Earlier this week, the U.S. House Committee on Natural Resources presented its latest version of H.R. 5278, better known as the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), a bill designed to resolve Puerto Rico’s creditor claims, restore fiscal stability, and implement policies to encourage economic development.
The proposed legislation, in its most recent version, clarifies that its main purpose is to protect prioritised payments to bondholders whose payments are required by the commonwealth’s constitution. This process would be managed by an independent Oversight Board composed of seven members appointed by the president of the United States, four of whom shall be from among a list of candidates presented by leaders of the U.S. House and Senate.
The Oversight Board will be appointed with the main objective of instituting:
“Fiscal and economic reforms to guarantee the island regains access to capital markets…[and]…ensure funding for public services and pensions”
The legislation also proposes holding all creditor litigation and general obligation (GO) principal payments through February 2017 or until six months after the establishment of the Oversight Board, whichever the latest. Last May, the US commonwealth defaulted on a debt payment worth almost USD 400 million and it is expected that it will default on July 1st’s USD 2 billion payment too.
The appointed board will also be responsible for revising and approving all the plans, budgets, revenue forecasts, executive orders, economic and fiscal policy efforts, and future bond and notes issuance proposed by the Puerto Rican government. If by any reason the Oversight Board determines that any of the presented fiscal plans or legislation efforts do not “agree” with the Board’s envisioned plan, the Oversight Board is empowered to draft its own revenue forecasts and economic measures and unilaterally approve them. In addition, the board has the authority to enforce balanced budgets and government reform if the Puerto Rico government fails to do so, including the sale of government assets, the consolidation of agencies and the reduction of workforce.
Neither the governor of Puerto Rico nor the island’s legislature can exercise control over the board nor pass laws that would otherwise inhibit its functioning. Furthermore, any public official or private citizen who defies or obstructs the board can be found guilty of “criminal misdemeanor” and can be subject to suspension without pay, removal from office, and even potential imprisonment, according to The Nation.
Positive market reaction
Despite Puerto Rico’s overall light trading volume, prices on Puerto Rico credits moved incrementally higher following the introduction of the most recent version of the PROMESA legislation. It is believed that this reflects optimism among creditors and market participants.
UBS reports that, as of May 24, 2016, the price on Puerto Rico’s general obligation benchmark bond carrying an 8.0% coupon maturing in 2035 last traded at USD 67.49 (12.50% yield). As a point of reference, these bonds traded at an all-time low price of USD 63.375 (13.33% yield) on May 6, 2016.
Overall market’s positive reaction is due to the fact that PROMESA reduces the likelihood of a moratorium on the payment of all debt service across the island’s capital structure. It is the legislation’s purpose after all to “ensure that Puerto Rico and its instrumentalities are required to make scheduled interest payments on outstanding debt” during the proposed freeze period (February 2017).
Beyond the promise, what about Puerto Rico’s future?
Recent polls in social media and local Puerto Rican newspapers show that an overwhelming “majority” favours the implementation of the oversight board (~75%).
“Wrong does not cease to be wrong because the majority share in it.”
In Spanish, “PROMESA” means promise. But the promise of severe austerity measures including budget cuts, privatisation of key infrastructure, public service layoffs, increases in taxes, and reductions in pensions plans and wages, all to serve the interests of bondholders while ignoring important economic development initiatives, doesn’t guarantee a sustainable future for the island.
As Puerto Rico deepens further on its critical debt situation, its citizens also find themselves facing an equally critical scenario. Puerto Rico has lost 10 percent of its population during the last decade due to the devastating effects of the economic collapse. Worsening the crisis is the flight of health professionals from Puerto Rico, and the closure of clinics and hospitals. In addition, half a million Puerto Ricans are in poverty, of which only 110,000 receive food assistance. Statistically, 47 percent of Puerto Rican children live in poverty, the highest in the United States. None of these important issues are addressed by PROMESA which raises serious concerns about where the Puerto Rican civil society stands in the U.S. Congress’ list of priorities.
The bill is expected to be considered by the full house in early June, afterwards, the Senate is expected to send the bill to the White House for the President’s signature.