Allowing Puerto Rico’s public corporations to file for Chapter 9 bankruptcy protection would benefit holders of the agencies’ debt as well as the commonwealth, according to Fitch Ratings.
Pedro Pierluisi, a Democrat who represents Puerto Rico in the U.S. House, introduced in July a measure that would let the island’s agencies restructure debt in court. They don’t have that option, unlike cities including Detroit and Stockton, California. The U.S. territory and its corporations have a combined debt burden of $73 billion.
Lacking a bankruptcy option, Puerto Rico approved a law in June that would allow some public corporations to negotiate with bondholders, potentially forcing them to accept unfavorable terms. Fitch cut the commonwealth’s rating deeper into speculative grade after the legislation passed, and its bonds declined. Giving the Chapter 9 option would allow investors to better assess potential losses, Fitch said.
“Clarifying the rules for restructuring and aligning them to a federal standard with understandable precedent, albeit limited, and providing a federal forum for the proceeding would benefit bondholders,” Fitch analysts said in a report today.
The restructuring law the island passed in June threatens Puerto Rico’s sales tax bonds, known as Cofinas, more than a federal bankruptcy alternative, Fitch said. The New York-based company cut the senior-lien bonds to junk on July 9, dropping them nine levels to BB-, the same as the commonwealth’s general obligations.
Extending the Chapter 9 option to the island’s agencies may bolster Cofina’s credit above that of the territory’s, Fitch said.
The new restructuring law would probably be withdrawn if Chapter 9 becomes available, Fitch said. That would end litigation associated with the measure from Franklin Templeton Investments and Oppenheimer Funds Inc., which have sought to have it thrown out in court.
The prospects of the legislation proposed by Pierluisi are unclear. Pierluisi, who can propose legislation but can’t vote on it, said he has no guarantees from Republican leaders that they would consider the legislation, which he plans to push once lawmakers return in September.