Wednesday, May 04, 2016

Puerto Rico Debt Measure Pressed by Democrats, Citing Zika
May 4, 2016 — 2:46 PM EDT
Laura Litven

House Democrats are stepping up pressure on Republicans to advance legislation addressing Puerto Rico’s worsening debt crisis by issuing a report arguing that austerity cuts can’t be sustained and have made the island more vulnerable to the mosquito-borne Zika virus.

Health-care cuts in response to the $70 billion debt crisis have created a potentially “disastrous” outcome for residents and show how further sharp reductions in government spending can’t be a part of a legislative solution, according to the report released Wednesday by Democrats on the House Natural Resources Committee.

"We have heard from opponents of legislation to restructure some of Puerto Rico’s debt that the real solution is for the Commonwealth to just cut spending even more deeply," Representative Raul Grijalva of Arizona, the top Democrat on the Natural Resources panel, said in a statement. "This report demonstrates that calls for more cuts, while they might be easy to make, are actually irresponsible and dangerous."

Puerto Rico has been particularly hard hit by the virus, and the rainy season that started last month is creating a breeding ground for mosquitoes -- and more health-care demands. The disease can result in birth defects and miscarriages.

The Obama administration is calling for urgent action after Puerto Rico didn’t make most of a $422 million debt payment Monday, the biggest default so far in the U.S. territory’s intensifying debt crunch. Bigger problems are just around the corner. Congress has a handful of weeks to hammer out a legislative fix ahead of a second default on a $2 billion debt payment due on July 1.

“As Congress considers legislation to help Puerto Rico emerge from this humanitarian crisis, further austerity measures must be off the table,” according to the report. “A robust public health infrastructure and health care system are essential in fighting threats like Zika and recovering the economy.”

The report comes as lawmakers on the Republican-led panel are still trying to negotiate a new version of legislation, H.R. 4900, that would establish a federal oversight board to help manage the island and supervise a debt restructuring.

Bipartisan Objections

The first versions of the bill ran into objections from Republicans, as well as Democrats and U.S. Treasury officials. Republicans have worried about elements that resemble bankruptcy protection, as well as provisions they say could allow an outside authority to prioritize repayment of debt-holders.

Democrats have said the control board is being granted too much authority and could infringe on Puerto Rico’s sovereignty. The new report from Natural Resources Democrats suggests that such a board would be likely to impose stiff budget cuts on Puerto Rico, which has a population of 3.5 million.

Grijalva said in an interview Wednesday that he wants to see a provision added to the Puerto Rico legislation that would restrict the oversight board from imposing cuts to public health programs.

“This is a growing humanitarian crisis that is going to supersede this discussion of a fiscal crisis very soon if this Congress doesn’t do something fair and very soon,” he said.

Natural Resources Chairman Rob Bishop, a Utah Republican, said last week that he hopes to introduce a new draft of the bill, which will be generally similar to an earlier proposal that hit snags, shortly after Congress returns to work on May 10 from a one-week recess.

Call for Action

Treasury Secretary Jacob J. Lew is urging Congress to act as schools and hospitals on the island are scaling back services.

“Puerto Rico doesn’t have decades, Puerto Rico has a crisis today,” Lew said Tuesday in an interview on Bloomberg Television. "The need for action is urgent.”

Later Tuesday, he warned that inaction risks the very outcome that many Republicans in Congress say they fear -- a taxpayer-funded bailout of the commonwealth.

“The cost of delay is you get to the point where there’s nothing to restructure,” Lew said in an appearance before the Milken Institute Global Conference in Los Angeles. He added that “a restructuring is an alternative to a bailout.”

Zika Funding

House Democrats are bringing up the island’s struggle with Zika just as Republicans in the Capitol are wrestling with an Obama administration request for $1.9 billion in broader emergency funding to combat the virus nationwide. Although most Republicans initially resisted the request, there were signs last week that some are growing concerned that inaction could backfire on them in many election-year battleground states, including Florida.

The Zika virus is emerging as a key public-health risk in Puerto Rico, with about 707 cases confirmed by late April, 89 of them pregnant women at risk of having babies with birth defects. The first Zika-related death in the commonwealth was confirmed late last month.

