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The Supreme Court And Puerto Rico

February 18, 2016 Blog

The sudden passing of Justice Antonin Scalia and the ensuing political scramble to replace him could have a profound effect on Puerto Rico’s debt crisis.

In June, The Supreme Court will decide whether or not Puerto Rico’s public utility, PREPA can restructure its own debts.

The Supreme Court will consider reinstating a Puerto Rico law that would let its debt-ridden public utilities restructure their obligations, according to a report from Bloomberg in December. The Court is to hear an appeal by the commonwealth of a lower court’s decision last July that prevented the measure under federal bankruptcy laws. The disputed law would affect $22 billion of Puerto Rico’s $70 billion in debt. That includes $8.2 billion owed by PREPA.

Justice Scalia’s death makes this matter even more complicated. The seven remaining Justices (Justice Samuel Alito has recused himself from the case) may decide to delay a decision until a new Justice is approved by the Senate. With Republican leaders in the Senate vowing not to consider a new Justice until after the presidential election in November, the Court’s turmoil is clearly a blow to the island’s restructuring efforts.

If Puerto Rico cannot restructure its $72 billion debt soon, massive defaults are likely as early as this spring.
Time for Puerto Rico and owners of its debt, including Mom and Pop investors who own UBS Puerto Rico bond funds, appears to be running out.

As if things couldn’t possibly get worse, on Tuesday, Puerto Rico lawmakers “also tried to find out why the government had been unable to issue audited financial statements from 2014,” according to the Times. “Late in the day, the government responded by issuing unaudited financial statements, saying that the information ‘could be useful in evaluating Puerto Rico’s financial condition and new legislative measures to address the current fiscal crisis.’”

Late Tuesday the Puerto Rico government said in a statement that there was “substantial doubt as to the ability of the commonwealth and most of its public corporations and retirement systems to continue as going concerns.”

According to a Bloomberg report from Wednesday, “Puerto Rico may suspend principal and interest payments on its bonds in less than three months as the island struggles to cover health and safety programs. The potential halt on debt-service payments comes as the commonwealth’s Government Development Bank faces a $422 million debt payment May 1. Puerto Rico and its agencies owe investors $2 billion on July 1, including $805 million for general-obligations.”

Remarkably, a recent New York Times article reported that debt service consumes “an unsustainable 36% of the island’s tax revenue” compared with 5% spent by the “typical state.”

With bankruptcy not an option, Puerto Rico could seek restructuring authority under the “Territorial Clause” of the U.S. Constitution, according to the Times.

Such a maneuver is likely to end up in the Supreme Court and entail years of expensive litigation in these uncharted legal waters. Years of litigation would prove to be catastrophic for Puerto Rico’s already ailing economy.

Caught in the legal and political cross current are the UBS Puerto Rico bond investors. While Washington dithers, investors will wait years for visibility on the value of their holdings.

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