Righting a Wrong: Puerto Rico’s Bankruptcy

Go Lean Commentary

How do you measure success … or failure?

In school, there is a simple measurement: there is the perfect “A”; everything else – B, C and D – was less desirable. But the actual grade “F” means you fail.

How can we measure success and failure for our community’s societal engines: economics, security and governance? There are so many approaches, but just like in school, there is a definitive “F” grade, a Failed-State status. In the case of a municipal entity, there is no doubt that a Bankruptcy filing is an “F”, a failure!

This is Puerto Rico today.

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Their Governor, Ricky Rossellójust announced (May 3, 2017) that the US territory will invoke the bankruptcy-like powers that were extended to them by Congress last year. This was designed to bring an end to their intractable crisis, despite the assurances that they had given to investors that bankruptcy-style “haircuts” could not be considered. There are so many issues afoot with this move:

Can other American states/territories push lawmakers (Congress) for this same legal recourse – Chapter III of the Bankruptcy Code, the Promesa Provision – that has been ceded to Puerto Rico if they are ever at the end of their financial ropes?

(Chapter 9 Bankruptcies are allowed for municipalities, but not state governments).

This is a slippery slope!

“If Puerto Rico can achieve this level of debt relief through Promesa as the initial plan suggested, it will only make sense for Virgin Islands to attempt the same” – Wall Street Analyst

This commentary is 2 of 4 in a series considering how to “Right a Wrong”. Surely, reneging on a pledge to repay debts is a “Wrong”. This type of move could affect every other community seeking to raise funds on the capital markets (bonds). So there are lessons that we need to glean from the “Righting of these Wrongs”. The full series is as follows:

  1. Righting a Wrong: 2008 Housing Crisis
  2. Righting a Wrong: Puerto Rico’s Bankruptcy
  3. Righting a Wrong: Volkswagen Emissions Crisis
  4. Righting a Wrong: Takata Air-Bags

As related in the first submission in this series, these “Wrongs” relate to bad actions and inaction by different actors. The image and reputations of stakeholders “take a hit” while these issues are fresh. This is definitely the case for Puerto Rico right now. “Righting the Wrong” can override the bad image and the “comeback” or recovery could be the lasting legacy.

The book Go Lean…Caribbean addressed Puerto Rico from the beginning; starting with the opening assessment of the State of the Caribbean region. The book identified Puerto Rico on Page 18 as:

The Greece of the Caribbean
Puerto Rico’s population is declining. Faced with a deteriorating economy, increased poverty and a swelling crime rate, many citizens are fleeing the island for the U.S. mainland. …

Puerto Rico has been through austerity and made tough decisions: It has cut government jobs, privatized a couple of highways, and is in the process of privatizing the international airport. But unlike the case of Greece, the economic mess is on America’s hands. For U.S. citizens on the mainland who have a 401(k) account or pension for retirement, it’s possible that they have money invested in Puerto Rican bonds, which are now no longer worth much. So citizens in the states could feel the pain if Puerto Rico’s economy collapses.

This book was published in November 2013, projecting verbiage like “if Puerto Rico’s economy collapses”. According to the latest developments and this news article here (and VIDEO), that collapse is now a reality:

Title: Puerto Rico Declares a Form of Bankruptcy
By: Mary Williams Walsh

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With its creditors at its heels and its coffers depleted, Puerto Rico sought what is essentially bankruptcy relief in federal court on Wednesday, the first time in history that an American state or territory had taken the extraordinary measure.

The action sent Puerto Rico, whose approximately $123 billion in debt and pension obligations far exceeds the $18 billion bankruptcy filed by Detroit in 2013, to uncharted ground.

While the court proceedings could eventually make the island solvent for the first time in decades, the more immediate repercussions will likely be grim: Government workers will forgo pension money, public health and infrastructure projects will go wanting, and the “brain drain” the island has been suffering as professionals move to the mainland could intensify.

Puerto Rico is “unable to provide its citizens effective services” because of the crushing weight of its debt, according to a filing on Wednesday by the federal board that has supervised the island’s financial affairs since last year.

The total includes about $74 billion in bond debt and $49 million in unfunded pension obligations.

While many of Puerto Rico’s circumstances are unique, its case is also a warning sign for many American states and municipalities — such as Illinois and Philadelphia — that are facing some of the same strains, including rising pension costs, crumbling infrastructure, departing taxpayers and credit downgrades that make it more expensive to raise money. Historically, Puerto Rico was barred from declaring bankruptcy. In the end, however, financial reality trumped the statutes, and Congress enacted a law last year allowing bankruptcy-like proceedings.

