Puerto Rico power co. gets debt deadline extension

23 Dec 2015 | Author: | No comments yet »

Inside the Billion-Dollar Battle for Puerto Rico’s Future.

The Puerto Rico Electric Power Authority reached a preliminary agreement with bond insurers to restructure the utility’s finances, a key step toward completing the first deal that would grant debt relief to the U.S. commonwealth.With a potential huge default on bonds looming and a new bankruptcy law for Puerto Rico to be weighed by Congress in the new year, bondholders have agreed to keep trying to reach a deal to restructure as much as an eighth of the island’s $72 billion debt.

Over weak coffee in a conference room in Midtown Manhattan last year, a half-dozen Puerto Rican officials exhaled: Their cash-starved island had persuaded some of the country’s biggest hedge funds to lend them more than $3 billion to keep the government afloat. Insurers agreed to bolster the security of the new bonds, which would make it more likely that the bonds would be rated investment grade, according to a person familiar with the situation. Stocks of bond insurers Assured Guaranty (AGO) and MBIA (MBI) as well as uninsured bonds were trading higher as the deal was seen as favorable for bondholders. An agreement to pursue the restructuring plan was set to expire on Thursday, but the parties renewed it that evening, as they have done a number of times previously. And under the island’s Constitution, Puerto Rico was required to pay back its debt before almost any other bills, whether for retirees’ health care or teachers’ salaries.

The agreement hasn’t been approved by the power authority’s board and would only take effect after Puerto Rico’s lawmakers reconvene and pass legislation to allow the deal. On the surface, it is a battle over whether Puerto Rico should be granted bankruptcy protections, putting at risk tens of billions of dollars from investors around the country.

But it is also testing the power of an ascendant class of ultrarich Americans to steer the fate of a territory that is home to more than three million fellow citizens. The commonwealth is seeking to strike deals with investors to restructure about $70 billion of debt, which includes Prepa debt, without the bankruptcy protections allowed U.S. municipal entities. Many of them have also taken on an outsize role in financing political campaigns in the aftermath of the Supreme Court’s 2010 Citizens United decision. Puerto Rico’s cash has dwindled, debate has flared in Washington over whether and how to help the island, and the governor of Puerto Rico, Alejandro García Padilla, warned that the island was likely to default, either in January or May. In addition, the United States Supreme Court unexpectedly said it would consider Puerto Rico’s case for enacting its own restructuring law, because it is ineligible for Chapter 9 bankruptcy, which cities like Detroit and Stockton, Calif., have used recently to shed debt.

To block proposals that would put their investments at risk, a coalition of hedge funds and financial firms has hired dozens of lobbyists, forged alliances with Tea Party activists and recruited so-called AstroTurf groups on the island to make their case. Persuading the Supreme Court to reconsider has been widely seen as a surprise victory for the struggling island, and a setback for creditors, even though any ruling is still months off. This approach — aggressive legal maneuvering, lobbying and the deployment of prodigious wealth — has proved successful overseas, in countries like Argentina and Greece, yielding billions in profit amid economic collapse. A measure allowing the commonwealth to restructure debt didn’t make the $1.15 trillion spending bill passed Friday. “By not acting now, Congress has opted for the U.S. commonwealth to default on its obligations and unfold into chaos,” the governor said in a statement.

The Treasury Department has been pressing Congress to give Puerto Rico access to bankruptcy reorganization, or something similar, so that it can reduce its debts in an orderly fashion. Senator Marco Rubio, whose state, Florida, has a large Puerto Rican population, expressed interest this year in sponsoring bankruptcy legislation for the island, says Senator Richard Blumenthal, Democrat of Connecticut.

While some investors oppose such a move and have said the Prepa negotiations show there is no need for it, Congress this week gave the clearest sign that lawmakers will eventually take up legislation addressing the island’s crisis. House Minority Leader Nancy Pelosi introduced a bill on Friday that would stay legal actions against the commonwealth while Congress considers restructuring legislation.

Any such power “should sunset within a short period of time after the restructuring is accomplished,” Richard Ravitch, the former lieutenant governor of New York State, said in written responses to questions from Senator Orrin G. Hatch, Republican of Utah and a member of the Judiciary Committee, which has been working on a possible restructuring framework. “This would ensure that no future government would borrow as promiscuously and then be able to take advantage of the bankruptcy laws,” said Mr. Bankruptcy, he said, should be considered only as a “last resort.” The fight over the island’s future is stretching from the oceanside neighborhoods of San Juan, where a growing number of wealthy investors and financial professionals have migrated in recent years to exploit generous tax breaks, to Capitol Hill. Their efforts are being closely watched by financial institutions, labor unions and policy makers on the mainland, where many ordinary investors own Puerto Rican bonds through mutual funds.

