Puerto Rico Continues to Seek Debt Solution

Alejandro_Garcia_PadillaIn July 2014, the government of Puerto Rico enlisted the help of U.S. bankruptcy experts in an effort to resolve its staggering $72 billion in debt following a significant decline in the island’s economic activity and employment over the past decade. Governor Alejandro García Padilla has attempted to assuage his commonwealth’s financial crisis since entering office in January 2013, implementing tax increases, spending cuts, and pension reform.

During the first half of 2014, he bolstered his efforts by implementing the Public Corporations Debt Enforcement and Recovery Act, which sought to restructure a number of Puerto Rico’s utility agencies in order to facilitate the repayment of approximately $52 billion in municipal bonds. The legislation threatened losses for bondholders who had invested over $20 million in Puerto Rico’s infrastructural agencies, including PREPA, the island’s electric utility. However, it protected the distressed debt investments of bondholders possessing more than $3 billion in general obligation and governmental development bank bonds.

Despite these efforts, Governor Padilla and his senior staff members reported in June 2015 that Puerto Rico’s debts are “not payable” and stated their intention to seek debt payment deferrals and repayment extensions from creditors. Since Puerto Rico is a commonwealth, it lacks the Chapter 9 protection that allow debt restructuring for municipal governments. However, a bill sponsored by the island’s nonvoting congressional representative, Pedro Pierluisi, may offer bankruptcy protections to certain parts of Puerto Rico’s government. Under the proposed bill, Puerto Rico’s large public companies could declare bankruptcy and reduce the island’s debt by as much as $25 billion. The legislation has received broad support from Democrats, while Republicans remain hesitant, noting that the proposed law could retroactively affect investors’ rights.

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