Puerto Rico will likely need to fund government operations using sales-tax revenue claimed by warring factions of bondholders unless a legal dispute at the heart of the island’s bankruptcy is resolved by November, Bloomberg News reported on Saturday. The federal oversight board charged with restructuring Puerto Rico’s $74 billion debt asked a judge to let the board appoint two independent agents to help litigate a dispute over who owns cash collected by the government’s sales tax agency, known by its Spanish acronym Cofina. In court papers filed on Saturday morning, lawyers for the oversight board said those agents should take over the fight currently being waged between general-obligation bondholders and Cofina bondholders. The U.S. Bankruptcy Court in San Juan will decide who has control over $400 million of funds held by the sales-tax bond trustee. If the court rules that Puerto Rico doesn’t have claim to any sales-tax revenue, then the island will face “acute cash management issues” that may require it to borrow sales-tax revenue after Nov. 1 from the island’s sales-tax agency, the commonwealth said in the court documents. Read more.
Even before the U.S. territory filed for a tailor-made form of bankruptcy, the government spent as much as $154 million on financial consultants and lawyers as it negotiated with bondholders to cut its $74 billion debt, according to the terms in contracts provided by the island’s Office of the Comptroller. With creditors and Puerto Rico now squaring off in court, the fees will only grow, according to a Bloomberg News analysis. Puerto Rico’s May 3 bankruptcy, allowed under a unique process created by a federal rescue law enacted last year, is the largest ever for a U.S. government, promising significant paydays for lawyers and advisers clashing over who has a higher claim on the island’s diminished cash. The amount the government spent during its slow-motion collapse approached the $180 million shelled out in Detroit’s record bankruptcy — roughly equivalent to what it costs to cover the annual pensions of 11,000 Puerto Rico retirees. Some of the spending on consultants has borne fruit: the Puerto Rico Electric Power Authority, known as PREPA, and the Government Development Bank have both reached out-of-court settlements with bondholders to reduce what’s owed. The power company’s deal struck this year, which amended an earlier one, promises to cut its debt-service costs by about $2.2 billion from 2018 to 2022 if it’s executed. Puerto Rico was less successful with owners of other bonds, ultimately wagering on a better outcome from bankruptcy. Read more.
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
