Puerto Rico Senate approves $3.5 billion general obligation issuance
The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:
1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,
2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,
4. Provide for the payment of rent to the Public Building Authority, or provide for the repayment of debts to finance the Buildings Authority,
5. Contribute money to certain funds created by existing law,
6. Other purposes authorized by previous legislation,
7. Establish such reserves as may be required or desirable in connection with the issuance of the bonds and notes authorized by this Act, and
8. Pay the expenses of the sale of such bonds and notes, clarify the scope of the provisions of Law 33 of December 7, 1942, to exempt the bonds and notes and interest on such bonds and notes payment of taxes; provide for the payment of principal and interest on said bonds and notes; establish guidelines and limitations listed in the event that the net proceeds from the sale of bonds to exceed two thousand seven hundred million (2,700,000,000) dollars…and for other purposes.
The key takeaway of the vote is that the Commonwealth can issue $3.5 billion of general obligation bonds, but the expected net proceeds appear to be $2.7 billion. Approximately $2 billion will be used to pay debts incurred by past administrations. Proceeds will refinance debt issued in 2012-2013 and cover a small part of the government deficit for that year. Proceeds will also finance payment for debt refunding, swaps and various funding measures in the law (see page 6).
El Nuevo Dia is reporting that the Senate approved a measure to allow bond investors to sue the Commonwealth in Puerto Rico and New York if necessary:
The version that passed the Senate removed an article that gave broad discretion to the Secretary of the Treasury authorized to negotiate terms of financing.
Added another article that recognizes the possibility of lawsuits related to this issue can be heard in the jurisdiction of Manhattan, in New York, but the sovereign immunity of Puerto Rico to their property arising from such lawsuits are not alienate expressly retained.
This amendment authorizes the Secretary/Treasury to consent to the approval of the Secretary of Justice, “the application of the laws of New York and the jurisdiction of any state or federal court located in the County of Manhattan … if any claims relating to such bonds.”
Make that ‘notwithstanding the foregoing, the Commonwealth may not waive its sovereign immunity from public property located in the Commonwealth of Puerto Rico. Any waiver of sovereign immunity from the bonds issued under the provisions of this law shall be expressly limited to legal proceedings with respect to such bonds, and under no circumstances constitute such a waiver, a general waiver by the Commonwealth of its sovereign immunity.’
Reactions from politicians were mixed. Sincomillas.com reported:
Furthermore Senate President Eduardo A. Bhatia recognized that today is a difficult day for Puerto Rico as options run out. ‘This decision was made by 30 years of irresponsibility. This issue is not to make new work, it is to keep the country afloat. Today is the day to pick one of two ways: Puerto Rico decides to stop paying your debt or have to borrow.’
Three senators who voted against House Bill 1696, Ángel R. Rosa, Antonio J. Fas Alzamora and Ramón Luis Nieves, distributed a written objection (authors’ emphasis):
Among a Senator’s most solemn responsibilities is voting on the subject of bond issues, because they compromise our future in the long run. We support our Governor Alejandro García Padilla. However, we cannot support with our vote a bond issue in these circumstances. It is time to recognize that our public debt cannot be paid in full. It is also time to speak clearly to our creditors. To continue our efforts to service that debt without a renegotiation of its terms is not only wrong but detrimental to Puerto Rico…
…As legislators our responsibility requires a broader vision. This responsibility is to the common weal and not with a privileged group of lenders. Up to now we have followed to the T the recipe of the credit rating agencies. This recipe has taken us to where we are. The credit rating agencies also share responsibility for the state of our fiscal and economic health. For decades they recommended buying debt, facilitating enormous deficits and feeding an addiction that we desperately need to break. We are in the crossroads of accepting that the debt they bought cannot be paid, or in its defect going to the market under usurious conditions. The second is the one that this Senate today supports, with grave consequences for our possibilities of an economic recovery.
To issue public debt at this time is a suicidal act. The bond issue proposed is a blank check to the Government Development Bank (GDB) so that it pays our bondholders without considering the consequences to our economic development. We are mortgaging our future at exaggerated interest rates. The debt service alone will increase our deficit by $200 million a year.