Puerto Rico has been in a painful recession since 2006, and previous governments dug it deeper into debt by borrowing to pay operating expenses, year after year. For the last two years, officials have been seeking assistance from Washington, testifying before stern congressional committees and even making fast-track oral arguments before the United States Supreme Court.

At the same time, Puerto Rico’s efforts to coax its creditors to agree to concessions have gone nowhere. Now the coming court proceedings will give Puerto Rico extraordinary powers to impose losses on holdout creditors unilaterally.

The island’s many creditors — whose lawsuits filed against Puerto Rico on Tuesday prompted the island’s request for court relief on Wednesday — are likely to receive far less of their money back than they want. Their predicament may turn out to be a cautionary tale for bond holders of other troubled states and cities. Puerto Rico’s case could show public workers and retirees that seemingly inviolate pension systems can be changed, too.

The next step is for the Supreme Court — specifically, Chief Justice John G. Roberts Jr. — to designate a bankruptcy judge to handle the case.

The island’s lawyers may view some bankruptcy courts as more likely to be favorable to them than others. Some creditors fear Puerto Rico will seek to have the case handled in the Southern District of New York.

Puerto Rico’s governor, Ricardo Rosselló, issued a statement Wednesday aiming to offer some reassurance, even as he sought the federal court’s protection. “We remain committed to holding good-faith negotiations to reach agreements with our creditors,” he said, adding that he hoped the court proceedings would “accelerate the process.” He appeared to be referring to the extraordinary power Puerto Rico will now have in court to unilaterally impose big losses on creditors.

Some of those creditors are furious.

“The Commonwealth’s proposal is not a credible starting point for negotiations,” Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison, an adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders, said in a statement. He said that moving the proceedings to bankruptcy court would put the situation in “free-fall.”

The creditors got a shock this year when Mr. Rosselló issued a five-year fiscal plan that allowed only about $800 million a year to pay principal and interest on Puerto Rico’s bond debt, far less than the roughly $3.5 billion a year it would cost to make those payments on time. The prospect of losses on that scale prompted some creditors to argue that most of the $800 million was rightfully theirs.

“That things are starting out in such a highly adversarial way strongly suggests this will be a long and contentious journey for Puerto Rico,” said Matt Fabian, a partner at Municipal Market Analytics who closely tracks activity in the municipal bond market.

Puerto Rico’s case will be the first ever heard under a federal law for insolvent territories, called Promesa, which was enacted last summer; the Obama administration had warned that a “humanitarian crisis” would ensue if Puerto Rico were not given extraordinary powers to abrogate debt. There is no existing body of court precedent for Promesa, but the island’s creditors — who range from hedge fund managers to mom-and-pop investors — are bracing for a titanic battle.

Despite the depth of the island’s troubles, many Republicans in Congress have opposed debt relief, saying that the island has long received big federal subsidies for its health system, public housing and other works. They said Puerto Rico should explain what it had done with that money before it got any more help.

Last week President Trump suddenly added fuel to those fires, saying on Twitter that there should be no “bailout” for Puerto Rico.

On the island, Washington is not seen as a helper but as an unsympathetic colonial overlord. The step toward bankruptcy-like proceedings, under a federal judge, intensified complaints that Puerto Rico has lost all control of its own future.

But at the same time, some Puerto Ricans say quietly that if the court proceedings really do allow their government to cancel debt, their island may finally get the fresh start it needs.

The coming court proceedings will not be formally called a bankruptcy, since Puerto Rico remains legally barred from using Chapter 9, the bankruptcy route normally taken by insolvent local governments. Instead, Mr. Rosselló petitioned for relief under Title III of the Promesa law, which contains certain Chapter 9 bankruptcy provisions but also recognizes that, unlike the cities and counties that use Chapter 9, Puerto Rico is not part of any state and must in some ways be treated as a sovereign.

Bankruptcy lawyers and public finance experts are watching Puerto Rico’s case closely, to see if it shows a path that financially distressed states like Illinois might also one day take. States, like United States territories, currently cannot declare bankruptcy.

The only creditors who reached an agreement with Puerto Rico were the holders of a class of bonds, about $9 billion worth, that were sold to raise money for the island’s public power utility. Those creditors gave concessions that the governor pointed to Wednesday as a good example for other creditors to follow.

