SAN JUAN Puerto Rico Governor Alejandro Garcia Padilla unveiled a bankruptcy-like process for some 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 proposed legislation, 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 approved by creditors or 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 afloat. All three rating agencies have cut the territory's credit score to junk and the island has hired restructuring consultants to help handle $70 billion in outstanding debt.
The territory's woes have spread into the wider $3.7 trillion municipal bond market. The island's debt has been popular in the past because its interest is exempt from federal and state taxation.
The law would not apply to the territory's general obligations. Puerto Rico's 78 municipalities, Government Development Bank (GDB), 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.
The Puerto Rico Electric Power Authority (PREPA) called a last-minute meeting of its board of directors on Wednesday. Board member Juan Rosario said he expected it was related to the restructuring bill. PREPA has one of the heaviest debt loads of the corporations, $10 billion, according to Treasury Secretary Melba Acosta Febo. Currently, it is seeking extensions of $800 million of expiring lines of credit. There is uncertainty the GDB will step in with needed liquidity if those negotiations fail. In a call with reporters, GDB board President David Chafey said the restructuring bill did not target any specific public corporation. He said the GDB, which serves as a bank, fiscal agent and financial adviser, was "continuously working with PREPA to see what their alternatives are," however.
The governor's debt restructuring proposal comes as the territory's legislature finalizes the fiscal year 2015 budget before its session ends next Monday. Senate Minority Leader Anibal Jose Torres said 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 Chafey.
"Many investors will see this (restructuring bill) positively because it creates a judicial framework,” he said.
Yields on bonds Puerto Rico issued in March began falling after the governor's announcement reaching 9.191 percent, or 89 cents on the dollar, in afternoon trading.[74514LE86=MSRB]
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.