In December, the U.S. Supreme Court agreed to hear Puerto Rico’s bid to reinstate a law that would allow restructuring of the debt burdened U.S. territory’s public agencies.
The U.S. commonwealth has nearly $72 billion in debt. Puerto Rico will get to argue before the top U.S. court that the proposed restructuring law is the best way to pull the island out of a nearly decade-long recession. The court will decide whether or not the previous ruling that the 2014 Recovery Act conflicts with U.S. federal bankruptcy law will stand.
Governor Alejandro Garcia Padilla is calling for a compromise from creditors due to the island’s “unpayable” debts. However, Puerto Rico’s creditors argue that the bankruptcy mechanism is unfair and would impose deep repayment cuts.
U.S. statutes that allow states to put cities, towns and agencies into bankruptcy, do not apply to Puerto Rico because it is a U.S. territory, not a state. The goal of the Recovery Act of 2014 was to seek similar authority to put Puerto Rico into bankruptcy agencies.
Mutual funds giants such as Franklin Advisors and OppenheimerFunds were first to challenge the law, saying that the Act contradicted the U.S. bankruptcy code even though the code excludes Puerto Rico.
A U.S. federal court in Puerto Rico nixed the law in February and an appeals court affirmed the decision in July.
The court will hear arguments in the spring and rule by the end of June. If the decision is reversed, the territory could place companies into bankruptcy agencies such as, the Puerto Rico Electric Power Authority (PREPA), and the Puerto Rico Highways & Transportation Authority (PRHTA). Together the two companies hold more than $12 billion in debt.
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