Bankruptcy Would Be ‘Huge Mistake’ for Puerto Rico, Says Bond Insurer

The question of whether bankruptcy is a good option for Puerto Rico came to a head at an investor conference featuring the island’s top restructuring adviser and head of one of the bond insurers with the most exposure to the commonwealth’s securities.

Jim Millstein, founder of Millstein & Co. and the commonwealth’s restructuring expert, said bankruptcy would help bring all creditors together to make concessions.

Nader Tavakoli, the chief executive officer of Ambac Financial Group, which guarantees repayment on $10.4 billion of Puerto Rico principal and interest payments through 2054, disagreed.

The island needs to reduce spending and must repay its obligations, Tavakoli said, in comments that sparked applause Thursday at the 2016 Puerto Rico Investment Summit in San Juan, where hedge- fund manager John Paulson is a keynote speaker.

“Bankruptcy is a huge mistake,” Tavakoli said during the panel with Millstein and Lisa Donahue, chief restructuring officer of the island’s main power provider. “Puerto Rico has a liquidity problem, not a solvency problem. Also, Puerto Rico has a spending problem.”

Commonwealth officials have lobbied Congress to allow it to access bankruptcy, a provision that U.S. territories don’t have. They say it would better allow Puerto Rico to pull together its various creditors — hedge funds, mutual funds, individual bondholders and insurance companies — that hold or guarantee a range of commonwealth securities with different repayment pledges and legal protections.

For Tavakoli and other bond-insurance companies, granting bankruptcy access would change the rules in the middle of the game and not address the island’s structural problems, he said.

Congressional lawmakers are working on legislation that may give Puerto Rico some sort of bankruptcy powers and also implement a federal control board that would manage budgets and debt issuance. House Speaker Paul Ryan has asked members to craft legislation by the end of March to help the commonwealth address its debt crisis.

Puerto Rico last week unveiled its restructuring proposal, which seeks to reduce its obligations by 46 percent through a voluntary debt exchange. Recovery rates on the island’s different securities range from 39 percent to 72 percent.

After years of borrowing by various administrations to fill budget gaps, Governor Alejandro Garcia Padilla in June 2015 said the island was unable to repay all of its obligations on time and in full and would ask investors to take losses. Two Puerto Rico agencies have defaulted on debt payments since then.