As Puerto Rico runs out of cash and approaches a Jan. 1 due date for about $1 billion in debt payments, investors increasingly are uneasy about the fate of bonds sold with a near guarantee, the Wall Street Journal reported today. The bonds, backed by sales taxes and known by the Spanish acronym Cofina, were issued starting a decade ago to plug budget gaps and repay other lenders. The debt at the time was considered the island’s safest offering, and Cofina bonds soon became the biggest chunk of Puerto Rico’s debt outstanding. Now, as the struggling commonwealth redirects money intended for some debt to pay bonds with better legal protections, some analysts are predicting it will soon target Cofina bonds to avoid defaulting on its constitutionally protected general-obligation debt. Such a move would spark a showdown over its two most-sacrosanct obligations. Read more. (Subscription required.)
A New York Times editorial yesterday advocated for Congress to help Puerto Rico, which is home to 3.5 million American citizens, by giving it the ability to restructure its debts in an orderly way. On Jan. 4, the island’s government has to pay creditors nearly $1 billion, money it does not have. It will almost surely default on some of that debt, which could result in lawsuits by investors. The commonwealth is already behind in paying vendors about $400 million and owes residents $300 million in tax refunds. Officials have raised taxes and slashed spending, but that has only depressed the weak economy and encouraged thousands of people to move to the mainland. What needs to happen is clear, according to the editorial: Congress should change the law that excludes Puerto Rico from bankruptcy protection. The island’s government and its creditors should be able to renegotiate the debt in court. And federal lawmakers should appoint an oversight board to make sure the commonwealth’s government adopts sound policies. Read the full editorial.
The December episode of "Eye on Bankruptcy" last week was devoted to Puerto Rico, featuring remarks by Rep. Pedro Pierluisi, Judge Steven Rhodes and an analysis of the coming Supreme Court argument on whether the Recovery Act was pre-empted by the Bankruptcy Code.
Join experts in San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium, Feb. 4-6, 2016. Click here to register!
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
