Friday, July 18, 2014

Puerto Rico Recovery Act May Be Struck Down | Complete loss of credibility - By CARLOS ROMERO BARCELÓ | PR government says it may not be able to honor all of its obligations

» Puerto Rico Recovery Act May Be Struck Down - ValueWalk
18/07/14 11:11 from puerto rico - Google News
Puerto Rico Recovery Act May Be Struck Down ValueWalk Assured Guaranty Ltd. (NYSE:AGO), MBIA Inc. (NYSE:MBI) and Ambac Financial Group, Inc. (NASDAQ:AMBC) have exposures of $2.6 billion, $2.5 billion and $897.9 million respectively to va...

Puerto Rico Recovery Act May Be Struck Down

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The Act likely violates the Takings Clause and may be held to be unconstitutional
Assured Guaranty Ltd. (NYSE:AGO), MBIA Inc. (NYSE:MBI) and Ambac Financial Group, Inc. (NASDAQ:AMBChave exposures of $2.6 billion,  $2.5 billion and $897.9 million respectively to various Puerto Rico entities that are eligible to restructure under Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act (the Act).
(Read ourarticle on Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act here.)
The Act has been challenged in Puerto Rico’s federal district court by the Franklin and Oppenheimer Funds (Franklin California Tax-Free Trust for the Franklin California Intermediate Term Tax Free Income Fund, et al. v. The Commonwealth of Puerto Rico” Case. No. 14-1518) wherein the plaintiffs seek a declaration that the Act enacted by the Commonwealth of Puerto Rico violated multiple provisions of the United States Constitution.

The Takings Clause

BTIG’s Mark Palmer writes on his blog (“Assured Guaranty, MBIA, Ambac Financial Group: What is the “Takings Clause” and Why Should It Matter to Investors in AGO, MBI and AMBC Concerned About the Impact of Puerto Rico’s Debt Enforcement Act?” July 17, 2014) clarifying the significance of the Takings Clause, the last clause of the Fifth Amendment to the US Constitution, and how this clause could be instrumental in deciding the constitutionality of the Act.
It has been held by the Supreme Court that the federal government and each state has the power ofeminent domain—the power to take private property for “public use”. The Takings Clause limits this power by requiring that “just compensation” be paid if private property is taken for public use.
The Franklin and Oppenheimer Funds, in their complaint above, have objected to Section 322 ( c ) of the Act which enables the petitioner, after court authorization, to “the obtaining or credit or the incurring of debt secured by a senior or equal lien on the petitioner’s property that is subject to a lien.”
According to the Funds, this would constitute a taking in violation of the Takings Clause because it would enable the creation of a superior lien on already liened property without paying compensation to the lienholders.
It may be noted that there could be other constitutional infirmities in the Act, but the alleged violation of the Takings Clause is the most serious, and the one most likely to succeed in a constitutional challenge.

Puerto Rico authorities put up a determined front, however

Regardless, in a webcast yesterday, Puerto Rico has asserted the legality of the Act and its determination to defend it – see the yellow shaded portion in the slide below.
Recovery-Act2-From-webcast-presentation

The Commonwealth’s arguments

In any case, Puerto Rico may well have anticipated these challenges. According to an alert dated July 16 by Orrick, Herrington & Sutcliffe LLP, the Commonwealth’s arguments for the constitutionality of the Act, as per the Senate bill, run as follows:
“The Commonwealth has the police power to enact orderly debt enforcement and recovery statutes when facing an economic emergency, based on the power conferred on the Commonwealth under the Commonwealth’s constitution and enabling statutes. The Commonwealth asserts that it may enact its own laws, as long as the law does not conflict with the Commonwealth’s constitution, the Constitution of the United States or applicable federal law. The Commonwealth asserts that the debt enforcement act is constitutional because the United States Supreme Court has held that states may enact their own laws for entities Congress has not rendered eligible under applicable federal law.”

Puerto Rico to respond on July 22

“Puerto Rico is slated to respond to the bond funds’ lawsuit on July 22, a response that almost certainly will include a motion to dismiss and may address some of the funds’ arguments,” says BTIG’s Palmer.
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Complete loss of credibility

By : CARLOS ROMERO BARCELÓ
Edition: July 17, 2014 | Volume: 42 | No: 27

Two of the most important attributes that a chief executive must have, either in private enterprise or government, are credibility and fairness. A president, prime minister, governor, mayor or any leader who loses his credibility will also be driven out of office. If he acts unfairly with the public and loses his credibility, this person will be driven out of office even faster. A leader without credibility and who acts unfairly with those he pretends to lead will definitely lose all his followers.
On the other hand, a leader who strives to be properly informed and tell his people the truth, even when it hurts, and who acts with a sense of justice toward all his people, will be trusted and people will be much more likely to follow his lead.

PR government says it may not be able to honor all of its obligations

By CB Online Staff


The Puerto Rico government may be unable to honor all of its obligations as they come due as it faces a number of fiscal and economic challenges and its liquidity has been hit by a flood of recent credit downgrades, according to a new report released by the Government Development Bank on Friday.

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