Puerto Rico's government unveiled a fiscal plan Thursday under which the commonwealth would only be able to support $2.5 billion to $14 billion of debt in the long term, a fraction of its current level. The plan suggests that holders of its bonds might receive as little as a nickel on the dollar.
Under the Puerto Rican government's fiscal plan, the territory would pay nothing in debt service over the next five years.
The plan assumes that the federal government will provide $35.3 billion in federal disaster assistance linked to Hurricane Maria, which devastated the island. That figure is one third of what Puerto Rican Gov. Ricardo Rosselló recently requested, but still more than Congress is likely to provide.
The fiscal plan is subject to approval by the oversight board that Congress established when it passed the Puerto Rico Oversight, Management, and Economic Stability Act. And it would require the approval of U.S. District Judge Laura Taylor Swain, who is overseeing the bankruptcy of the commonwealth, which sought court protection to restructure its more than $70 billion in debts.
But the fiscal plan is a new marker of the dire state of the commonwealth. It contrasts with the campaign pledge of Rosselló, who vowed to sustain interest payments to the island's creditors. And, if anything, its assumptions might be optimistic.
On Thursday, Teva Pharmaceuticals, as part of a broad restructuring, decided to close its Puerto Rican plant, which employs roughly 500 people, and move those jobs to Florida, according to the newspaper El Nuevo Dia. Other companies, buffeted by long electricity outages, are likely to follow.
The fiscal plan forecasts an additional 10 percent decline in population over the next two years, on top of the sharp drop in recent years. The student population, down 40 percent since 2000, is expected to shrink another 16 percent by fiscal 2022.
Bondholder groups received some support from Congress. House Natural Resources Committee Chairman Rob Bishop (R-Utah) said in a statement that the oversight board's "stated goal under PROMESA is to return Puerto Rico to fiscal accountability and the capital markets, and this can only occur if the fiscal plans respect the lawful priorities and liens of debt holders."
The fiscal plan makes some other contentious assumptions. It forecasts revenue growth of 2 percent a year and disposable personal income growth of 2.5 percent a year. In addition, its hopes for federal money look dubious given that the Treasury has not even released the $4.9 billion appropriated by Congress in the wake of Hurricane Maria.
Moody's ratings agency said: "Puerto Rico's new fiscal plan suggests a minimal long-term debt repayment capacity, and it incorporates additional population and economic base deterioration following Hurricane Maria."
But the ratings agency said that eventual payments to bondholders would "likely emerge after judicial proceedings or negotiations."
Earlier in the week, Rosselló said the Puerto Rican government would privatize the electric utility, Puerto Rico Electric Power Authority. But that plan, which must also win approval from Swain, faces numerous obstacles. One restructuring expert, speaking on the condition of anonymity to protect his business relationships, said the utility has no viable assets. Its power generation facilities are liabilities; they require money to upgrade or, in most cases, shut down. The transmission grid remains in tatters, with about a third of the island's inhabitants still without electricity.
In addition, Rosselló's plan will anger bondholders and labor unions. Bondholders assert that the utility is still functioning and could generate enough cash to come up with a better plan. The unions want to maintain a state-owned utility with changes.
"PREPA is bankrupt. That's a reality," Angel Figueroa Jaramillo, president of PREPA's largest union, said in a December interview. "But we could look for alternatives to strengthen PREPA and the public model."
Privatizing the utility "is a move in the right direction, but the devil is in the details," said Miguel Soto-Class, president of the Center for a New Economy, a San Juan think tank. "Now more than ever, Puerto Rico desperately needs and deserves a modern and efficient electric power system, with a regulatory environment that will provide for genuine competition and low costs and policies that will provide the space for renewable fuels."