Congress Throws Puerto Rico A Lifeline

Puerto Rico is drowning in debt, its population and tax base are shrinking and its infrastructure is crumbling. Puerto Rico needs any help it can get.

Against that backdrop, the U.S. Congress is finally set to throw the island a lifeline, with the House approving legislation last week that would establish a process to handle the largest municipal debt workout in U.S. history, according to numerous reports.

The House bill, which still must pass the Senate, is called the Puerto Rico Oversight Management and Economic Stability Act, PROMESA, or promise in Spanish. It would create a seven member federal control board to help the island restructure its debt. The bill is expected to pass with bipartisan support.

This Congress has been roundly criticized for failing to have both political parties work together on legislation. Puerto Rico’s debt crisis is indeed serious if gets Republicans and Democrats to join together and pass a rescue bill in an election year.

Congress, however, better show its support fast. Puerto Rico is set to default on $2 billion of debt payments due on July 1.

Passing the PROMESA legislation was quite an achievement for House Speaker Paul Ryan, the Wall Street Journal noted.

“On the right, some creditors and other interest groups spent millions of dollars on television ads to oppose the measure. Bondholders worry the bill’s restructuring powers will let Puerto Rico escape major fiscal overhaul by aggressively writing down their bonds instead. The bill doesn’t commit federal funds to Puerto Rico, whose debt is held by U.S. hedge-fund and mutual-fund firms and by Puerto Rican residents and financial institutions.”

“On the left, the bill faces concerns from labor unions and political leaders in Puerto Rico that, given the lack of any federal aid, the seven-member oversight board charged with balancing the commonwealth’s finances will impose austerity measures that do little to boost growth,” according to the Journal.

Under the federal control board, Puerto Rico’s population could face austerity measures similar to those imposed on Greece, which has repeatedly negotiated with its creditors since 2010 over cuts to its national budget.

Watch out. Hedge funds holding a big chunk of the debt are scrambling to kill the PROMESA bill or at the very least, water it down. They are trying to protect their speculative investment play by exercising their lobbying muscle with Congress and the Puerto Rico government, which will hold elections in November.

Making the situation more complicated, a recent audit of the island’s debt reveals that billions of dollars of outstanding bonds may be invalid under the Puerto Rico Constitution. In a strategy known as “scoop and toss,” these bonds were issued to pay debt on prior debt. Puerto Rico’s constitution prohibits such debt issuance. That means Puerto Rico may be able to void some of its borrowing because politicians exceeded constitutional debt limits and their own authority.

The Supreme Court weighed in, refusing to revive a dormant law that would have allowed Puerto Rico to restructure a portion of its $70 billion debt, according to numerous reports. That makes the PROMESA bill even more important.

Suffice it to say, this is shaping up to be a busy summer for all of those with interests in Puerto Rico debt.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.  For more information about Zamansky LLC, please visit https://www.zamansky.com.