Presidentand CEO Dominic Frederico spoke out against a legislative proposal aimed atcreating an oversight board for Puerto Rico, saying it would put U.S.taxpayers' money at risk.
In mid-April, the House Committee on Natural Resourcesreleased a draftof the Puerto Rico Oversight, Management and Economic Stability Act, orPROMESA. While approving of the creation of a federallyestablished control board, the bond insurer's CEO said on an call that the proposedlegislation "would also retroactively create an unprecedentedrestructuring mechanism."
The scope and provisions of the legislation "go wellbeyond what would be available under Chapter 9 and set a dangerous precedentthat rewards fiscal mismanagement through irresponsible borrowing and spendingwith inadequate financial disclosure," Frederico argued.
"When the U.S. administration and Puerto Rico refer tothe legislation as granting restructuring authority, what they really mean isthe ability to declare bankruptcy with the right to impair creditorsnonconsensually without regard to the secured or unsecured status of thecreditors with a legally prescribed priority of payments, or constitutional orcontractual protections," he said.
Frederico noted that Puerto Rico has not supplied reliableaudited information about its financial condition, agencies and pension systemas requested by the U.S. Senate. Without that information, he said it is notpossible to know if the proposed measures will address the economic andstructural reforms that are necessary to improve Puerto Rico's economic future.
Providing Puerto Rico with the ability to impose anonconsensual debt restructuring on investors will result in "a cost thatwill be borne predominantly by U.S. taxpayers who own these municipal bonds orinvestors in companies with exposures to Puerto Rico, including investors inbond insurers like our shareholders," the CEO said.
According to Frederico, thelegislation could set a precedent for other municipalities and stateborrowers to "demand similar retroactive bankruptcy legislation to dealwith their fiscal problems." Investors would be forced to price thispotential risk into bond yields, and the cost of municipal finance would risenationwide.
While federal legislation is certainly required to putPuerto Rico on the road to fiscal responsibility and recovery, "it isimperative that the legislation include an empowered and uncompromised federaloversight board to ensure that the Commonwealth puts its fiscal house inorder," Fredericosaid.