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Puerto Rico Municipal Bankruptcy Proposed in U.S. House Bill

Puerto Rico’s government-owned corporations could file for bankruptcy protection under a bill proposed in the U.S. House of Representatives by the delegate from the Caribbean territory, which is struggling to pay $73 billion in debt.

Pedro Pierluisi, a Democrat who can propose legislation but can’t vote on it, today introduced the measure that would let agencies restructure debt in court. They don’t have that option, unlike cities including Detroit and Stockton, California, that have done so to escape financial burdens they could no longer afford.

The bill would “enable the Puerto Rico government to authorize its government-owned corporations to utilize the tried-and-true Chapter 9 procedure if it becomes necessary, under the expert supervision of an impartial federal bankruptcy judge,” Pierluisi said in a statement.

Puerto Rico’s credit rating was cut to junk this year, prompting speculation among investors about bond defaults. The island of 3.6 million people and its agencies, including its electric company, have borrowed to pay bills as the economy shrank and residents left for the U.S. mainland. Its debt is tax free in all states and is held in 66 percent of U.S. municipal-bond mutual funds.

No Guarantees

The legislation’s prospects are uncertain. Pierluisi said he has no guarantees from Republican leaders that they would consider the legislation, which he plans to push once lawmakers return in September.

The bill would give Puerto Rico the privileges extended to states under bankruptcy law. The territory, like states, wouldn’t be eligible to file itself, Pierluisi said.

“Everybody that we’ve talked to is receptive,” he said today.

Bond investors in the U.S. have long opposed municipal bankruptcies, which let cities force creditors to accept less than they are owed. Only about half the states let their municipalities file for bankruptcy.

Puerto Rico lawmakers have already taken their own steps to allow the restructuring of debts short of bankruptcy. A law passed last month would allow some public corporations to negotiate with bondholders, potentially forcing them to accept unfavorable terms. Two investment funds, Franklin Templeton Investments and Oppenheimer Funds Inc., have sought to have the law thrown out in court. No agency has sought to utilize the law.

The Puerto Rico Electric Power Authority, which supplies most of the island’s electricity, is a leading candidate. The authority has been negotiating with banks for time to make payments on credit lines used to buy fuel. Fitch Ratings on June 26 downgraded the authority to CC, its third-lowest speculative grade, citing a probable restructuring or default.

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