House Judiciary on Chapter 9 in Puerto Rico
House Judiciary Committee
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
“H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 2015”
Thursday, February 26, 2015
Key Topics & Takeaways
- Downsides of Chapter 9: Chairman Tom Marino (R-Pa.) asked about the downside of allowing Puerto Rican public corporations to go into Chapter 9. Mayer answered that the decision really rests on whoever runs the bankruptcy process, and that Puerto Rico wants to ensure that it can run the restructuring at the expense of its investors.
- Effect on Bondholders: Mayer said H.R. 870 will “cause more harm than good” for American investors. He argued that tax-exempt Puerto Rican bonds are held in every state by investors who “live on Main Street, not Wall Street.” He rejected the example of Detroit as having been a fair process to bondholders, saying they were paid just 13 percent of what they were owed.
- Orderly Process: Rep. Pierluisi of Puerto Rico argued that Chapter 9 would be an orderly process with a federal judge overseeing it to ensure its fairness.
Speakers
- John Pottow Esq., Professor of Law, University of Michigan Law School
- Melba Acosta Esq., President, Government Development Bank for Puerto Rico
- Robert Donahue, Managing Director, Municipal Market Analytics
- Thomas Moers Mayer Esq., Partner and Co-Chair, Corporate Restructuring and Bankruptcy Group, Kramer Levin Naftalis & Frankel LLP
Opening Statements
Chairman Tom Marino (R-Pa.) said the ramifications of allowing public corporations in Puerto Rico to reorganize through Chapter 9 of the U.S. Bankruptcy Code must be carefully considered because Puerto Rico is a significant issuer of municipal bonds and the decision would affect a diverse array of investors.
Rep. Darrell Issa (R-Calif.) said it was uncommon for Puerto Rico to turn to Congress on this issue after a federal court had already disallowed Puerto Rico’s Recovery Act. He said he has not made a decision on the bill yet, but has serious concerns.
Ranking Member Hank Johnson (D-Ga.) expressed support for the bill as a “vital roadmap” for Puerto Rican issuers, and Rep. John Conyers (D-Mich.) called Puerto Rico’s current status “inexplicable.”
Testimony
John Pottow Esq., Professor of Law, University of Michigan Law School, said in his testimony that H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 2015, has support from the bankruptcy community because it seems to be a technical fix. He said it is interesting that Puerto Rico took a moderate approach in its Recovery Act by choosing to apply its own version of Chapter 9 but applying it only to certain entities.
Melba Acosta Esq., President, Government Development Bank for Puerto Rico, said in her testimony that the fiscal an economic situation in Puerto Rico is critical and the governor has responded to challenges with an eye on long-term fiscal responsibility by making sure that public corporations can become self-sufficient. She said the Recovery Act was enacted because these public corporations are so critical to the provision of basic public services.
Acosta said the exclusion of Puerto Rico from Chapter 9 means there is no current legal regime for Puerto Rican public corporations to restructure their obligations, leading to many issues. She explained that credit markets require a risk premium to compensate for the uncertainty, making it more expensive for Puerto Rico to borrow money. She stressed the Puerto Rico sees Chapter 9 only as an option of last resort, and that it would not apply to debt issued directly by the Commonwealth. She argued that Chapter 9 would provide an orderly process under clear supervision from a court.
Robert Donahue, Managing Director, Municipal Market Analytics said in his testimony that the current framework under which Puerto Rican corporations can restructure is very uncertain and unsuitable for complex processes. He said H.R. 870 would provide a technical fix by extending the framework of the 50 states to Puerto Rico. He further commented that the bill would reduce the near-term likelihood of Puerto Rico requesting external assistance and argued that it would set no adverse precedents for other municipalities.
Donahue stated that the bill would create an environment in which Puerto Rico can “finally focus on fiscal responsibility” by amending a flaw in the bankruptcy code. He argued that the bill “is not a bailout” or a panacea, and will not create the feeling the Puerto Rico is being absolved of past failings.
Thomas Moers Mayer Esq., Partner and Co-Chair, Corporate Restructuring and Bankruptcy Group, Kramer Levin Naftalis & Frankel LLP, said in his testimony that his clients oppose H.R. 870 because it will “cause more harm than good” for American investors. He argued that tax-exempt Puerto Rican bonds are held in every state by investors who “live on Main Street, not Wall Street.” He said the bill would be a bad deal for bondholders, just as the Chapter 9 process in Detroit was. He stated that Puerto Rico wants to “force a bailout” on the backs of bondholders and investors from outside of Puerto Rico. He instead supported a receivership for distressed firms.
Question and Answer
Marino asked about the downside of allowing Puerto Rican public corporations to go into Chapter 9. Mayer answered that the decision really rests on whoever runs the bankruptcy process, and that Puerto Rico wants to ensure that it can run the restructuring at the expense of its investors.
Acosta countered that Chapter 9 is an orderly process with oversight from an experienced judge. She warned that a traditional receivership process could entail “huge amounts of litigation” in a “totally disorderly process.” Pottow added that Chapter 9 has a focus on getting people together through mediation, and that this would be important because a public debtor cannot be broken up and sold.
