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Puerto Rico: Facilitate an Exchange Offer, Now

posted by Stephen Lubben

Jacoby asks what can the Executive Branch do to help out Puerto Rico.  The most practical thing it could do, right now, is to facilitate an exchange offer.  Whether the Treasury itself can act as a mediator, or at least facilitate mediation by some outsider, this seems like the quickest way to a real solution to the near-term problems the Commonwealth faces.  Treasury might also act as an overseer of reforms and a (comparatively) neutral voice with regard to Puerto Rico’s financial information.

Yes, it would be great to resolve the Commonwealth’s awkward legal status – and maybe, just maybe the Supreme Court will do that this term.  Or at least start the process.  But long before that can happen, Puerto Rico is facing potential defaults.  Those need to be addressed right now.  If the Executive Branch can facilitate the negotiation of a comprehensive exchange offer, the Commonwealth will gain time to solve those bigger, long term issues.


Stephen - What leverage does the administration/Treasury use to coax all parties to participate?

Good question. I begin with the proposition that the Treasury Secretary has a lot of inherent power to get people to the table. Next, they need to make it clear that unreasonable behavior will have consequences. Rule/law changes – along the lines noted by Weidemaier – are much more supportable if the Commonwealth can say "we had not other choice."

The Puerto Rican government might look to the terms of the GO bonds that were purchased by hedge funds and are subject to the laws of New York in order to determine some of the concessions that it could make in an exchange offer to the holders of GO bonds that are subject to Puerto Rican law. The hedge funds specifically negotiated what they believed to be more favorable terms (for them) when they purchased the New York law GO bonds--bought at a time when Puerto Rico was desperate to find parties willing to purchase its bonds. While this would be of little help in facilitating an exchange offer with the holders of the New York law bonds, the majority of the GO bonds are subject to PR law. If there are attractive clauses in the NY law bonds--for example, the hedge funds negotiated a narrow waiver of sovereign immunity into the terms--then they could be used as a carrot to entice PR law GO bond holders into the exchange.

To respond to Inquiring Mind's question, the fact that there are numerous issues surrounding this Puerto Rican debt (numerous issuances falling under different governing laws, issues of constitutionality of the debt, issues of immunity, issues of prioritization of various debt issuances, and whether this conflicting prioritization is enforceable) all contribute to greater uncertainty for the concerned parties in the matter. And all things being equal, greater uncertainty inevitably leads to greater risk for investors.

Thus, the leverage that the Treasury would have in bringing the parties to the table to participate in a mediation would be the possibility of reducing that uncertainty (and thus reducing the risk for these investors) that would be the result of the exchange offer. In the end, this cooperation would benefit all of the concerned parties, who as of now are not sure how they stand in relation to each other as well as to Puerto Rico.

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