U.S. House Passes Puerto Rico Debt Rescue Bill

The U.S. House of Representatives passed PROMESA, a bill to help Puerto Rico deal with its recession and its over $70 billion debt, in a landslide vote of 297-to-127. The island has been in financial trouble for some time now, with many of its residents leaving because the situation has gotten so bad. Already, Puerto Rico has defaulted three times in the last year on the debt payments that it owes.

PROMESA would establish an Oversight Board that will regulate the U.S. territory’s finances. The Oversight Board would be able to sell Puerto Rican government assets, let the island reduce the minimum wage for certain workers on a temporary basis, and decide whether to restructure the island’s debt. PROMESA is not a “bailout” of Puerto Rico as no taxpayer money would be used to pay off Puerto Rico’s debt and no federal funds would be committed under the bill.

Congress’s passage of PROMESA comes as the island is encountering new financial problems, including that the Commonwealth owes $2 billion on July 1 of this year. If the U.S. Senate were to pass PROMESA before then, however, Puerto Rico may not have to pay the full amount in July. The bill gives the Commonwealth a grace period through at least February 2017.

Under that “grace period” provision, Puerto Rico would be able to pay just interest on its debts and creditors wouldn’t be allowed to go after the Commonwealth with lawsuits. The grace period would hopefully give the board time to devise a plan.

Even though a solution is clearly needed, there are those who oppose the measure, including some creditors, interest groups, and bondholders. Puerto Rico’s $7 billion debt is held by local residents, financial institutions, U.S. hedge funds, and mutual fund firms, which means that there are investors on the mainland who are also holding Puerto Rico debt.

At the moment, Puerto Rico’s debt absorbs about 30% of its revenue. Its public agencies are not allowed to file for bankruptcy protection because the island is a U.S. commonwealth rather than a state. Since Puerto Rico is not an independent nation, it is not allowed to ask the International Monetary Fund for help.

In other related news, a commission set up to audit the island’s debt is disputing the legality of bonds that were issued by the Puerto Rican government. In a pre-audit report, its members said that millions of dollars of debt may have violated the territory’s constitution.

The report noted that Puerto Rico has borrowed over $30 billion to finance deficits even though the constitution does not allow this, nor does it let the government issue loans for longer than 30 years, which it also has done. The commission noted that in past U.S. court rulings, certain municipal agents were not held accountable for paying illegally issued debt.

At Shepherd Smith Edwards and Kantas, LLP, our Puerto Rico municipal bond fraud attorneys have been working with investors, both on the island and the U.S. mainland, to recoup bond and closed-end bond fund losses sustained. Brokerage firms and their financial representatives failed to disclose the dire risks of investing in Puerto Rican debt and they inappropriately recommended Puerto Rico municipal bonds and bond funds to clients even though the investments were unsuitable for them. Many investors were solicited to purchase these securities by firms such as UBS Puerto Rico (UBS-PR), Banco Santander (SAN), Banco Popular, and others who knew the risks but did not fully disclose them.

If you suspect that your Puerto Rico bond losses or your Puerto Rico closed-end bond fund losses are due to misrepresentations or the inappropriate recommendations of your broker or broker-dealer, contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Puerto Rico Debt Crisis Bill Passes U.S. House, The Wall Street Journal, June 9, 2016

Commission report questions legality of Puerto Rico bonds, Portland Press Herald, June 2, 2016

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