February 11, 2016 / 9:15 PM / 3 years ago

Sparks fly between Puerto Rico's financial adviser and creditor

SAN JUAN, Feb 11 (Reuters) - In a debt restructuring world ruled by non-disclosure agreements and secretive hedge funds, it is not every day that a debtor and one of its creditors hash out their differences live on stage.

But attendees of the Puerto Rico Investment Summit on Thursday got a close-up look at the contentious nature of the U.S. territory’s debt restructuring talks.

The island’s top adviser, Jim Millstein, and one of its key creditors, Nader Tavakoli, chief executive officer of Ambac Financial, traded barbs during a panel on Puerto Rico’s financial future.

They debated the merits of restructuring Puerto Rico’s debt through bankruptcy or a similar legal structure.

Ambac insures $2.2 billion net par of Puerto Rican bonds.

Puerto Rico, currently, cannot use U.S. bankruptcy law to work out its debt problems, but it is lobbying federal lawmakers for access to it or something similar. Meanwhile, Puerto Rico and its creditors are working behind the scenes, amid tense talks, to achieve a deal consensually.

Millstein’s team this month offered bondholders a debt exchange proposing about $23 billion in repayment cuts. The island faces $70 billion in total debt, along with a shrinking population and a 45 percent poverty rate.

Tavakoli gained a smattering of applause from the audience at Thursday’s summit - mostly investors - when he said “going down the path of bankruptcy” would “assure that economic contraction continues” in Puerto Rico.

“I’m not sure where the notion that bankruptcy is a good thing came from,” Tavakoli said. “It’s a terrible idea. It will chase consumer confidence to zero. To be sitting here at an investor seminar and discussing bankruptcy ... is frankly a bit surreal for me.”

Millstein, though, was quick to point out that Tavakoli’s company itself went through a court-supervised restructuring in 2010. “The fact is sometimes companies get out over their skis,” Millstein said. “They underwrite exotic derivatives, for example, when in fact they were a bond insurer, so they need the help of state-supervised restructuring.”

Millstein added that a restructuring law for Puerto Rico would not replace efforts to reach a consensual deal, but would give the island the legal ability to bind creditors who do not like whatever deal is reached.

Without that tool, he said, some creditors could holdout and block a deal akin to the infamous case of Argentina. Holdouts led by Elliott Management and Aurelius Capital Management used the U.S. courts to force better repayment terms from Argentina. Only now, more than 14 years later, are they close to fully curing that default. (Reporting by Nick Brown in San Juan; Editing by Daniel Bases and Lisa Shumaker)

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