Congress Introduces Two Bills to Address $70B Puerto Rico Debt Crisis

The United States Congress is considering two bills to help Puerto Rico out of its more than $70 billion debt crisis. The first bill, proposed by the Senate Finance Committee and spearheaded by Republican lawmakers, would offer the island’s government $3 billion in emergency cash, reduce the federal employee tax for the territory’s residents from 6.2% to 3.1%, and provide federal oversight to make sure that Puerto Rico continues to have debt plans in place that are sustainable.

While this bill would provide much needed relief to the island, Puerto Rico’s leaders would rather be able to restructure their debt in court. They want the U.S. territory to be able file for Chapter 9 bankruptcy, a protection it does not have at the moment, unlike all 50 U.S. states. Because it cannot avail of this option, Puerto Rico is having to negotiate with each group of bondholders individually. This is proving a slow and arduous process that could go on for years.

Under the second Congressional bill, presented by U.S. Rep Sean Duffy (R – WI), Puerto Rico would be able to file for Chapter 9. However, this bill offers the territory no financial aid. And, as CNN points out, because a lot of the island’s debt belongs to the central government, much of what it owes wouldn’t fall under the Chapter 9 umbrella. To qualify, the debt has to be owed by local towns or institutions.

Puerto Rico has a $1 billion debt payment coming up on January 1, 2016. Already, Governor Alejandro Garcia Padilla has warned that it would be “very difficult” to make that payment. After January, the next debt payment deadline for the island is in May.

Last August, Puerto Rico paid just $628,000 of $58 million that was due to the Public Finance Corporation’s creditors. That debt primarily belongs to the territory’s citizens through the credit unions. Puerto Rico did, however, pay roughly $425 million of debt that belonged to Wall Street hedge funds.

Earlier this month, the U.S. Supreme Court consented to examine the island’s efforts to restructure its public utilities’ debts. They will review a lower court’s ruling that determined that Puerto Rico could not pass a law allowing municipalities to declare bankruptcy. The territory’s lawmakers had passed the law in 2014 with the intent of allowing its beleaguered utility companies to satisfy their debt obligations to creditors and bondholders. However, a federal district court said that the measure was not in line with federal bankruptcy law.

As bondholders of Puerto Rican debt saw in the fall of 2013, Puerto Rico municipal bond began to dramatically fall and have their ratings slashed. Many retail investors sustained catastrophic losses, in part because a lot of them were not equipped to handle such huge losses and should not have invested in the bonds at all. It was only because brokers at firms such as UBS (UBS), Banco Popular (Popular Securities), and Banco Santander (Santander Securities) continued to push these investments that so many people backed them with their money.

Over the last several years, our Puerto Rico municipal bond fraud lawyers have been working with investors in FINRA arbitration to recoup their financial losses. In Puerto Rico and the U.S., Contact Shepherd Smith Edwards and Kantas, LTD LLP today.



Congress is trying to get Puerto Rico out of its ‘death spiral’, CNN, December 10, 2015

Supreme Court to review Puerto Rico debt case, National Monitor, December 5, 2015

Chapter 9 Bankruptcy Basics