Assured Guaranty Responds to Congressional Hearing on Puerto Rico and Treasury Proposal

October 22, 2015

Assured Guaranty, the leading provider of financial guaranty insurance, has been a long-time partner of Puerto Rico and its people, insuring billions of dollars of debt over many decades to assist the Commonwealth and its instrumentalities in lowering their cost of financing as the island built essential infrastructure such as roads, schools, water and sewer systems and energy generation facilities.

Much testimony given at today's hearing of the U.S. Senate Committee on Energy and Natural Resources focused on the minority of Puerto Rico’s debt that is currently in the hands of hedge funds that are earning higher effective yields.  In fact, the vast majority of Puerto Rico’s debt is held by individuals, mutual funds, retirement accounts and other main street investors throughout the United States and Puerto Rico. Additionally, Puerto Rico obligors are paying interest rates in the range of 4.5% to 6% on most of their debt, including on bonds that some hedge funds were able to buy in the secondary market at discounts.  These discounts resulted in the higher effective yields highlighted in today’s hearing but have no impact on the obligations owed by Puerto Rico.

In many cases, Puerto Rico was able to obtain the immediate benefit of a lower interest rate for the life of its borrowings by choosing to issue the bonds with insurance provided by Assured Guaranty or other financial guarantors.  The insurance guarantees timely payment of principal and interest to investors but does not relieve Puerto Rico of its legal and contractual obligations to honor its commitment to repay its debt.

As the Commonwealth's debt problems have become more acute, we have continued to work with Puerto Rico’s government and representatives to find consensual solutions that address the island’s liquidity and financial issues, provide continued access to the capital markets, and put Puerto Rico and its instrumentalities on a path to modernization and sustainable solvency. Assured Guaranty remains fully committed to work with the Puerto Rico government and agencies in helping to facilitate solutions.

For example, we continue to work with the Puerto Rico Electric Power Authority (PREPA) on a broad consensual settlement that would provide support from Assured Guaranty, and would put the utility on a sound financial footing going forward. This potential agreement would result in modernization, long-term sustainable rates to customers, and continued access to efficient financing. Unfortunately, such an agreement could be put in jeopardy by some of the initiatives discussed during today’s hearing.

Contrary to certain comments made during today’s hearing, PREPA’s utility rates currently stand at approximately 18 cents per kilowatt hour, well below equivalent island comparison sets and also below some continental U.S. rates. To date, PREPA has ignored its legal obligation to raise those rates to meet operating, modernization and debt service costs, even as its rates have dropped precipitously with falling oil prices over the last year.

Nevertheless, instead of addressing fundamental economic issues, some officials are now advocating a retroactive change in the law that would allow an unprecedented bankruptcy regime with broader powers to impair obligations owed to long-term investors than even those afforded to any state in the nation. Such proposals would reward fiscal and operational mismanagement and would harm Puerto Rico residents by restricting the island’s ongoing access to efficient financing, while at the same time hurting those long-term bondholders who invested in Puerto Rico with the express understanding that bankruptcy was not available. There is no justification for initiatives that could undermine the legal rights and remedies that were the basis on which bondholders agreed to provide capital for the island’s development.

We also find troubling Governor Garcia-Padilla’s statement in his testimony today that not only has fully transparent financial reporting been delayed for years, but that there is a history in the Puerto Rico government “to hide information to the market so they were able to have more access to the market.” Congress should not take any action to approve a bankruptcy regime that permits the Commonwealth and its instrumentalities to impair debt that was sold to investors based on possibly misleading or incomplete disclosure practices. Such an action would condone inadequate disclosure, ineffective financial management and poor governance.

To the extent that the Federal government is able to intervene in this situation, we agree with those parties calling instead for a more constructive approach aimed at the root causes of the crisis. Incentivizing economic growth, facilitating access to efficient financing and providing Federal oversight of fiscal management would not only provide near-term relief, but also long-term sustainability. For example, modifications to provisions applicable to federal health care reimbursement, or oversight mechanisms used in the 1990s to assist the District of Columbia could form a part of the solution.  We welcome the involvement of the U.S. Department of the Treasury and Congress in this regard.