June ABI Journal Article Spotlights Controversies over Restructuring Puerto Rico's Debt
Alexandria, Va. — The lead article in the June issue of the ABI Journal examines why Puerto Rico remains a hot topic in the distressed municipal sector and explores the financial controversies that will likely keep the U.S. territory in the spotlight for some time. “Puerto Rico is struggling with $73 billion in public debt, more than any other U.S. state except for California and New York,” writes Sonia Colón (Ferraiuoli LLC; Orlando, Fla.) in her article “Puerto Rico: Still in the Spotlight.” “Top finance officials ... have warned the governor of Puerto Rico that the government could shut down in the next three months due to insufficient liquidity.”
Following up on her October 2014 Journal article on Puerto Rico’s debt situation, Puerto Rico native Colón identifies continuing areas of concern:
- Puerto Rico Bonds: “Junk status has not prevented the government and its municipalities from issuing additional debt to cover short-term liquidity problems and other noncapital investments, primarily because of their attractive triple tax exemption,” Colón writes. She said that a $2.95 billion bond issuance under consideration is needed to increase the liquidity of Puerto Rico’s Government Development Bank to keep its operations afloat.
- Measures to Increase Revenues: The Puerto Rican government pushed measures to back the recent bond issuance, according to Colón. She writes that the government hiked the petroleum products tax in March, trimmed pensions for teachers and other government employees, and passed laws to stimulate the economy and generate investment.
- Tax Reform: Colón details various proposals that the Puerto Rican government has recently considered to increase revenue through tax reform. Puerto Rico Governor Alejandro Garcia Padilla on May 29 signed a bill into law that is expected to bring in $1.2 billion of additional tax revenue.
- Court Decisions and Legislation: Colón writes about the uncertainty related to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”), which was to provide for the potential restructuring of the debt obligations of certain Puerto Rican public corporations. A U.S. District Court on Feb. 6 struck down the Recovery Act, determining that it violated the U.S. Constitution’s Supremacy Clause in attempting to pass bankruptcy law. Colón writes that an appeal of that decision is forthcoming in the next few weeks.
Colón also highlighted the re-introduction of H.R. 870, the “Puerto Rico Chapter 9 Uniformity Act,” in the U.S. House of Representatives. The legislation by Resident Commissioner Pedro Pierluisi, Puerto Rico’s non-voting voice representative to Congress, proposes to amend the Code to treat Puerto Rico as a state for purposes of chapter 9 relating to the adjustment of debts of municipalities. Receiving initial bipartisan support and a hearing on Feb. 26 in the House Judiciary’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law, no legislative action is currently scheduled on H.R. 870 amid opposition from bond market stakeholders.
- Public Corporations and the Situation with PREPA: Puerto Rico has multiple public corporations, Colón writes, including the Puerto Rico Electric and Power Authority (PREPA), the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highways and Transportation Authority. “These public entities hold approximately 40 percent of Puerto Rico’s debt,” Colón writes, and investors continue to worry that they will default.
Given the events of the past year, Colón thinks that the situation will be very unpredictable for Puerto Rico. “Going forward, and as Puerto Rico appears to be approaching a critical point in its financial crisis, systemic problems are likely to require difficult decisions by the government and could lead to further complex restructuring topics and considerations,” according to Colón.
ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/calendar-of-events.