Johnson asked if anything exists to encourage consensus among creditors in the absence of Chapter 9. Pottow answered “not much” and added that this is the basic principle behind the existence of the bankruptcy system. Mayer said there is no possibility that creditors will “run in to grab assets and sell them,” and that the only real question is whether public corporations such as the Puerto Rico Electric Power Authority (PREPA) will maximize value by raising rates or collecting on debts.
Pottow said that while a bankruptcy judge would not be able to order a raise in rates under Chapter 9, he does have the right to determine whether or not negotiations have been carried out in good faith and could require a rate rise in this way.
Rep. Pedro Pierluisi (D-P.R.) was critical of Mayer and his testimony, arguing that most experts disagree with the claim that Chapter 9 would do more harm than good. He said he could not understand the argument that the bill is bad for Puerto Rico itself. Pierluisi then called it “incredible” that Mayer said his clients would not oppose the application of Chapter 9 if it was a fairer statute because this would be an argument that Chapter 9 as a whole must be improved by Congress.
Mayer said he does believe Chapter 9 to be imperfect, but that he is chiefly concerned about investors who bought Puerto Rican debt before Chapter 9 was applicable, saying it would be a breach of their trust. He called H.R. 870 a “short-sighted fix.”
Issa questioned why Puerto Rican corporations should be allowed to be bankrupted without reforms. Mayer said this was a good question, and that other municipalities such as Detroit that have used Chapter 9 had financial oversight boards to ensure that reforms were implemented. He commented that Puerto Rico has no comparable system.
Pottow countered that financial oversight boards can be setup before enacting Chapter 9, and that the reason no such system exists currently is precisely because Chapter 9 excludes Puerto Rico.
Conyers asked what would happen if the bill is not enacted. Pottow answered that if H.R. 870 is not passed, then Puerto “will see a default at some point.”
Pierluisi reiterated that Chapter 9 provides an orderly process in which investors can participate. He said he could not understand the basis for rejecting Puerto Rico’s access to U.S. law.
Mayer responded by arguing that investors bought Puerto Rican bonds assuming that Chapter 9 would not be a consideration, saying that PREPA can collect and pay its debts. He again rejected the example of Detroit as having been a fair process to bondholders, saying they were paid just 13 percent of what they were owed.
Pierluisi said there should be no concern about who is in charge of a restructuring because a federal bankruptcy judge would be running the process to ensure that it is fair to everyone.
For more information on this hearing, please click here.
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House Judiciary Committee
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
“H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 2015”
Thursday, February 26, 2015
Key Topics & Takeaways
- Downsides of Chapter 9: Chairman Tom Marino (R-Pa.) asked about the downside of allowing Puerto Rican public corporations to go into Chapter 9. Mayer answered that the decision really rests on whoever runs the bankruptcy process, and that Puerto Rico wants to ensure that it can run the restructuring at the expense of its investors.
- Effect on Bondholders: Mayer said H.R. 870 will “cause more harm than good” for American investors. He argued that tax-exempt Puerto Rican bonds are held in every state by investors who “live on Main Street, not Wall Street.” He rejected the example of Detroit as having been a fair process to bondholders, saying they were paid just 13 percent of what they were owed.
- Orderly Process: Rep. Pierluisi of Puerto Rico argued that Chapter 9 would be an orderly process with a federal judge overseeing it to ensure its fairness.
Speakers
- John Pottow Esq., Professor of Law, University of Michigan Law School
- Melba Acosta Esq., President, Government Development Bank for Puerto Rico
- Robert Donahue, Managing Director, Municipal Market Analytics
- Thomas Moers Mayer Esq., Partner and Co-Chair, Corporate Restructuring and Bankruptcy Group, Kramer Levin Naftalis & Frankel LLP
Opening Statements
Chairman Tom Marino (R-Pa.) said the ramifications of allowing public corporations in Puerto Rico to reorganize through Chapter 9 of the U.S. Bankruptcy Code must be carefully considered because Puerto Rico is a significant issuer of municipal bonds and the decision would affect a diverse array of investors.
Rep. Darrell Issa (R-Calif.) said it was uncommon for Puerto Rico to turn to Congress on this issue after a federal court had already disallowed Puerto Rico’s Recovery Act. He said he has not made a decision on the bill yet, but has serious concerns.
Ranking Member Hank Johnson (D-Ga.) expressed support for the bill as a “vital roadmap” for Puerto Rican issuers, and Rep. John Conyers (D-Mich.) called Puerto Rico’s current status “inexplicable.”
Testimony
John Pottow Esq., Professor of Law, University of Michigan Law School, said in his testimony that H.R. 870, the Puerto Rico Chapter 9 Uniformity Act of 2015, has support from the bankruptcy community because it seems to be a technical fix. He said it is interesting that Puerto Rico took a moderate approach in its Recovery Act by choosing to apply its own version of Chapter 9 but applying it only to certain entities.
