A House subcommittee heard testimony on a bill that would allow Puerto Rico’s government-owned corporations to restructure their debt under Chapter 9 of the federal bankruptcy code.
The proposal was filed last month by Pedro Pierluisi, Puerto Rico’s nonvoting congressional delegate. Rep. Tom Marino, chairman of the subcommittee, indicated the bill will soon be sent to the full House Judiciary Committee for a vote.
Unlike other U.S. municipal entities, public agencies in Puerto Rico are currently prohibited from filing under the bankruptcy code.
The president of Puerto Rico’s Government Development Bank, Melba Costa, said the commonwealth needs a “clear debt adjustment mechanism,” and Chapter 9 has been tested in cities such as Detroit and Stockton, Calif., and Jefferson County, Ala.
‘Orderly process’
“Chapter 9 establishes a legal regime that is already understood by the capital markets, creditors, prospective lenders, and suppliers,” she said in a statement. “It would provide an orderly process, requires the public corporation to negotiate in good faith, creates an environment to reach consensus and allows the process to be supervised by an experienced court.”
No decision has been made whether any public corporation would file under Chapter 9, she said, and if enacted, it would only be an “option of last resort.”
Rep. Bob Goodlatte, chairman of the House Judiciary Committee, said access to Chapter 9 could provide an orderly way to restructure Puerto Rico’s debt, but was leery of its impact on investors.
Funds argue for better management
An attorney representing funds managed by Franklin Municipal Bond Group and OppenheimerFunds, Inc., which have invested about $1.6 billion in bonds issued by the Puerto Rico Electric Power Authority, spoke against the measure.
Thomas Mayer said Prepa, which faces about $9 billion in debt, could “fix itself” by raising rates, collecting unpaid bills and becoming more efficient. He said investors relied on Puerto Rico’s exclusion from Chapter 9, and the bill “breaks faith with those millions of men and women.”
Puerto Rico and its agencies are saddled with about $73 billion of debt. Though the bill would allow Puerto Rico’s public corporations to use bankruptcy to restructure their debt, there would be no effect on funds owed on its general obligation bonds. Further, it probably wouldn’t apply to debt backed by sales taxes, Puerto Rico Senate President Eduardo Bhatia told Bloomberg after the hearing.
Movement on the bill comes on the heels of a recent ruling that struck down Puerto Rico’s “Recovery Act,” which would have allowed the commonwealth’s public corporations to restructure their debt.