Puerto Rico’s ability to reform $10 billion of debt gets House review

By Kali Hays

New York, Feb. 26 – A bill proposing an amendment to Bankruptcy Code allowing the Commonwealth of Puerto Rico the option to file for Chapter 9 bankruptcy was brought before the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Thursday.

The bill, introduced last week after Puerto Rico’s own recovery act was deemed void by the U.S. District Court for the District of Puerto Rico, would alter the language in section 101(52) of the Bankruptcy Code to include a definition of State that would clearly identify Puerto Rico as an applicable debtor in a bankruptcy proceeding.

The code’s current section on Chapter 9 does include Puerto Rico as a state along with the District of Columbia, “except for the purpose of defining who may be a debtor under Chapter 9” of the Bankruptcy Code.

During Thursday’s hearing before the subcommittee, Thomas Moers Mayer of Kramer Levin Naftalis & Frankel LLP representing Franklin Municipal Bond Group and OppenheimerFunds, Inc. argued against the bill and claimed that the Puerto Rico Electric Power Authority (PREPA) has the ability to pay its debts outside of Chapter 9.

“It can fix itself,” Mayer said. “It can raise revenues in the same manner as nearly every other municipally owned utility in the United States. PREPA has not raised its “base rate” – the rate that pays for everything other than fuel and purchased power – in nearly 26 years. Every other public utility in the country sets its rates at a level sufficient to service its bonds and cover its other costs.”

Together, Franklin and OppenheimerFunds hold about $1.6 billion in PREPA bonds, but Mayer claimed that the proposed bill “would affect $48 billion of Puerto Rico’s municipal bonds” and that allowing it to enter Chapter 9 “will hurt bondholders.”

However, Robert Donahue from Municipal Market Analytics, Inc. and John A.E. Pottow from University of Michigan Law School, argued that the exclusion of Puerto Rico from Chapter 9 access is an “oversight” and that approval of the bill “will provide a technical fix” removing Puerto Rico from the “infantilizing no man’s land it finds itself in under current bankruptcy law for no apparent reason.”

In addition to the adjustment of the code’s current language, Pottow said that allowing Puerto Rico the option to enter a Chapter 9 process will enable it to set up government oversight, force it to negotiate with creditors and provide a structured process for dealing with its debt.

“Puerto Rico will not be able to service the debt and at some point you can’t draw blood from a stone, which is why you have a restructuring process,” Pottow said.

Regarding the trust indenture that is supposed to govern a default by PREPA, Robert Donahue said that the agreement dates back to 1974 making it “totally inadequate” and said that “it was not built for this kind of circumstance, where PREPA holds close to $10 billion in debt.”

“Going the route of opposing Chapter 9 will result in a creditor race to the court house,” Donahue said.

The witness parties have five days to submit further augments to the House while it continues to consider the bill. A further hearing has not been scheduled.

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