Melba Acosta Esq., President, Government Development Bank for Puerto Rico, said in her testimony that the fiscal an economic situation in Puerto Rico is critical and the governor has responded to challenges with an eye on long-term fiscal responsibility by making sure that public corporations can become self-sufficient. She said the Recovery Act was enacted because these public corporations are so critical to the provision of basic public services.
Acosta said the exclusion of Puerto Rico from Chapter 9 means there is no current legal regime for Puerto Rican public corporations to restructure their obligations, leading to many issues. She explained that credit markets require a risk premium to compensate for the uncertainty, making it more expensive for Puerto Rico to borrow money. She stressed the Puerto Rico sees Chapter 9 only as an option of last resort, and that it would not apply to debt issued directly by the Commonwealth. She argued that Chapter 9 would provide an orderly process under clear supervision from a court.
Robert Donahue, Managing Director, Municipal Market Analytics said in his testimony that the current framework under which Puerto Rican corporations can restructure is very uncertain and unsuitable for complex processes. He said H.R. 870 would provide a technical fix by extending the framework of the 50 states to Puerto Rico. He further commented that the bill would reduce the near-term likelihood of Puerto Rico requesting external assistance and argued that it would set no adverse precedents for other municipalities.
Donahue stated that the bill would create an environment in which Puerto Rico can “finally focus on fiscal responsibility” by amending a flaw in the bankruptcy code. He argued that the bill “is not a bailout” or a panacea, and will not create the feeling the Puerto Rico is being absolved of past failings.
Thomas Moers Mayer Esq., Partner and Co-Chair, Corporate Restructuring and Bankruptcy Group, Kramer Levin Naftalis & Frankel LLP, said in his testimony that his clients oppose H.R. 870 because it will “cause more harm than good” for American investors. He argued that tax-exempt Puerto Rican bonds are held in every state by investors who “live on Main Street, not Wall Street.” He said the bill would be a bad deal for bondholders, just as the Chapter 9 process in Detroit was. He stated that Puerto Rico wants to “force a bailout” on the backs of bondholders and investors from outside of Puerto Rico. He instead supported a receivership for distressed firms.
Question and Answer
Marino asked about the downside of allowing Puerto Rican public corporations to go into Chapter 9. Mayer answered that the decision really rests on whoever runs the bankruptcy process, and that Puerto Rico wants to ensure that it can run the restructuring at the expense of its investors.
Acosta countered that Chapter 9 is an orderly process with oversight from an experienced judge. She warned that a traditional receivership process could entail “huge amounts of litigation” in a “totally disorderly process.” Pottow added that Chapter 9 has a focus on getting people together through mediation, and that this would be important because a public debtor cannot be broken up and sold.
Johnson asked if anything exists to encourage consensus among creditors in the absence of Chapter 9. Pottow answered “not much” and added that this is the basic principle behind the existence of the bankruptcy system. Mayer said there is no possibility that creditors will “run in to grab assets and sell them,” and that the only real question is whether public corporations such as the Puerto Rico Electric Power Authority (PREPA) will maximize value by raising rates or collecting on debts.
Pottow said that while a bankruptcy judge would not be able to order a raise in rates under Chapter 9, he does have the right to determine whether or not negotiations have been carried out in good faith and could require a rate rise in this way.
Rep. Pedro Pierluisi (D-P.R.) was critical of Mayer and his testimony, arguing that most experts disagree with the claim that Chapter 9 would do more harm than good. He said he could not understand the argument that the bill is bad for Puerto Rico itself. Pierluisi then called it “incredible” that Mayer said his clients would not oppose the application of Chapter 9 if it was a fairer statute because this would be an argument that Chapter 9 as a whole must be improved by Congress.
Mayer said he does believe Chapter 9 to be imperfect, but that he is chiefly concerned about investors who bought Puerto Rican debt before Chapter 9 was applicable, saying it would be a breach of their trust. He called H.R. 870 a “short-sighted fix.”
Issa questioned why Puerto Rican corporations should be allowed to be bankrupted without reforms. Mayer said this was a good question, and that other municipalities such as Detroit that have used Chapter 9 had financial oversight boards to ensure that reforms were implemented. He commented that Puerto Rico has no comparable system.
Pottow countered that financial oversight boards can be setup before enacting Chapter 9, and that the reason no such system exists currently is precisely because Chapter 9 excludes Puerto Rico.
Conyers asked what would happen if the bill is not enacted. Pottow answered that if H.R. 870 is not passed, then Puerto “will see a default at some point.”
Pierluisi reiterated that Chapter 9 provides an orderly process in which investors can participate. He said he could not understand the basis for rejecting Puerto Rico’s access to U.S. law.
Mayer responded by arguing that investors bought Puerto Rican bonds assuming that Chapter 9 would not be a consideration, saying that PREPA can collect and pay its debts. He again rejected the example of Detroit as having been a fair process to bondholders, saying they were paid just 13 percent of what they were owed.
Pierluisi said there should be no concern about who is in charge of a restructuring because a federal bankruptcy judge would be running the process to ensure that it is fair to everyone.
For more information on this hearing, please click here.