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Puerto Rico Debt Crisis Reaches New Heights; What’s The Solution?

April 8, 2016 Blog

Puerto Rico’s $70 billion debt crisis is coming to a head.

Massive defaults are looming, Congress is dithering over a solution to the calamity and Puerto Rico’s government is taking steps that will protect its residents but potentially harm its bond holders.

The dire situation worsened on Wednesday.

“Benchmark Puerto Rico bond prices touched record lows after Gov. Alejandro García Padilla signed a bill that would allow the territory to suspend debt payments while awaiting help from Washington, D.C., in dealing with the island’s financial crisis,” according to the Wall Street Journal. “The bill empowers Mr. García Padilla to impose a moratorium on payments to keep government cash flowing for essential services. It is the latest attempt by the U.S. commonwealth to protect money it says it needs for police and firefighters while it waits on action from the U.S. Congress or Supreme Court.”

“Under the provisions of the bill, the governor could evaluate whether to pay debt on an ‘entity-by-entity basis,’ according to the Journal. “The moratorium powers would generally last through Jan. 31 with a possible two-month extension. The debt would remain outstanding and missed payments would be due when the moratorium ends.”

The New York Times noted the urgency of Puerto Rico’s debt situation. “The bill did not specify a starting date for the moratorium, leaving that decision to the governor,” the Times reported on Thursday. “But a big debt payment, $422 million, is due on May 1, and there have been many signs that Puerto Rico is not able or willing to pay it.”

While Puerto Rico has missed other bond payments in the past year, the size of the May debt payment is significantly higher and could lead to a series of larger defaults.

Boxed into a corner, Gov. Padilla had to take some sort of action along these lines. Critical services are in danger of being shut off.

Puerto Rico’s populous is already at risk. According to a recent Associated Press report, PREPA, Puerto Rico’s power authority, “cut off electricity to a hospital over nearly $4 million in unpaid bills, part of a stepped-up effort by the heavily indebted agency to collect money amid the island’s economic crisis.”

PREPA said it “waited for surgeries to end before pulling the plug at the Santa Rosa Hospital in the southern coastal town of Guayama.”

In an effort to restructure its debt through bankruptcy or other means, the Puerto Rico Government has occupied every branch of the U.S. government to deal with its woes.

President Obama’s Administration is leading the effort to change U.S. law to allow the Island to file a Chapter 9 bankruptcy, which is not permitted under current law.

Congress is wrestling with competing proposals from Democrats and Republicans to allow debt restructuring through a “fiscal control board” which would referee disputes between the Government and its creditors and would have authority to cut the budget and make service cuts.

And the Supreme Court last month heard arguments on the constitutionality of a new Puerto Rican law which would allow PREPA and other utilities to file for bankruptcy.

Meanwhile, investment fraud attorneys are busy prosecuting arbitration cases against brokerage firms such as UBS and other sellers of Puerto Rico bond closed end funds to retail investors. Hundreds of millions of dollars in investor money is at stake.

It appears that many are trying to find a solution before Puerto Rico’s government defaults on a massive amount of its debt this spring. We will see which, if any, of these efforts bears the most fruit. Stay tuned.

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