Puerto Rico Gov. Alejandro Garcia Padilla has proposed legislation that would provide a clear framework for certain public corporations to overcome their financial obstacles.
Entitled “The Puerto Rico Public Corporations Debt Enforcement and Recovery Act (Recovery Act),” the measure, introduced Wednesday, would provide an orderly, statutory process that would allow these corporations to handle their debts fairly and equitably while ensuring the continuity of essential services to citizens, according to the government.
The institutions would include bond-issuing entities such as the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highway and Transportation Authority.
Government: Goal is to protect jobs, institutions, creditors
The governor said the proposal will protect the jobs of thousands of employees and the institutions providing these services, as well as the collective interests of creditors.
As stated by the Government Development Bank for Puerto Rico, the Recovery Act is designed as an “option of last resort” that fills gaps in the current law. It protects the public interest and creditors by giving public corporations a controlled, orderly way to negotiate with creditors to lower debt and become self-sustaining businesses.
“The main purpose of the law is to protect the interests of the people of Puerto Rico and to ensure that the gap in federal law does not jeopardize essential public services,” Treasure Secretary Melba Acosta said. “The Recovery Act also protects Puerto Rico’s GO debt by giving public corporations the opportunity to address their individual financial challenges and thereby no longer depend on the General Fund. Also, the law protects the interests of bondholders and creditors, along with other stakeholders, by giving corporations a way to negotiate with their primary stakeholders to ensure a fair and equitable allocation of resources and create a more promising future for their finances and for all the people who depend on them.”
The law will provide public corporations with two different paths to restructuring: one involving direct negotiations with creditors and another that entails court supervision.
Currently, according to the governor, no Puerto Rico corporation has made a decision to restructure its debt. He emphasized that in order to do so, the corporation would have to prove to its creditors or the courts that it was insolvent.
The Bottom Line
Puerto Rico’s proposed Recovery Act is intended to provide an orderly process by which the Commonwealth’s public corporations, in conjunction with bondholders and other creditors, can negotiate an approach to ensure that the interests of both are recognized in any future debt reorganization.
Previously, unlike federal law, Puerto Rico’s laws had no provisions for negotiations between its public corporations and their creditors should the need arise to change the terms or structure of a public corporation’s obligations. By providing a process, under the purview of the courts, with a requirement for active participation and agreement by creditors, the new proposed law provides both bondholders and the corporations a roadmap to meeting the interests of both parties. The proposed law would apply to only three public corporations, all of whom generate revenues to pay operations and debt service. By requiring that any proposed debt renegotiation involve the participation of debt-holders, the law seeks to protect the interests of both creditors and the island’s public corporations, alike.
David Chafey, chairman of the Development Bank for Puerto Rico, reiterated that while no restructuring was imminent, the government wanted legislation in place to create a procedure. Chafey added that bondholders should be assured there is a framework in place.
This remains to be seen.