Some warn that Puerto Rico could be a test case for the rest of the country, paving the way for troubled states like Illinois to escape unsustainable debts. Donahue, the AlixPartners managing director who is Prepa’s chief restructuring officer, said in an interview earlier this week. “Everybody does want a deal.

Stiglitz, the Nobel Prize-winning economist. “They want their money now, and they want to get the rules set so that they can make money for the next 20 years.” Along Ashford Avenue in San Juan’s Condado district, newly renovated hotels gleam beside shops like Gucci and Cartier. Still farther west, not far from the Capitol in Old San Juan, a new development named the Paseo Caribe makes a more explicit pitch to potential buyers: “The Puerto Rico Advantage: Sun, Sand and Zero Taxes,” the development’s website promises.

Pharmaceutical companies and manufacturers have fled the island, followed by young Puerto Ricans looking for jobs, draining the island’s work force and tax base. Three years ago, in a bid to lure financial services firms and other employers, Puerto Rico’s governor at that time, Luis Fortuño, a Republican, signed laws intended to turn the island into a domestic tax haven.

Americans who relocated to Puerto Rico, spent at least half a year there and brought their company with them would pay no federal income or capital gains taxes. They settled in Condado and a handful of coastal enclaves like the Dorado Beach Resort, where the billionaire investor Toby Neugebauer, who provided $10 million to the presidential campaign of Senator Ted Cruz of Texas, bought a home. Paulson told an investor conference last year, would become “the Singapore of the Caribbean.” This spring, at his urging, the island even rented a booth at the hedge fund industry’s annual conference at the Bellagio casino in Las Vegas, where two attractive women pitched Puerto Rico’s charms to guests.

But in 2013, after the island’s general obligation bonds were downgraded, they caught the attention of a different sort of investor: hedge funds specializing in distressed assets. Not only were the bonds guaranteed by the Puerto Rican Constitution, but under a wrinkle of federal law, the island’s public corporations and municipalities — unlike those of the 50 states — do not have bankruptcy as a recourse. Paulson’s firm purchased bonds in March 2014, as did Appaloosa Management, founded by David Tepper; Marathon Asset Management; BlueMountain Capital Management; and Monarch Alternative Capital, said Puerto Rico officials involved in the sale. Rubio had won a large portion of Florida’s Puerto Rican vote in his 2010 race, and he was now about to announce his presidential campaign. “We were given to understand by his staff that they were very interested in the bill and in fact were going to co-sponsor it,” Mr.

In the weeks that followed, the staffs of the two senators worked together on the legislation. “To give them credit, his team made contributions to the substance of the bill,” Mr. But opponents were organizing against the measure, led by firms that owned debt from Puerto Rico’s power authority, according to federal lobbying records and other documents. Martin said, “I don’t know that I can answer that.” She added: “It’s more bailouts for bad decisions, expecting us to help take care of things that we should not be responsible for.”) The pressure put Mr. Rubio held off. “We delayed the actual formal introduction of the bill while we were waiting for a final answer from Senator Rubio, and at some point, we said: ‘We need to go. This fall, a conservative group called the 60 Plus Association, based in Alexandria, Va., unleashed a wide-ranging media and lobbying effort against a restructuring and Governor Padilla, whom it accused of “manufacturing a crisis” and trying to “extort” money from Congress.

In November, 60 Plus recruited a group of these individuals, calling them “Main Street Bondholders,” for a news conference in San Juan. “Do these folks look like vultures to you?” asked Matthew Kandrach, the vice president of 60 Plus, who apologized for not speaking Spanish. “I want the governor to see these faces.” Exactly who the group was speaking for was unclear. And while 60 Plus claims to represent millions of seniors, most of the group’s revenue comes from a few large, anonymous contributions, according to its most recent tax return. Two Republicans briefed on the arrangement said 60 Plus had been recruited by the DCI Group, a Republican public relations firm that specializes in “AstroTurfing” — orchestrated lobbying campaigns designed to look like grass-roots efforts. Kandrach responded: “When it helps us better serve and represent our seniors, we are proud to partner with firms such as DCI who offer valuable logistical support to getting our message out.” Hedge fund executives and their allies also pressed their case in private meetings with key members of Congress and their staffs.

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