The governor’s fiscal plan also calls for shifting all current government workers from pensions into 401(k)-style retirement plans. Current retirees will continue to receive their traditional monthly pensions, but the amounts are to be reduced by about 10 percent on average.

The governor’s hand was forced by the expiration on Monday, at midnight, of a court stay that had been keeping Puerto Rico’s creditors from suing. On Tuesday, as soon as the stay expired, bondholder groups and at least one bond insurer sued. Wednesday’s actions by the governor and the federal supervisory board effectively blocked the lawsuits from proceeding.
Source: Posted May 3, 2017; retrieved May 4, 2017 from: https://mobile.nytimes.com/2017/05/03/business/dealbook/puerto-rico-debt.html


VIDEOMiller Buckfire MD Says Title III Will Help Puerto Ricohttps://www.bloomberg.com/news/videos/2017-05-04/miller-buckfire-md-title-iii-will-help-puerto-rico-video

Published on May 3, 2017 – Puerto Rico made the decision to use a U.S. court to escape from its debts. This casts a few ripples in the state and local bond market. But this action — once inconceivable for a territory that didn’t have authority to file for bankruptcy — sets a precedent that could resonate with struggling states in the decades ahead. See the full article here: https://www.bloomberg.com/news/articles/2017-05-04/puerto-rico-collapse-shows-debts-seen-as-iron-clad-may-not-be-so

What will Puerto Rico do now?

The recommendation of the movement behind the Go Lean book is to pay the debt … eventually. (Though bankruptcy filings usually involve “haircuts” where creditors will get “pennies on the dollar”).

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This is the purpose of the book Go Lean…Caribbean, to help reform and transform the societal engines in the 30 member-states of the Caribbean region. The book serves as a roadmap for the introduction and implementation of the Caribbean Union Trade Federation (CU) and the Caribbean Central Bank (CCB). The Go Lean/CU/CCB roadmap applies best-practices for community empowerment and features these 3 prime directives, proclaimed as follows:

  • Optimization of the economic engines to grow the regional economy to $800 Billion & create 2.2 million new jobs.
  • Establishment of a security apparatus to protect public safety and ensure the economic engines of the region.
  • Improvement of Caribbean governance to support these engines.

Had the CU/CCB been in force now, we would not look to Washington for answers!

The Go Lean movement asserts that Caribbean communities need to resolve their challenges together. One Go Lean mission describes the process of consolidating legacy debt and refinancing them to ease the burden on local governmental finances. Imagine a personal household that just incurred a BIG BILL for repair – think a new roof. The best strategy is to refinance and add it to the 30-year mortgage, therefore only enduring “bite-size” payments for now. The book relates this:

10 Ways to Better Manage Debt  – Page 114

1 Lean-in for the Caribbean Single Market, Caribbean Dollar & Caribbean Central Bank.
This treaty allows for the unification of the region into one market, thereby creating a single economy of 30 member-states, 42 million people and a GDP of over $800 Billion, according to 2010 figures. The CU will reboot the economic engines of the region with investments in infra-structure and business inducements.Many times these projects require up-front capital but the returns will be garnered slowly over time. These projects therefore require debt, from the capital or lending markets. The issue of debt not only concerns governments, but individuals as well. The CU will impact this dynamic by mastering credit ratings and offering to buy back foreign debt for local C$ financing and CCB controls. This tactic lets the CCB function as a local IMF, fostering a new regime for the economy.
2 M1 & The Interest Economy
The CU seeks to consolidate the currency of each member-state around the Caribbean Dollar (C$); then by inducing more electronic transactions as opposed to paper currency, there will be more lendable funds in the money supply (M1). Plus having viable capital markets will allow governments, institutions and businesses to get the capital they need, and investors/lenders can garner interest income for the use of their funds. Most Pension funds depend on this model.
3 Public Financing
Every independent country in the Caribbean is a member of the IMF, only the OverseasTerritories are not engaged in this arrangement. Why not? Their host countries (US, UK, France and the Netherlands) provide the capital access that the island territories need. The CU quest is to shift this dependency to a Caribbean source, not European or American.
4 Bonds & Add-on’s (Warrants)
Rather than international loans, the CU strategizes bond issues in C$ capital markets for government financing. There are a number of ways to make bonds more attractive to investors, like adding warrants as “sweeteners” (premiums on sale price, leverage, expirations and exercise restrictions). Warrants are often detachable and tradable in markets.
5 CU Federal Bankruptcies
6 Credit Reporting – Sharpening the Tool
7 Retail Credit Reboot and New Engines
8 Student Loans Sensible Dynamics
9 Mortgage Loan Sensible Dynamics
10 Crowd Sourcing – Community Capital Sharing Mitigates Debt

