A former U.S. bankruptcy judge hired to help Puerto Rico with its debt problems said it would be impractical to expect the commonwealth to restructure its $72 billion of obligation outside the court system.
“I just don’t think that an out-of-court negotiation process is feasible here,” Steven Rhodes said Tuesday in a telephone interview. “There are too many creditors, too many different kinds of creditors. They’re all over the place.”
Puerto Rico currently is barred by U.S. law from using Chapter 9 of the federal bankruptcy code, a last-resort tool that enables municipalities to resolve their debt in court. Rhodes, who presided over the city of Detroit’s bankruptcy, is working with Puerto Rico officials to help them gain access to Chapter 9 and make use of it. His contract with the Government Development Bank, which is at the center of the fight, began June 1, he said.
David Millar, a spokesman for the GDB at Sard Verbinnen & Co. in New York, declined to comment.
The retired judge said the island will need access to bankruptcy courts for more than just its public agencies, which would be allowed under a bill introduced by Pedro Pierluisi, the U.S. territory’s non-voting member of Congress.
“The commonwealth itself needs access to Chapter 9 relief as well,” Rhodes said in a telephone interview.
Puerto Rican politicians have been trying to drum up support for the bill that Pierluisi introduced that would enable the island’s public corporations to file for bankruptcy protection.
The commonwealth last year attempted to institute its own version of a restructuring law for its public corporations. But U.S. District Judge Francisco A. Besosa in San Juan ruled on Feb. 6 in response to two separate suits from creditors that the law -- the Public Corporation Debt Enforcement and Recovery Act -- violated the U.S. Constitution.
Bond funds affiliated with Franklin Resources Inc., Oppenheimer Rochester Funds and BlueMountain Capital Management had sued the commonwealth, contending that the law was unconstitutional and depressed the value of the $2 billion in Puerto Rico power utility debt they held.
Puerto Rico and the creditors of the utility, known as Prepa, are awaiting a decision from an appeals court. The case was argued May 6 in Boston before a three-judge appellate panel.
Support from mainland Congressional leaders for the Chapter 9 idea started to build this week. New York Senator Charles Schumer, the third-highest ranking Democrat in the chamber, and another Democrat will sponsor a companion of H.R. 870, the Congressman said in an e-mailed statement today. Josh Earnest, a spokesman for the White House, said Monday that Congress should “take a look” at the bill, and a spokeswoman for House Minority Leader Nancy Pelosi said it should be voted on when the House of Representatives returns to its next session.
“Puerto Rico is not a state. It’s not a sovereign in the same sense that Michigan or Pennsylvania or Illinois is,” Rhodes said.“Congress has complete and plenary authority over it. Without violating any of our constitutional principles, it could grant the commonwealth that relief, if it chose.”
While overseeing the Detroit bankruptcy, Rhodes made a number of key rulings that forged compromises. He refused to authorize lenders’ demands to sell millions of dollars of art, but also ruled against the municipality when it tried to settle a disputed swaps trade for more than he thought it was worth. In addition, he hired an independent financial adviser to evaluate the plan’s feasibility because he said the focus of the bankruptcy was to ensure that Detroit could provide basic services to its residents.
For more, read this QuickTake: Puerto Rico’s Slide
Puerto Rico has retained a group of former International Monetary Fund economists who’ve identified its exclusion from Chapter 9 as one reason it could be difficult for the commonwealth “to facilitate a more orderly discussion of debt,” the economists said in a report commissioned by the island government.
The report’s chief author, Anne Krueger, said Puerto Rico being exempted from bankruptcy protection “doesn’t seem to make sense” in an interview Wednesday on Bloomberg Radio with Michael McKee and Tom Keene.
“Puerto Rico is not a country,” she said. “So it can’t go to the IMF or the World Bank.”