U.S. Government to Help Restructure Puerto Rico’s $70B Debt

U.S. lawmakers have come up with a bill that will help Puerto Rico restructure its debt. The territory has been asking for help from the federal government to deal with its debt crisis.

Unlike states and other municipalities in the U.S., territories are not allowed to file for bankruptcy protection under the U.S. Bankruptcy Code. The bipartisan legislation would offer the territory a legal remedy similar to filing for bankruptcy protection but without requiring the commitment of federal funds.

Puerto Rico has been in a huge economic crisis while struggling to repay its debt. Already, the island has defaulted on different bond classes, including the majority of a $422 million payment that was due this month. The Commonwealth also has another $2 billion debt payment due in July.

The purpose of the bill would be to lower the island’s debt burden, which absorbs over 30% of the Commonwealth’s revenues. The U.S. government is also trying to prevent the legal brouhaha that could arise in court between different creditors to which the island owes money. Per some of the terms of the bill, a control board would mandate that Puerto Rico’s government establish a fiscal plan, which would including providing sufficient funding for pensions. At the moment, according to Fox News, the territory has underfunded its public pension by over $40 billion. However, there are those who oppose the bill, including opposition groups cautioning that the legislation could establish a precedent for U.S. states that are in trouble. Already, Puerto Rico’s economic woes have compelled over 200,000 to flee the island.

Thousands of investors that lost money from investing in Puerto Rico bonds are waiting to recover their losses that amassed nearly three years ago when the island’s municipal bonds dropped significantly in value. Investors claim they were encouraged by brokerage firms such as Banco Santander (SAN), UBS Puerto Rico (UBS-PR), Banco Popular, and others to invest in Puerto Rico bonds and Puerto Rico closed-end bond funds even though these were not appropriate securities for many investors because they could not handle the risks involved in such speculative debt. Some brokers are accused of recommending to investors that they borrow money so that they could get into even more Puerto Rico municipal bonds.

In other news, Puerto Rico Governor Alejandro García Padilla announced a state of emergency for the Puerto Rico Highways and Transportation Authority (“PRHTA”), barring PRHTA from transferring income to bondholders in order to keep up operational costs. The order also puts into place a stay on bondholder lawsuits.

The action from the Puerto Rican government comes in the wake of a lawsuit brought by Ambac over the highway agency’s approval of a lease extension for the running of two toll roads. Ambac contends that the extension could erroneously divert $115 million from PRHTA’s estate. Ambac insures some of the agency’s debt.

Also, the island wants the Puerto Rico Aqueduct and Sewer Authority (“PRASA”) to borrow hundreds of millions dollars so it will not have to default on the $135 million bond payment it owes investors in July. The territory’s lawmakers are working on legislation that would set up a new public corporation that could sell securities for PRASA. The water utility owes suppliers and contractors over $140 million.

Our Puerto Rico bond fraud lawyers represent investors to pursue their claims against UBS, Banco Santander, Banco Popular and others. Call us for a free, no obligation consultation today.

Republicans, Obama Administration Reach Agreement on Puerto Rico Restructuring Bill, The Wall Street Journal, May 19, 2016

In major step for Puerto Rico, House GOP introduces new bill to rescue island, Fox News, May 19, 2016

Puerto Rico declares state of emergency for highway authority, Reuters, May 18, 2016

Puerto Rico Seeking to Sell Water Bonds Even as Crisis Worsens, Yahoo/Bloomberg, May 19, 2016