Photo by Brad Crittenden

FULL STORY: Commission Raises Questions Regarding PR Debt’s Validity

By Gil Hall, 

A Puerto Rican congressional commission tasked with evaluating Puerto Rico’s debt stock released a 31-page report Thursday outlining its preliminary findings.

The “Puerto Rico Commission for the Comprehensive Audit of the Public Credit” (PRCCAPC) was created by public law 97-2015, and began its work in January 2016. Its goal was to perform a preliminary legal and accounting evaluation of the island’s debt, and to suggest areas that require further investigation.

The Committee’s evaluation of the six key areas addressed in the report can be seen as a suggestion that a thorough analysis of these topics could render up to $30 billion of Puerto Rico’s $72 billion invalid and, therefore, legally uncollectible.

The Committee framed its investigation in the context of two of Puerto Rico’s most recent borrowing transactions: the 2014 $3.5 billion general obligation bond offering; and the “privately placed” 2015 TRANS notes (Unable to gain access to the traditional municipal bond market in 2015, Puerto Rico was forced to borrow from Commonwealth assets that, under normal circumstances, would never be available for such purposes. Hence, “privately placed”).

The six questions it asked were:

  1. Was debt used to finance deficits (and, thus, in violation of the Puerto Rican Constitution’s balanced budget requirement)?
  2. Was the Puerto Rican Constitution’s express debt limit breached?
  3. Were maturing bonds regularly, and as a part of accepted practice, refinanced rather than paid off to avoid the Constitution’s express limit of 30-year debt? (In the municipal bond lingo, the practice of refinancing maturing debt is referred to as “scoop and toss“).
  4. What was the role of “capital appreciation bonds” (CAB) in the acquisition of Commonwealth debt? Also known as “zero coupon bonds“, CABs are bonds that pay the interest and principal in one lump sum at the end of the bond’s term. CABs could theoretically have been used to avoid constitutional debt restrictions.
  5. Were federal Security and Exchange Commission rules followed by the bonds’ underwriters and advisors? If not, what is their liability for the issuance of those bonds?
  6. The sixth and final question is broader than the others, and more contemplative:   at what point did Puerto Rico’s debt cease contributing to the island’s economic growth?

The document was released in English–Puerto Rican government documents are rarely released in English–and was immediately disseminated via social media to bondholders, regulators, lawmakers, and their staff.

After noting that this review “was limited due to the fact that the Commission has yet to receive funds to commence its work,” the Committee enumerated not only the volunteer man hours required to create the report, but contrasted the hypothetical market cost of the report on the mainland versus in Puerto Rico. “Using typical legal[,] accounting, and research related professional rates in Puerto Rico … this report would have cost $63,740. Using average mainland legal rates … the rate comes to $135,000.”

In recent years the Commonwealth has spent close to a hundred million dollars on mainland professional services. In that context the comment can be read as questioning whether mainland consultants were the best use of Commonwealth funds.

The report also seems to question the effectiveness of professional services firms based in Puerto Rico: it enumerates, for example, the Puerto Rican law firms who offered opinions indicating that the debt issued conformed to Puerto Rican law.

After discussing concerns that came about in the course of the document’s preparation, the Committee makes a series of recommendations to future analysts who participate in a more comprehensive investigation of the topics.

A January 2016 press release identifies the commission’s members as: Eduardo Bhatia (Senate majority leader); Jaime Perelló (House majority leader); Aníbal José Torres (Speaker of the Senate for the majority); Larry Seilhamer (Senate minority leader), María de Lourdes Santiago (senator representing the Independence Party); Charlie  Hernández (House majority speaker); Jenniffer González (House minority speaker) ; Melba Acosta (director of the Government Development Bank); Mario Marazzi (director of the Puerto Rico Statistics Institute); José Alameda (economist); Juan Lorenzo Martínez (attorney and CPA); Roberto Pagán (Spokesman for the Puerto Rican Workers Union); Aurelio Alemán (President of First Bank); Irma Hilario Arroyo (representative of the Caguas Savings and Cooperative credit union); and  Frank Medina (president of the Puerto Rican Chamber of Commerce).

It is unclear how any discussion of the legal merits of the debt will be viewed by other market participants, including a possible future control board. The US Congress is expected to vote on such a board next week.

The Commissions’ recommendations are not a legal finding as to the legality of any or all of the debt stock, rather recommendations as to areas that it believes merit further investigation.

Photo by Brad Crittenden


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Recommended Citation:  Gil Hall, “FULL STORY:  Commission Raises Questions Regarding PR Debt’s Validity”,

Published: 20160603 112439

Updated:  n/a

About Gil Hall

Currently writing book on PR crises. Working title: "Los Pertrechos: the Story of an Economy". Polyglot prone to prolixity in English, German &, Spanish. Based between San Juan and North Carolina. MBA/MHA.