The Supreme Court is due to rule by the end of June on the validity of a Puerto Rico law that would allow the U.S. territory to restructure the chunk of its debt issued by public agencies, more than $20 billion, in a bankruptcy-like process, Reuters reported today. The court fight is playing out as the Republican-led Congress grapples with legislation that lawmakers hope will prevent the need for a bailout of the territory of 3.5 million U.S. citizens. The legislation is expected to put Puerto Rico's finances under federal oversight through a control board and let the Caribbean island cut debt through a bankruptcy-like restructuring process. It would preempt the Recovery Act, the local restructuring law that was thrown out in U.S. courts before Puerto Rico asked the Supreme Court to reinstate it. Puerto Rico is not covered by federal bankruptcy laws that U.S. cities and public agencies can use, so some U.S. lawmakers view legislation as the only way to keep the debt crisis from worsening. But drafting the bill has been laborious. Some bondholders, including U.S. hedge funds, and Republicans are seeking to ensure that creditors get paid as much as possible of what they are owed. Congressional Democrats, the Obama administration and Puerto Rico itself are trying to prevent austerity that could threaten services on the island. An early draft of the bill by the House of Representatives Natural Resources Committee never made it to a vote, and the panel on Wednesday delayed unveiling the latest draft, citing the need for "a number of refinements." Some Republicans oppose inclusion of a "cram-down" provision that would let Puerto Rico impose debt cuts on creditors who do not agree to them. If the Supreme Court reinstates the Recovery Act, the congressional legislation might not seem so bad to creditors in comparison, said ABI Resident Scholar Prof. Melissa Jacoby of the University of North Carolina School of Law. "It might alter the lobbying landscape," Jacoby said. Puerto Rico has already defaulted on some of its debt, most recently the bulk of a $422 million payment owed by its primary government bank. Read more.
Experts talk about the next steps for Puerto Rico to resolve its financial distress today at ABI’s New York City Bankruptcy Conference. Walk-up registration available!
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
