Puerto Rico ring fences its public corporation debt

June 26, 2014

Puerto Rico

In a dazzling effort, Puerto Rico Governor Alejandro Garcia Padilla presented legislation to restructure the debt of several public corporations. Both the Puerto Rico Senate and House approved the measure and pushed it to conference where statutes require that it be reconciled by the end of the legislative session on June 30. Seldom have financial markets seen such an elegantly choreographed approach to haircutting sovereign debt.

For months, Padilla has promised a balanced budget for fiscal year 2015, which begins July 1. He maintained that no government employees would be laid off (although contract workers might be). The Commonwealth’s $9.6 billion general fund budget had enormous deficits. By severing the fund from the deficits of Puerto Rico’s public corporations, the general fund will be relieved from financing about $800 million a year. Caribbean Business reported:

Over the past year, the GDB has reiterated that the public debt of the commonwealth should not be seen as a sum of debts to a single debtor, but rather as individual loans supported by various sources of revenues and income, with certain priorities established by law or contract. The officials said the GDB’s message to the market has been consistent in the sense that neither the commonwealth nor the GDB is in the position to subsidize or bail out public corporations and that they need to become self-sufficient.

The message of public corporation “self sufficiency” has been repeated by Padilla’s administration and members of Puerto Rico’s legislature.

Puerto Rico

The new legislation shows how it will be done. The chart, distributed by the government, details two paths that Puerto Rico will take to restructure its public corporation debt. First is a consensual approach (Chapter 2) that asks bondholders to participate in mediation to reduce or restructure debt. The second approach (Chapter 3) moves the issue to a Puerto Rico court to resolve claims. Bondholders will likely attempt to litigate these issues in federal court. Washington-based Height Analytics said:

Puerto Rico

Needless to say, bankruptcy attorneys are queued up to represent bondholders in this case. If all $20 billion in public corporation debt identified in the new law is restructured, it will dwarf Detroit’s $9 billion in bonded debt.


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The questions are: Given these legal ramifications, will Padilla now sign this law (he was supposed to do it already yesterday)? If he does, will the law be actually used for debt restructuring, or just as a stick to extract further concessions from the Prepa and other unions (contracts with whom would no longer hold under either chapter if filed)?

Posted by CraigL | Report as abusive