NEW YORK (Reuters) - A proposed bill to give Puerto Rico’s ailing public agencies a way to restructure debts under U.S. bankruptcy law is a “Wild West” solution that would likely hurt bondholders, an adviser for major investors argued in written testimony ahead of a key congressional committee.
The bill to give Puerto Rico’s agencies the ability to file under Chapter 9 of the U.S. bankruptcy code - used by cities such as Detroit, Michigan, and Stockton, California - was proposed by the U.S. territory’s representative to Congress, Democrat Pedro Pierluisi. It will be heard on Thursday.
“Use of Chapter 9 by any of Puerto Rico’s public corporations will cause more harm than good, for both millions of Americans who invested in Puerto Rico bonds and for the Commonwealth,” according to testimony from Thomas Mayer, a partner at Kramer Levin.
Mayer represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds Inc in respect to their investment in $1.6 billion of bonds issued by Puerto Rico’s electric utility, PREPA. PREPA is in dire shape, laden with about $9 billion in debt and already deep in restructuring negotiations with bondholders.
Using Chapter 9 would force bondholders to shoulder the burden of PREPA’s operational failures and Puerto Rico’s fiscal irresponsibility, Mayer said.
“Chapter 9 is the Wild West,” Mayer’s testimony said. “The only certainty is that Chapter 9 takes a long time - at least 18 months to three years - and is very expensive.”
Pierluisi has argued that the bill empowers the Puerto Rico government to authorize its insolvent public corporations to use a “tried-and-true legal procedure” and would be in the best interests of all stakeholders, including creditors.
Discussion about the bill was reignited when a federal court on Feb. 6 struck down a local law enacted by the Caribbean island granting agencies similar debt-restructuring authority.
Puerto Rico’s Government Development Bank, which finances many of the territory’s official functions, said Chapter 9 would be a “useful tool for Puerto Rico’s long-term economic success, whether or not it is actually invoked,” according to testimony from GDB President Melba Acosta.
Acosta said Chapter 9 provides a legal regime already understood by the markets, creditors, prospective lenders and suppliers.
Reporting by Nick Brown and Megan Davies