Puerto Rico’s Department of Health is among many agencies that have scaled back services as the debt crisis has worsened, with its annual budget cut by 15 percent between 2011 and 2015, the report from Democrats on the Natural Resources panel said. At the same time, residents are highly reliant on the Medicaid health system for the poor to receive care, and Puerto Rico isn’t benefiting from the same type of federal reimbursement that other low-income jurisdictions receive, the report says.

“Medicaid is only 55 percent federally funded, while low-income states are up to 74 percent funded,” it says, adding that an extra $6.4 billion provided under Obamacare for Puerto Rico’s medical expenses will run out in 2017.

Democrats argued that further cuts to public health “must be avoided at all costs” and that the island should have parity with low-income states on Medicaid funding.

Puerto Rico warns of more defaults after missing May payment

Gov. Alejandro Garcia Padilla warned that Puerto Rico bond investors face a cascade of defaults starting in July unless Congress passes legislation that facilitates a restructuring of the commonwealth's debt.

The exhortation made Monday in San Juan came a day after Garcia Padilla announced a moratorium on the payment of $400 million in Government Development Bank debt that matured Sunday. The governor said he was choosing to focus on providing essential services as the commonwealth's financial crisis worsens, rather then to pay creditors. The default is the biggest yet by the island.

The missed payment opens the door to larger and more consequential defaults on general-obligation bonds, which are protected by the island's constitution. Puerto Rico and its agencies owe $2 billion on July 1, including $805 million in GOs. It also could affect slow-moving efforts by U.S. lawmakers to resolve the biggest crisis ever in the municipal bond market.

"The really bigger deadline is the one the market's more worried about, the July 1 payment," Peter Hayes, who oversees $110 billion of state and local debt as the head of BlackRock Inc.'s muni group, said during an interview on Bloomberg Television. The May 1 payment "has been widely expected, generally known."

After announcing the default, the GDB said it reached a tentative agreement with a group of hedge funds who hold $900 million of its debt under which creditors would accept a potential haircut, leaving them 47 cents on the dollar of the face value of their original securities. The parties agreed to keep discussions out of court while they continue to negotiate. It reached a similar agreement Friday with credit unions holding about $33 million in debt.

Even with the debt-deferral agreements, credit-rating companies said a default was inevitable. Moody's Investors Service analysts said last week that any non-payment, even if creditors agree to it, constitutes a default in their eyes. S&P Global Ratings said a distressed debt exchange or temporarily withholding interest is synonymous to default.

A default on the general-obligation bonds would be the first by a state-level borrower since Arkansas missed payments on its debt in 1933. That would likely trigger a restructuring of the commonwealth's $13 billion of general obligations, which would be the largest-ever in the tax-exempt market.

Not everyone is convinced it will reach that point. Daniel Hanson, an analyst at Height Securities, wrote in a note that April tax collections may show that Puerto Rico is taking in enough revenue to be able to meet its July payments. The island's Treasury Department will release April collections next week.

Even so, the non-payment by the GDB alone will push the amount of outstanding munis in default up by 44 percent, to $23.6 billion from $16.4 billion, according to a tally from Municipal Market Analytics. That would make 0.64 percent of the $3.7 trillion market in default, up from 0.44 percent.

Puerto Rico racked up $70 billion of debt across more than a dozen issuers as it borrowed to paper over budget deficits. Garcia Padilla said 10 months ago that the obligations were unpayable. Yet, up until now, the commonwealth only missed $143 million of payments on appropriation bonds from the Public Finance Corp. and rum-tax securities from the Infrastructure Financing Authority.

The development bank, in contrast to those borrowers, is a prominent, visible and well-known Puerto Rico entity set up after the Great Depression to chart a course out of poverty. It's the fiscal agent of the commonwealth, lending to the island government and localities. For the past few weeks it has operated under a state of emergency to preserve cash.

The lender was designed to promote business investment with a long-term horizon, but in recent years politicians turned it into a piggy-bank that lent to the government and its agencies, helping keep them afloat as the island's economy shrunk every year but one since 2006. About 45 percent of residents live in poverty. Puerto Ricans have been fleeing the island at record rates for work on the U.S. mainland.

The default comes as the House Natural Resources Committee is working on a bill that would establish a federal oversight board to manage any debt restructurings and weigh in on spending plans. It's set to file a new draft after lawmakers return from recess on May 10. The committee last month postponed a vote on the measure as lawmakers from both sides and the U.S. Treasury Department sought to make changes to the bill.

"Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis," Treasury Secretary Jack Lew said in a letter to Congress posted Monday on the Treasury department's website. "Congress must work quickly to resolve the few outstanding issues on the proposed legislation to help Puerto Rico."

The island owed $470 million in total to bond investors in May, including a $1.6 million general-obligation payment. Puerto Rico will pay everything Monday except for the GDB principal, according to Barbara Morgan, a spokeswoman for the GDB at SKDKnickerbocker in New York.

The GDB bond in question, which matured May 1, is a $400 million taxable security issued in 2011 with a 4.7 percent interest rate. The $22 million in interest will be paid, the commonwealth said. It last traded in March at about 32 cents on the dollar.

Those with the largest positions, according to the latest disclosure filings compiled by Bloomberg: Thompson Investment Management, $24 million; Frost Investment Advisors, $11.2 million; Baird Financial Group, $5.1 million; Texas Mutual Insurance Co., $2 million; Merchants Mutual Group, $1.5 million; and UBS Asset Managers of Puerto Rico, $1 million.

The tentative accord with investors holding $900 million of debt involves bondholders swapping their securities in the near term at a 56.25 percent recovery rate, the bank said in a statement. If Puerto Rico at a later date reduces most of its debts through a broader restructuring, then the final recovery rate on GDB bonds would be 47 percent of the original value. The GDB will pay May 1 interest on the bonds in full.

Members of the so-called Ad Hoc Group of bondholders include Avenue Capital Management, Brigade Capital Management, Claren Road Asset Management, Fir Tree Partners, Fore Research; Management and Solus Alternative Asset Management.

Alexander Lopez contributed.

Puerto Rico Debt Crisis Explained: 5 Things To Know About The Default And Congress

International Business Times
05/04/16 AT 9:07 AM

Puerto Rico defaulted Monday on $422 million worth of municipal bond debt, putting increasing pressure on Washington lawmakers to help broker a deal between creditors with stakes in the U.S. territory and the small island government. The default represents a relatively small chunk of the overall debt of $70 billion debt that is putting Puerto Rico underwater.

Here are five things to know about the debt crisis facing Puerto Rico.

The default is the biggest yet in the growing financial crisis in Puerto Rico, where banks act as the main depository and liquidity sources for public agencies and infrastructure authorities, Reuters reported.

Just after the default was announced, there were signs that major financial institutions in Puerto Rico were continuing attempts to work with creditors to resolve the issue. The night before the default, the Government Development Bank — the island’s main fiscal agent — announced a framework for restructuring. The agreement would require U.S. federal government approval and participation from the banks’ creditors.

It is unclear how receptive Congress would be to the framework.

How Did Puerto Rico End Up in This Crisis?

In the past few years, hedge funds and mutual funds bought huge amounts of Puerto Rico municipal bonds for cheap, betting the island would rebound and pay back its debts in full with big payouts to those who invested. The investors insisted the island make big cuts to government social services and worker pensions in order to pay back that debt.

One of the biggest points of contention, at least as far as stateside lawmakers are concerned, is determining whether Puerto Rico can file for chapter 9 bankruptcy under the U.S. tax code. Creditors —and many Republicans in Congress — have argued that form of debt relief is not available to municipalities in a nonstate territory and say granting that debt restructuring would set a dangerous precedent. Democrats, on the other hand, have largely argued that giving the island’s government those types of restructuring tools is the only viable way to respond to the economic and growing humanitarian crisis there.

What Creditors Want

Simply put, creditors don’t want to lose money — and they’ve spent big money lobbying in Washington to ensure Puerto Rico doesn’t easily drop their bond commitments. Interested parties include hedge funds and banks, as well as millionaires and billionaires connected to the Koch network and Karl Rove. Other interested parties include debt insurers like Vanguard.

Beyond the Money

There’s more at stake to resolving this crisis than just money. While public services on the island are still running, the administration of U.S. President Barack Obama and others are concerned that the debt could lead to a humanitarian crisis. The Department of the Treasury is urging Congress to act swiftly on the issue and eyeing several scenarios, such as what would happen if local hospitals — which are expected to be hit by Zika virus cases this summer — aren’t able to pay their bills. Unemployment on the island has hit 12.5 percent, and doctors have been leaving the island at a rate of one per day.

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