August 24, 2018 Read More →

IEEFA op-ed: Who really owes Puerto Rico’s bondholders—and how much?

Investigation points to negligence and wrongdoing in both the public and private sector

One thing that jumps out from the Puerto Rico Financial Oversight Management Board’s (FOMB) recent report on the island’s debt quagmire is the backward nature of the process by which the powers-that-be are determining how much Puerto Rico’s residents will be on the hook for.

The FOMB report, to its credit, lays out a history of negligence involving an astounding cast of high-level officials in both the public and private sectors.

It is clear from the FOMB report – prepared by law firm Kobre & Kim — that accountants, lawyers, credit agencies, financial advisors, engineers, brokers, insurance companies and other bond market facilitators—the same people who brought Puerto Rico to its current state of insolvency—owe Puerto Rico and its bondholders alike significant sums.

These matters should be raised and settled before rank-and-file Puerto Ricans are asked to pay.

Making the people of Puerto Rico pay first and ask questions later, as many decision makers advocate, is neither a fair nor viable solution. The FOMB, the Puerto Rico Electric Power Authority (PREPA) and some of PREPA’s creditors recently announced a preliminary debt deal that would require PREPA’s ratepayers to pay 77 cents on the dollar for the agency’s legacy debt (the debt trades in the 30 to 40 cent range). The findings of this report show that this deal, and any deal at PREPA or other government issuers, should be stopped now.

It’s clear also that those most responsible for the commonwealth’s bankruptcy are not being held accountable. These people include a long line of officials who engaged in conduct that was at least negligent and perhaps worse. And what about the bondholders who bought Puerto Rican debt after warnings were issued not to do so?

It seems obvious that these matters should be raised and settled before rank-and-file Puerto Ricans are asked to pay. The FOMB report devotes 98 pages to a list of hundreds of legal claims that could be brought as a result of the facts and findings of the investigation—and that’s not even a complete list.

With all the wrongdoing by powerful players in the public and private sectors, it appears very likely that these players may owe lots of money to bondholders and that the people of Puerto Rico owe very little.

A mess this complex can’t be sorted out in bankruptcy court or in Congress.

While the FOMB report makes clear that the Securities and Exchange Commission has been AWOL on Puerto Rico, perhaps the commission can still be shamed into doing its job, specifically by taking enforcement action on the questionable marketing of Puerto Rican debt.

If the SEC won’t do so, it’s up to state attorneys general to exercise their authority.

UNFORTUNATELY, MANY OF THE SAME PEOPLE WHO CREATED THE MESS IN THE FIRST PLACE ARE CONCENTRATING ON HOW TO SAVE THEIR REPUTATIONS from an avalanche of discovery and negative headlines. What’s called for is an apportioning of liability and a process by which all parties liable pay bondholders money—probably lots of money—before Puerto Ricans pay a single penny.

Although many of the responsible parties may seek to shield themselves with narrow legal arguments, such as expiration of the statute of limitations, there are in fact many paths by which the powers of the SEC or the political process can compel a solution.

The narrative being put out by Wall Street and its Washington puppets is that the people of Puerto Rico owe tremendous amounts to bondholders. The FOMB report implies otherwise, even if it doesn’t say so explicitly, if 98 pages of legal bases for claims against powerful public and private sector officials means anything.

Tom Sanzillo is IEEFA’s director of finance.  This commentary appeared first this week in the Bond Buyer . 


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