Puerto Rico is buried under at least $73 billion in debt that has left its economy in a near perpetual recession and caused a significant number of its residents to relocate to the mainland. Worse, the island’s status as a U.S. territory leaves it legally unable to reorganize its staggering debt in bankruptcy.
But a bill before Congress would change that—somewhat. The measure would give Puerto Rico’s state-run corporations, which provide crucial services such as water and electricity and are responsible for a sizable chunk of the government’s overall debt, the same bankruptcy protections enjoyed by cities throughout the United States.
Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, told a House subcommittee Thursday that granting the island’s public corporations bankruptcy protection would be best for everyone involved. The corporations would not necessarily exercise the option, she cautioned, but if they did, debtors would face a clearer path than if the corporations simply run out of money. The island’s residents would not have to deal with a possible spike in already sky-high utility rates and possible interruptions of service that could result from the corporations toppling into receivership. Also, the future growth of the territory could be ensured by freeing up financing so the island could invest in more efficient power plants and other infrastructure.
Absent a way to reorganize its debt, the island is left in "an environment of uncertainty that makes it more difficult to address Puerto Rico’s fiscal challenges and threatens Puerto Rico’s economic future,” Acosta said.
Earlier this month, a federal judge threw out a local law that would have allowed Puerto Rico’s highway, water and power companies to restructure about $20 billion in debt. The ruling left the state-run firms without a clear way to reorganize if they went broke. Under current law, some corporations could be put in receivership, which Acosta called an untested and likely chaotic option. “That is not the best process,” she said. “Chapter 9 is a much better process that everyone knows.”
Chapter 9 has been used by small government entities such as hospital districts, and lately by major cities including Detroit and Stockton, Calif., to reorganize their debt.
The House bill would allow Puerto Rico’s public corporations to do the same. The measure, introduced by Pedro Pierluisi (D), Puerto Rico’s representative to Congress, drew sharp opposition from Thomas Mayer, who represents OppenheimerFunds Inc. and Franklin Municipal Bond Group, which hold Puerto Rican debt, said the measure would harm investors. He also said the process would be costly and take a long time to complete. There is no sense yet that the measure will go anywhere in Congress.
But supporters said Chapter 9 offers the best viable option for the island to break a cycle of high unemployment, low growth, and an extended economic malaise. "No decision has been made as to whether any public corporation intends to file under Chapter 9 were it to become available," Acosta said, adding that the process: "establishes a legal regime that is already understood by the capital markets, creditors, prospective lenders, and suppliers."