Three members of the Puerto Rico House of Representatives have proposed legislation to open the door to restructuring the commonwealth's more than $70 billion of debt.
In a press release Sunday, Representatives Manuel Natal Albelo, Luis Vega Ramos, and Luis Raúl Torres Cruz called for a referendum on a constitutional amendment allowing for the restructuring of the debt of the commonwealth and its public corporations. The three are members of the Popular Democratic Party, along with Gov. Alejandro García Padilla.
Discussions of debt restructuring are becoming increasingly common in Puerto Rico, which has had a weak economy for several years and an unbalanced budget for decades. Adoption of any of the restructuring proposals would probably lead to the biggest bond default in U.S. municipal history.
"It's pretty clear they are trying to default." Triet Nguyen, managing partner of New Oak, said of the three legislators. He added that the proposals have little chance of passage in their current form.
Vega Ramos said Monday that 2/3ds majorities in the House and Senate would be needed to approve the referendum. In a public referendum, the measure would need a majority vote to pass.
The amendment would establish that payment of the debt should take into account the commonwealth government's fiscal realities. The debt should not be considered superior to the priorities of cheaper electricity, lower water prices, strategic infrastructure investment, schools, effective special education programs, and better health programs for everyone, the proposed language indicates.
The three Representatives introduced several bills on Monday. One would set up a special independent commission for the government to restructure the debt.
The representatives said in the press statement that the plan would apply to the debts of the Puerto Rico Sales Tax Finance Corporation (COFINA), the Puerto Rico Electric Power Authority, and the Puerto Rico Aqueduct and Sewer Authority. Vega Ramos said in an interview that all commonwealth and public corporation debt should be on the table.
The legislation would allow the commonwealth to use the fiscal emergency legislation passed in late June to decree a moratorium on the payment of 78% of public debt service.
The representatives have also proposed a bill to create a special commission to restructure the commonwealth's debt.
"The biggest impediment to achieving [public investments for economic growth] is the growing weight of the public debt in the government's proposed budget," Torres Cruz said in the press release.
In an interview on Monday, Vega Ramos presented the three legislators' proposals as similar to the Debt Enforcement and Recovery Act, adopted in late June, and Chapter 9 bankruptcy, for which Puerto Rico is not currently eligible. The proposals are to open the way for an orderly way of restructuring the debt if needed, he said.
A federal court last month struck down the Recovery Act. Puerto Rico has appealed the decision to a higher court. Gov. García Padilla has also indicated his support for a measure in the U.S. Congress to allow Chapter 9 for Puerto Rico.
The Debt Enforcement and Recovery Act, if it returns, would apply to only four Puerto Rico public corporations. Chapter 9 would apply to all public corporations and Puerto Rico's municipalities. By contrast, the measures proposed by the legislators would apply to all Puerto Rico debt.
The Popular Democratic Party has 28 members in the House, while the opposition New Progressive Party has 23 members.
Puerto Rico's constitution grants first lien to payments of the island's general obligation debt, according to the commonwealth's official statements and other sources.
On Feb. 25 Speaker of the Puerto Rico House of Representatives Jaime Perell- said through a spokesman that the commonwealth's debt was constitutionally protected and indicated his support for keeping the constitutional protection. He also said that some of the public corporation debt may need to be restructured and specifically mentioned PREPA's debt as an example.
Representatives of the governor and House Minority Leader Jennifer González didn't immediately respond to a request for comment. González is the leader of New Progressive Party in the House.
"We seem to be seeing a progression over the last two or so years where all on the island stood behind all the debt of the commonwealth to one where corporation debt was being considered for restructuring to now where there are discussions about restructuring virtually all of the public debt of the commonwealth," said AllianceBernstein director of municipal credit research Joseph Rosenblum. "It obviously reflects the continued serious nature of the commonwealth's fiscal situation, the high level of debt, and the lack of economic growth needed to support both the debt of Puerto Rico and the delivery of an acceptable level of government services; these are all interconnected. Such discussions add in my opinion, to the difficulty in their issuing additional debt badly needed for liquidity."
