Puerto Rico Loses Bid for Restructuring Law as Crisis Mounts

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Puerto Rico failed in its bid to revive a restructuring law that investors say conflicts with the U.S. bankruptcy code, a blow to the commonwealth as it falls deeper into a fiscal crisis.

Lawyers for Puerto Rico had asked the U.S. Court of Appeals in Boston to reinstate a local law to help it deal with $72 billion in debt. The court resisted on Monday, agreeing instead with a San Juan judge who threw out the statute in February.

The dispute centers on whether the island, which is excluded from a part of the bankruptcy code used by municipal entities and cities such as Detroit, can make its own rules for allowing public agencies to seek protection from creditors.

The commonwealth may ask the U.S. Supreme Court to consider the case, Cesar Miranda Rodriguez, Puerto Rico’s attorney general, said in a statement.

The court decision “is very disappointing,” the attorney general said. “It’s arbitrary and inconceivable that Puerto Rico will be deprived of a tool that allows for an orderly negotiation of public debt.”

Puerto Rico may also turn to Congress, where a bill sponsored by Puerto Rico’s non-voting member, Pedro Pierluisi, would allow certain public agencies to file for Chapter 9 protection. It hasn’t moved since a February hearing.

Democratic Senators Charles Schumer of New York and Richard Blumenthal of Connecticut last week announced plans to sponsor a similar statute, and on Tuesday Democratic presidential candidate Hillary Clinton announced support for legislative change.

Piecemeal Talks

Barring help from lawmakers, the decision means that debt-burdened Puerto Rico agencies must continue piecemeal negotiations with creditors, a process which could lead to chaos if discussions break down and investors end up suing the agencies and each other to reclaim what they’re owed.

Puerto Rico securities have dropped in price after Governor Alejandro Garcia Padilla last month said he would move toward restructuring the island’s debt. Commonwealth general obligations maturing in July 2035 traded Tuesday at an average price of about 70.4 cents on the dollar, after falling to a record low of 66.6 cents June 30, according to data compiled by Bloomberg.

Puerto Rico’s status as a U.S. commonwealth lacking in legal benefits provided to states has amplified its economic woes. Lawyers for the island and the power utility argued to the appeals court that Congress had left Puerto Rico in “no man’s land” by exempting it from federal law allowing state municipalities and agencies to seek bankruptcy protection.

Police Power

A lawyer for Melba Acosta Febo, president of Puerto Rico’s development bank, told the judges in May that the island’s dire fiscal circumstances constituted a state of emergency, allowing it to use police powers to enact a restructuring law.

Lawyers for investors argued that Congress didn’t permit Puerto Rico to create its own debt-relief statutes. The funds said the Puerto Rico law is a “harsher” copy of the Chapter 9 bankruptcy for state municipal entities.

The Puerto Rico power utility, serving almost all of the island’s 3.6 million residents, has been trying to negotiate for payment relief. Marking a break in escalating tensions over its financial state, the authority made a full $415 million bond payment due July 1 and reached an agreement to continue out-of-court discussions to restructure its $9 billion of debt.

An investor, BlueMountain Capital, praised the ruling and said in a statement it was working with the power utility to find a “sustainable path forward.”

Garcia Padilla has called the commonwealth’s debt “unpayable” and said it can’t make good on obligations without changes in the terms.

The island has struggled to grow since 2006 and its debt has been trading at distressed levels for two years. Puerto Rico’s population shrank by about 7 percent in the decade through 2014, losing about 280,000 residents, according to U.S. Census data. By 2050, it may be down to 3 million people, according to a Pew Research Center analysis.

The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).

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