Director of Credit Analysis
Stoever Glass & Co., Inc
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Obama Expected to Sign
What does this Mean for Puerto Rico Bondholders
The Senate today approved legislation (known as PROMESA) that will restructure how Puerto Rico manages its financial operations and repays its debt. That is about all that can be said with certainty.
The first thing that will likely occur will be the enactment of a moratorium on any and/or all debt repayment by Puerto Rico, starting now and continuing during the period that it will take to assemble and approve a seven-member control board. This control board will watch over debt repayment negotiations which, if they fail, can be taken over and implemented unilaterally by the yet-to-be-created control board. Since the control board has yet to be established, it is mere speculation as to how much weight the board will place on requiring Puerto Rico to honor its bonds.
Ideally, the Board will be in place by the end of September, but there is a back-up provision that would force finalization of Board election by December. Even if the Board is selected, it will take time to hire economic and financial specialists that will do the staff work and suggest recommendations to Board members, backed by data and analysis.
Since the law provides no financial resources, Puerto Rico will still default and fail to pay on over $800 million of constitutionally required general obligation debt payments on July 1, which according to Governor Padilla is a certainty because there are no funds available to make these payments. There is a possibility that those statements were politically motivated to push the PROMESA law toward passage. If that is true, and Puerto Rico pays its general obligation debt service on July 1, Governor Padilla, and by extension the entire Commonwealth of Puerto Rico, will have lost any of their remaining credibility.
Proponents of the law tout that it will provide an orderly process for Puerto Rico to restructure its budgets and debt. But with no indication of who will be appointed to the control board, that is mere speculation. Will the Board’s main focus be fiscal stability and integrity, or “Keynesian” fiscal policy of using debt (in this case not repaying debt) to stimulate Puerto Rico’s economy? Puerto Rico has used debt to stimulate its economy for over 10 years, without success. It is now time for leadership to exhibit fiscal propriety for a change.
The Control Board will literally determine Puerto Rico’s financial fate.
If PROMESA’s Board follows the lead of New York City’s Financial Control Board of the 1970’s, the Board could enact regulations, policies and reforms that will bring Puerto Rico’s financials under control and allow them to repay all of its debts. In the long haul, that should be PROMESA’s most important long-range goal: enable Puerto Rico to be self-sufficient and able to sell bonds in the future for its operating and capital needs. It’s been done before, and can be done again.
If the Control Board acts out of expediency and defers or reneges on legally issued debt merely to avoid tax hikes, continue unaffordable spending, or maintain artificially low electric rates, the control board will have done the ultimate injustice to Puerto Rico. Puerto Rico will be labelled as a permanent credit risk, and will have to accept usurious interest rates to borrow money they will desperately need to maintain or build needed infrastructure.
About the Author
RICHARD P. LARKIN, Stoever Glass & Co., Inc.
Richard Larkin is the Director of Credit Analysis specializing in municipal bonds, joining Stoever Glass in April 2016. Earlier in his career Dick spent 8 years at HJ Sims, where his first assignment was to testify before the House of Representatives on the Bond Insurance Crisis. Dick worked at J.B. Hanauer from 2003-2008, performing high-yield municipal bond analysis. Dick was also a Managing Director in Fitch’s public finance group as the Co-chairman of its Public Finance Criteria Committee. He covered high-profile tax-supported and revenue bond credits and had supervisory responsibility for credit surveillance and the development of public finance staff. Prior to joining Fitch in 1998, Dick was a Managing Director and Chief Municipal Rating Officer at Standard & Poor’s, responsible for municipal rating policies, practices, governance and criteria. Following twenty-one years at S&P, Dick worked as a financial advisor at Fairmount Capital Advisors where he developed credit enhancement programs for public pension funds. Later, he helped found Reliance SRL, a rating agency that performed local credit ratings in Uruguay.
From 1988-1992, Dick was a charter member of the Anthony Commission on Public Finance, created to protect federal tax law on the ability of state and local governments to carry out their responsibilities to their citizens at the lowest possible cost. From 1995-1998, Dick also served on the National Advisory Council on State & Local Budgeting (NACSLB). This industry task force, comprised of representatives from the private sector and officials from all levels of local government, identified and fostered 60 of the best budgeting practices that have been implemented by our best-run state and local governments. Dick earned his BA in economics from Iona College and a Masters in economics from Fordham. In 1999-2000, he was a key participant in the implementation of Fitch’s Default Study and revision of its criteria and ratings. During the same period, he authored the definitive study on the impact of municipal government’s management practices on credit ratings, defining for issuers a rating agency’s relative evaluation of best management practices. Dick has had hands-on rating experience in 42 states, at all levels of state and local government covering virtually every type of debt structure and security pledge. He has been a frequent speaker at state and national Government Finance Officers’ Association (GFOA) conferences, and has articles published in national media and public finance textbooks.
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