Fortuno, Millstein Discuss Chapter 9, Next Steps for Puerto Rico

On Thursday, October 22, 2015, in New York City, Reorg Research hosted an animated panel discussion on the critical economic and political challenges facing Puerto Rico.  The panel featured James Millstein, CEO of Millstein & Co. and Puerto Rico’s chief restructuring advisor, former Gov. Luis Fortuño and former International Monetary Fund officials Claudio Loser, director of the Centennial Group, and Charles Blitzer, principal of BlitzerConsulting, with Jude Gorman, General Counsel of Reorg Research, as moderator.

The panelists began by discussing the four-point plan proposed by the U.S. Treasury Department on October 21, 2015.  The plan provides for:

• “access to a federal restructuring mechanism”—dubbed “super chapter 9”—that would provide a “broader legal framework” for restructuring all of Puerto Rico’s debts, including constitutionally protected general obligation bonds and other central government debt;
• “strong fiscal oversight” in the form of an independent oversight body with enforcement authority, as well as improved fiscal accounting and transparency;
• “a long-term solution to Puerto Rico’s historically inadequate Medicaid treatment” by, among other things, offering access to additional core services, removing the unequal cap on Puerto Rico’s Medicaid program and increasing federal support through a federal Medicaid match; and
• extension to Puerto Rico of “time-tested, bipartisan” measures such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) that “reward work and support growth.”

Mr. Millstein was supportive of the Treasury Department’s plan and remarked that it echoed the Puerto Rican government’s own plan.  He cautioned against relying on the federal government to enact the plan, however, and noted that the Puerto Rican government is designing a “program of self-help” to garner political and creditor acceptance.

Gov. Fortuño supported each of the federal government’s proposals except “super chapter 9,” which, in his view, impermissibly “lumps all of the credits together.”  Gov. Fortuño advocated in favor of a financial control board with real enforcement mechanisms, located in Washington, D.C., as means of reducing the pressure on local politicians and helping to close the “credibility gap” that prevents Puerto Rico from getting back into the market and regaining liquidity.  Gov. Fortuño suggested that the concept of a strong financial control board is “not PC” in Puerto Rico, but it nevertheless “would be welcomed by most people in Puerto Rico.”  He advised the federal government to “tread carefully,” however, and avoid imposing its will upon Puerto Rico.

Mr. Blitzer agreed with Gov. Fortuño’s assessment of Puerto Rico’s lack of market credibility.  He characterized Puerto Rico’s problem as “a crisis of confidence.”  While he welcomed the Treasury Department’s proposals regarding Medicaid and tax credits, was cautiously in favor of the financial control board proposal and rejected the “super chapter 9” proposal, he likened expectations that the Treasury plan would be enacted to “believing in the tooth fairy.”  Instead, he suggested, Puerto Rico needs alternatives that do not rely on Congressional action.

Like Mr. Blitzer, Mr. Loser described Puerto Rico’s problem as a “confidence issue.”  He supported the Treasury’s measures that equate Puerto Rico to U.S. citizens.  He also supported a financial control board based “somewhere between DC and San Juan” with authority to act, since a local control board without such authority is merely “decorative.”  Mr. Loser similarly rejected the idea of a “super chapter 9.”

Mr. Loser and Mr. Blitzer contended that Puerto Rican authorities still have not produced a debt sustainability analysis.  Mr. Millstein argued that such an analysis is in fact contained in the Krueger Report, even if it is not in the format that Mr. Loser and Mr. Blitzer are used to seeing at the IMF.  Mr. Millstein suggested that if Puerto Rico were to put together the analysis described by Mr. Loser, it would run out of money before the report were finished.

Mr. Millstein, a restructuring advisor for 33 years, argued forcefully for chapter 9 as a structured legal regime to reconcile the competing claims of different creditor groups.  He asserted that the only way out of the debt crisis is an agreement as to priority among these creditor groups and suggested that the PREPA deal should serve as a model.  If the situation were to deteriorate into a “miasma” of litigation, “everyone loses.”

Mr. Blitzer and Mr. Loser asserted that Puerto Rico needs “new money” in the form of bridge financing to fill in the gaps after cutting spending.  According to Mr. Millstein, however, there is no more “fat” left to cut, and Puerto Rico has tried and failed to raise new money.  He told Mr. Blitzer and Mr. Loser to stop assuming there will be a “fairy godmother with new money in the face of an unsustainable debt burden.”  Absent “manna from heaven,” he suggested Puerto Rico’s problems would be solved only with a global creditor agreement and a bipartisan law implementing a fiscal adjustment plan.

Mr. Millstein urged the audience, comprised mostly of investors and other financial professionals, to act quickly since the “current runway”—made up of “extraordinary liquidity measures,” such as stretched payments and intergovernmental transfers “from one pocket to another”—will run out in the next 60 days.  Cautioning that Puerto Rico will face two “chokepoints” in the form of a $355 million GDB notes payment on December 1 and a $331.6 million general obligation payment on January 1, he also warned that Puerto Rico is facing a “huge wall of payments” as of July 1, 2016 when $780 million in general obligation debt service comes due.

The panelists’ views regarding the best course of action for Puerto Rico varied, but they appeared united in suggesting that decisive steps must be taken to resolve Puerto Rico’s financial travails soon.