Puerto Rico governor offers debt restructuring for public corporations

SAN JUAN, June 25 Wed Jun 25, 2014 1:11pm EDT

SAN JUAN, June 25 (Reuters) - Puerto Rico's Governor Alejandro Garcia Padilla unveiled a bankruptcy-like process for public corporations to restructure their debts on Wednesday, in a fresh bid to shore up the U.S. territory's deteriorating finances.

The governor's proposal, laid out in a bill expected to pass the legislature soon, would apply to the semi-autonomous public authorities that manage Puerto Rico's infrastructure and are unable to pay their debts. It offers two options for adjusting debts: a seven-step voluntary restructuring process, which would be approved by creditors, and also a process overseen by the island's courts.

"The principal purpose of this law is to protect the interests of the people of Puerto Rico and to assure that the existing void in federal law does not put in danger essential public services," the governor said.

He added that Puerto Rico could not sacrifice "all we have done to save the general fund" because "some public corporations don't have the structure to pay their debts."

Some analysts have said that reforming the corporations is key to salvaging the territory's finances. After years of economic and population declines, Puerto Rico is struggling to stay financially afloat. Earlier this year all three rating agencies cut the territory's credit score to junk and the island has hired Wall Street restructuring consultants as it struggles to handle $70 billion in outstanding debt.

The effects of the territory's financial woes have spread beyond its borders and into the wider $3.7 trillion municipal bond market. Many municipal bond funds have held the island's debt because its interest is free from both federal and state taxation.

The law would not apply to the territory's general obligations. Puerto Rico's 78 municipalities, Government Development Bank, retirement systems and some other authorities are also excluded.

A few corporations are already considering restructuring, but none has made a decision, Garcia Padilla said, emphasizing a corporation would have to prove to its creditors or courts it was insolvent.

The governor's move comes as the territory's legislature finalizes the fiscal year 2015 budget before its session ends June 30. Senate Minority Leader Anibal Jose Torres said Wednesday the legislature was ready to approve the measure in the coming hours.

Puerto Rico's public corporations are supposed to be fiscally autonomous, but they have been subsidized by the commonwealth's general fund for years. Political pressure has made raising rates impossible, while politicians have looked to the corporations to repay favors. Their employees are the best paid in the commonwealth.

U.S. law provides a framework for municipal entities to declare bankruptcy while continuing their services, but "Puerto Rico's public corporations fall through the cracks of these laws," said David Chafey, president of the board of directors of the GDB.

"Many investors will see this positively because it creates a judicial framework," he also said.

Workers from the Puerto Rico Aqueduct & Sewer Authority (PRASA) and the Puerto Rico Electric Power Authority (PREPA) and several other corporations took to the streets Wednesday to protest a recently passed fiscal emergency law that cuts worker benefits. The demonstration could mark the beginning of a national strike, labor leaders said.

Management at both PREPA and PRASA said the utilities' services were operating normally.

Yields on bonds Puerto Rico issued in March have been rising, partly on concerns over PREPA's liquidity. On Tuesday the yields spiked to a record high of 9.731 percent, or 84.625 cents on the dollar.

Federal Reserve Bank of New York President William Dudley said on Tuesday the territory "must confront this issue head on," given public corporations account for 40 percent of its total debt. (Reporting by Reuters in San Juan; Additional reporting and writing by Lisa Lambert in Washington; Editing by Tom Brown)

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