On Tuesday, the House Natural Resources Committee released a discussion draft on potential legislation regarding restructuring Puerto Rico. I view the legislation as being a good start to resolving the crisis in a fair and equitable way, although there are still some improvements that must be made. Key to the plan is a strong federally appointed control board. Puerto Rico admits that it has been unable to set and keep budgets, or even produce audited financial statements in a timely manner. Areas such as collections of taxes and receivables have been an incredibly serious problem. The control board would be able to assist in these matters and cut unnecessary expenses, which are plentiful in Puerto Rico. Puerto Rican people have been victims of a poor and corrupt government. There is no fixing the economic situation on the island until this key issue is addressed.
The bill would also require Puerto Rico to engage with creditors of the various debt issuances to attempt to consensually resolve matters. Not all debt issuances will require a restructuring but those that do should see their rights respected. For instance, revenue bonds, which comprise a large amount of Puerto Rico exposures, have important protections from the revenue streams that they are entitled to. This makes the loss severity very low in most cases when there is a restructuring. The control board will also be able to issue new debt and secure it with specific revenue streams, which is vital to Puerto Rico once again regaining access to credit. Very few companies and cities can survive without access to credit markets. Puerto Rico has lost access due to its own incompetence and scorched earth policy in how it has dealt with creditors.
While there is still considerable uncertainty into what the final details will look like, I’m encouraged that there seems to be a path towards resolution. The bond insurance companies that we own are in strong financial condition and can easily handle their obligations regarding Puerto Rico. Keep in mind that payments are made over 30 years in many cases, so actual losses. In addition, AGO has already been increasing reserves quite dramatically and has a strong track record of adequately reserving for problematic exposures. The key PREPA deal, which would impose no losses on creditors also seems likely to be protected in this legislation, which would be a major benefit and reduce uncertainty risk. I’ll keep you posted as new issues develop, but I believe it is a solid start to what will be a long-term resolution. Once this situation is resolved, there should be a clear path towards higher stock prices for these key positions.