Short on Cash, Puerto Rico Waiting for Debt Restructuring Authorization from Washington

The Commonwealth of Puerto Rico is anxiously looking north to Washington D.C., and for the U.S. Congress to provide legislative relief from its debt burden as it faces nearly $2 billion of debt service payments on Friday. Puerto Rico does not have sufficient funds on hand to make its July 1 payments, which include over $800 million for general obligation bond debt service. The debt restructuring bill, known as PROMESA, is moving through Congress and would establish a financial control board to oversee the debt restructuring process as well as the management of the commonwealth’s finances. The bill would also place a stay on outstanding creditor lawsuits, to help the commonwealth weather the restructuring process.

While the bill was approved in the House of Representatives on June 9, it is not certain if it will pass through the Senate by July 1. The Senate is expected to take up the PROMESA legislation this week, but final approval of the bill would be difficult to achieve by July 1 if the Senate makes any amendments to it. Absent this legislative support, the commonwealth has limited options to avoid another default on its debt. There have been suggestions that the government shut down to save cash, but the Governor has stated that the commonwealth would still not have enough cash to pay debt service. Earlier this month, the U.S. Supreme Court thwarted commonwealth efforts to restructure its debt by upholding lower court rulings that prohibited Puerto Rico from adopting legislation that would have provided its own bankruptcy-like restructuring statutes.

Puerto Rico has also enacted legislation that authorizes the Governor to suspend debt service payments through January 2017, and he has already utilized the legislation to suspend some debt service payments. Holders of the commonwealth’s general obligation bonds filed a lawsuit in New York last week, asking the federal court to prevent the commonwealth from suspending debt service payments on its general obligation bonds. A key issue for bondholders is that the Puerto Rico constitution provides that GO bond debt service has a priority over all other commonwealth liabilities, including operating expenses. Nonetheless, the commonwealth has indicated that it will continue to pay for essential government services before it makes debt service payments, including GO bond debt service.

Source: Bloomberg News, the Bond Buyer