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Muni Week Review / Preview 4/11/2016

Monday, Apr 11, 2016

THE “PUERTO RICO OVERSIGHT, MANAGEMENT AND ECONOMIC STABILITY ACT (PROMESA)

U.S. House Committee on Natural Resources ‘Statement’… For Puerto Rico, the responsible path forward must ensure the Island can impose fiscal discipline, produce audited financials and engage in voluntary negotiations with creditors to meet debt obligations. Only then can Puerto Rico restore credibility and transition its state-run economy to a foundation for growth.

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The “Puerto Rico Oversight, Management and Economic Stability Act (PROMESA)… Bill H.R. 4900 was introduced Tuesday (4/12/16) with provisions that recognize bondholder rights. The House Natural Resources Committee markup of the draft bill begins Wednesday at 5 pm and a vote can take place by Friday. If the bill passes in the House it will move to the Senate, if it passes in the Senate it will be ready for the President to sign into law. If it moves seamlessly, which is unlikely, the law could go into effect by June 1.

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House Speaker Paul Ryan… “A troubling new development has underlined the need to promptly address Puerto Rico’s fiscal crisis. Last week, the Puerto Rican government broke its fiscal obligation when it passed a moratorium allowing selective payment of its debt. Congress has a constitutional and financial responsibility to bring order to the chaos that is unfolding in the U.S. Territory, chaos that could soon wreak havoc on the American bond market,” Mr. Ryan said. With-out naming names, he said the bill “holds the right people accountable for the crisis.”

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Committee Chair Rob Bishop… “This package of reforms will restore the guardrails of freedom and self-governance in Puerto Rico. It will hold Puerto Rico accountable to its debt, uncover audited financial statements, enforce fiscal responsibility and cut red tape holding down the Island’s economy. It provides tools to redirect Puerto Rico from a path of destitution towards a path of prosperity, preserving freedom and opportunity for the next generation. This is the constitutionally sound solution that will provide real, long-lasting reform to the Commonwealth while respecting the rights of all parties and creditors. It is the Island’s best shot to mitigate its financial collapse and future calls for a bail-out, which would be untenable.”

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Bill Sponsor Rep. Sean Duffy… “The three and half million Ameri-cans living in the U.S. territory deserve the attention and support of Congress. After decades of misman-agement, Puerto Rico’s investors also deserve better. A protracted and chaotic legal battle would not serve the interest of creditors or the Island. Worse would be a multi-billion dollar tax payer bailout thrust on the shoulders of America’s taxpayers and retirees. The PROMESA ACT will ensure that the Island meets its debt obligations in a controlled, responsible manner, without saddling the U.S. taxpayers with the bill. If we get this right, we have an opportunity to put the people of Puerto Rico on a path to economic opportunity. However, if we do nothing, The American people will be on the hook,” Rep. Duffy said.

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Outline of PROMESA… The bill if passed as is will impose a seven member financial oversight board that would be appointed by the pres-ident and will have broad encompassing powers over the Island. The Financial Oversight Board members would be selected from a list of candidates submitted by the U.S. House speaker, Senate majority leader, and minority leaders of the House and Senate. The governor of Puerto Rico would be an ex-oficio member without voting powers. The board will have the power to issue subpoenas requiring documents or testimony. Failure to obey a court order may put the person in civil contempt. The entity will also have broad powers to oversee debt restructuring, which would need 66.66% of bondholders to agree to terms, but the bill states that any restructuring agreement al-ready consummated shall be deemed in conformance. According to the bill, if the board determines a budget is not balanced or that revenues and expenditures do not go hand in hand, the board will “make reductions in non-debt expenditures to ensure that the actual quarterly revenues and expenses are in compliance with the applicable certified budget. It will also be able to institute automatic hiring freezes or prohibit territorial instrumentalities from entering into contracts in excess of $100,000. The legislation does not specifically say the board can levy new taxes, but it does state that all proposed laws and contracts will also have to be approved by the board. There will be an automatic stay on litigation against the government except for those  filed before December. Promising remarks from the PR Rep in Congress and the Republican Study Committee shows a bipartisan solution is close at hand.

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Voluntary Consensual Restrucuring… The revised bill bows to the democrats demands on Control Board powers by increasing the size of the board, broadening its political composition and limiting its fiscal powers. To appease creditors, the bill shortens the suspension period for future litigation until February 2017. The board will approve and ensure adherence to budgets. The legislation would not give Puerto Rico the broad bankruptcy authority it has asked for, but would allow the oversight board to decide whether debt restructuring is necessary. If the board decides it is needed in some areas and stringent conditions are met, it could facilitate a voluntary court-supervised debt restructuring. In an attempt to mollify conservatives, the new draft would give creditors more of a say, adding an option for a class of creditors to vote on whether they want to voluntarily restructure debt. Under the proposed bill, all of Puerto Rico’s numerous issuers/debtors would have to complete a complicated process and meet stringent requirements before any single entity could request debt restructuring.

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Right Framework Speed Bumps Ahead… The committee has begun two days of drafting the legislature before it can be sent to the House. The White House and lawmakers in both parties have expressed concern over sections of the bill, including the composition of the Federal Control Board, the process that allows some of the debt to be restructured and whether creditors could be forced to accept less than par value for their bonds. There will be speed bumps to maneuver before the bill becomes law, however, it appears the right framework is in place.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.

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