is subject to a number of contingencies, including the approval of the Puerto Rican Congress. The legislative body expects to vote on the deal later this month.

However, the controversial clawback actions taken by the Puerto Rican government may prove to be an even bigger hurdle, given that Assured Guaranty, Ltd. is a party to both the PREPA agreement and the lawsuit against the administration.

In a statement on Thursday, the president and chief executive officer, Dominic Frederico, laid out his concerns: “These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility.”

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