The points of effective, technocratic stewardship of Public Debt have been elaborated upon in previous blog/commentaries. Consider this sample:

http://www.goleancaribbean.com/blog/?p=7989 Transformations: Money Matters – ‘Getting over’ with ‘free money’
http://www.goleancaribbean.com/blog/?p=7601 Beware of Vulture Capitalists
http://www.goleancaribbean.com/blog/?p=7268 Detroit’s ‘debt reality’ giving schools their ‘Worst Shot’
http://www.goleancaribbean.com/blog/?p=7235 Flint, Michigan – A Cautionary Tale for bad debt management
http://www.goleancaribbean.com/blog/?p=6563 Lessons from Iceland – Model of Recovery
http://www.goleancaribbean.com/blog/?p=5818 Greece: From Bad to Worse
http://www.goleancaribbean.com/blog/?p=5759 Pressed by Debt Crisis, Doctors Leave Greece in Droves
http://www.goleancaribbean.com/blog/?p=3582 For Canadian Banks: Caribbean is a ‘Bad Bet’
http://www.goleancaribbean.com/blog/?p=3311 Detroit’s Municipal Bankruptcy – Lessons Learned

Overall, the Go Lean book stresses the community ethos, strategies, tactics, implementations and advocacies to reform and transform the economic, security and governing engines of Caribbean society. This effort will be technocratic! It will make “sure all ends meet”. We must properly administer the finances of our communities. This vision was anticipated from the beginning of the Go Lean book, opening with these pronouncements in the Declaration of Interdependence (Page 12):

xi. Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest.  The Federation must guarantee the executions of a social contract between government and the governed.

xii. Whereas the legacy in recent times in individual states may be that of ineffectual governance with no redress to higher authority, the accedence of this Federation will ensure accountability and escalation of the human and civil rights of the people for good governance, justice assurances, due process and the rule of law. As such, any threats of a “failed state” status for any member state must enact emergency measures on behalf of the Federation to protect the human, civil and property rights of the citizens, residents, allies, trading partners, and visitors of the affected member state and the Federation as a whole.

xiv. Whereas government services cannot be delivered without the appropriate funding mechanisms, “new guards” must be incorporated to assess, accrue, calculate and collect revenues, fees and other income sources for the Federation and member-states. The Federation can spur government revenues directly through cross-border services and indirectly by fostering industries and economic activities not possible without this Union.

xix. Whereas our legacy in recent times is one of societal abandonment, it is imperative that incentives and encouragement be put in place to first dissuade the human flight, and then entice and welcome the return of our Diaspora back to our shores. This repatriation should be effected with the appropriate guards so as not to imperil the lives and securities of the repatriated citizens or the communities they inhabit. The right of repatriation is to be extended to any natural born citizens despite any previous naturalization to foreign sovereignties.

xxiv. Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.

xxv. Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the Federation and of the member-states.

Yes, the purpose of this commentary is to project the better plan for reforming and transforming Caribbean municipal financing. But it is also about reforming and transforming Puerto Rico. An agenda for Puerto Rico has always been a priority for the Go Lean roadmap. This island is just sitting there in the middle of the Caribbean region. No effort to reboot the Caribbean neighborhood could reasonably ignore this island.

“But they are an American Territory, a subset of the richest, most powerful nation on the planet”.

And yet … they are a Failed-State!

In a previous blog-commentary from the Go Lean movement, it was declared that “Puerto Rico needs the strategies, tactics, implementations and advocacies of the CU. [And] the CU needs Puerto Rico!” This is true now more than ever!

Now is the time for all stakeholders – state and municipal governments and their citizens – in the Caribbean to lean-in for the empowerments described here-in and in the book Go Lean … Caribbean. We must do better with public finance than our predecessors. They tried to “go for it alone” – this is why Puerto Rico always failed – let try this different approach of “going for it together”. This is guaranteed to make Puerto Rico and all of the Caribbean a better place to live, work and play. 🙂

Download the free e-Book of Go Lean … Caribbean – now!

Sign the petition to lean-in for the roadmap for the Caribbean Union Trade Federation.

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