Strong and Comprehensive Oversight the Best Remedy for Puerto Rico’s Fiscal Ills
Puerto Rico’s recent enactment of a controversial debt moratorium statute ahead of large debt service payments due in May and July is evidence the territory’s fiscal crisis is coming to a head. We believe an orderly, fair and transparent resolution to the situation in Puerto Rico is best for all bondholders, the broader municipal market and the people of Puerto Rico. This is best accomplished through Congressional intervention in the form of a strong oversight board, a framework that encourages negotiation between Puerto Rico and creditors and a process for the renegotiation of all of the Commonwealth’s obligations. Draft legislation that has been publicly released provides a fair framework for consensual negotiations between Puerto Rico and its creditors and will not increase borrowing costs for U.S. states, municipalities or other territories. Failing to take action now will, in our opinion, most certainly result in prolonged, complex litigation and will stifle any hope of economic recovery for Puerto Rico. That outcome is more likely to disrupt the municipal market than providing a rational, comprehensive, and territory-specific legal framework to resolve this economic and fiscal crisis. The argument that this legislation will lead to higher borrowing costs for U.S. states is simply not borne-out by the facts: as Puerto Rico’s crisis wore on over the last few years and Congress began to consider intervention, states did not see a corresponding penalty to borrow.
We see no reason this will change. The municipal market defies broad-brush generalizations; it is a highly complex market that trades based upon analysis of individual issuers. Puerto Rico is a significant outlier relative to U.S. states and the market has already rejected the notion that states should pay higher borrowing costs for Puerto Rico’s debt crisis. Even the most fiscally challenged states have the capacity to honor their obligations, unlike Puerto Rico. We do not see the value of these securities or the integrity of the muni market compromised by the options provided to Puerto Rico in draft legislation we have reviewed. Rather the opposite is true. Stabilizing Puerto Rico would be a positive outcome for the most challenged states and the rest of municipal market.
A strong federal oversight board to facilitate greater transparency and fiscal discipline will be critical to restoring market confidence and building a strong foundation for Puerto Rico’s future economic growth. Only an independent oversight board will have the credibility to establish the government’s true capacity to pay its obligations including labor contracts, debt service, pensions and vendor payments. Until Puerto Rico’s true fiscal picture is understood, it would be unreasonable for creditors to agree to debt impairment. For this reason, we are encouraged to see the draft legislation requires a full accounting of Puerto Rico’s financial picture before starting a restructuring process.
Importantly, the current proposal does not pick winners and losers among Puerto Rico’s complex capital structure. Rather, it provides all creditors the opportunity and responsibility to participate in a consensual, negotiated solution to Puerto Rico’s onerous debt burden. Legislation that exempts any particular class would serve as an inappropriate Congressional bail-out of specific classes of creditors. The current proposal wisely leaves restructuring outcomes to the negotiation process and the courts. We believe it is critically important that all of Puerto Rico’s obligations are within the scope of the oversight committee. A comprehensive approach frees the oversight authority to craft a comprehensive and long-term solution. A more limited approach will – in our opinion – be lacking and lead to additional rounds of Congressional attention. The best outcome for the broader municipal bond market and all issuers is for Congress to address this situation quickly, decisively and only once.
Finally, we believe legislation like that proposed will provide better outcomes and recoveries for the thousands of individual investors that lack the ability to aggressively lobby Congress, submit editorials or seek injunctions. These investors hold an estimated one-third of Puerto Rico’s debt and will realize the best recoveries possible if there is an effective oversight board shepherding the process and seeking equitable outcomes for all creditors both big and small, which is exactly the intent of the proposed legislation.
The quite vocal opposition to Congress implementing a territorial oversight and restructuring package to address Puerto Rico’s debt crisis has been heavy on opinion and supposition, but light on facts. And for good reason: the facts plainly don’t support the resistance to any path for a renegotiation of Puerto Rico’s debts. In short, while decrying a “bail-out” for Puerto Rico, these creditors – mostly non-traditional municipal investors – are in fact seeking a bail-out for themselves.
Experience tells us – and the facts support our belief – that legislation like that proposed will do nothing to increase the borrowing costs for the rest of the municipal market. In fact, instituting aspects like the oversight board with a comprehensive scope that includes all forms of debt, pensions and contracts provides the best opportunity for a fair outcome free from bail-outs for either Puerto Rico or its creditors.
John Miller
Managing Director, Co-Head of Fixed Income
Nuveen Asset Management
The statements contained herein represent the views and opinions of Nuveen Asset Management, LLC as of the date of publication and may change without notice at any time based on market and/or other conditions and may not come to pass. This material is for informational and educational purposes only and is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. Information was obtained from third party sources, which we believe to be reliable but not guaranteed. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time.
