WASHINGTON — Pedro Pierluisi, Puerto Rico's sole non-voting member of Congress, has introduced legislation that would allow the commonwealth's government to authorize certain government-owned corporations to enter Chapter 9 municipal bankruptcy.
The bill, the Puerto Rico Chapter 9 Uniformity Act of 2014, would adjust the federal bankruptcy code that currently allows only a "municipality" to restructure its debt under Chapter 9. A provision in the code defines this term as a "political subdivision or public agency or instrumentality of a state." Another provision in the code provides that the term "State" includes Puerto Rico, "except for the purpose of defining who may be a debtor under chapter 9 of this title." Pierluisi's bill would remove this prohibition.
Pierluisi said earlier this month that he would explore the possibility of legislation to make Puerto Rico equal under the bankruptcy law.
His public push began in reaction to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act signed into law by Gov. Alejandro García Padilla last month, which allows public corporations to restructure their debt. That law has spurred major credit concerns surrounding the Puerto Rico Electric Power Authority's bonds and prompted investment firms to file suit against the commonwealth in an effort to have the law overturned.
"By enacting the Recovery Act, the governing party in Puerto Rico gave a clear signal that one or more of its government-owned corporations might seek to adjust their debts in the future," Pierluisi said in a release. "This signal generated a strong negative reaction from the bond market and credit rating agencies. It also led to legal challenges filed by investors represented by some of the best law firms in the nation, who argue that the Puerto Rico government does not have the power to enact this law."
Pierluisi has been critical of the move to attempt a solution by local law without consulting his office, although the governor consulted U.S. Treasury officials about the possibility of amending the bankruptcy code and backed off the idea after deciding it would be too slow a process.
Pierluisi said that amending Chapter 9 is a better route, calling it "more predictable, orderly and swift."
"I believe that amending the U.S. Bankruptcy Code to extend Chapter 9 to Puerto Rico is the most sensible and logical way to proceed," he said.
Those following the Puerto Rico situation from Washington said when Pierluisi floated the idea in early July that it could work, but would take time. Congress is headed out on a recess this week and will not return to legislative business until Sept. 8.
The National Bankruptcy Conference, a group of bankruptcy experts dating back to the Great Depression, issued a letter endorsing Pierluisi's bill.
"The Conference sees no bankruptcy policy reason why Puerto Rico's municipalities should not have the same access as municipalities in the states to Chapter 9," the letter states. "Enactment of the bill, allowing Puerto Rico to authorize its municipalities to file for Chapter 9 relief, would ensure immediate access to debt adjustment for Puerto Rico on a less constitutionally-contested basis than the Commonwealth's [Recovery] Act."
The conference also said it "does not see any impediment in the U.S. Constitution to giving Puerto Rico the same right as states to authorize municipalities to file for Chapter 9 relief," However it added that "questions may arise about the intersection between the bill and the Public Corporation Debt Enforcement and Recovery Act enacted by Puerto Rico in June 2014.
Pierluisi's announcement was also quick to reassure holders of Puerto Rico bonds that he does not believe his bill would result in rampant bankruptcy filings among Puerto Rico issuing authorities like PREPA.
"A government-owned corporation must be "insolvent" to be eligible for relief under Chapter 9, not simply financially distressed, he noted in a statement. "A federal bankruptcy judge would dismiss a Chapter 9 case filed by a government-owned corporation in Puerto Rico if it fails to meet this test, which appears to be more stringent than the test established by the local Recovery Act."
Pierluisi also said his bill would do nothing to change the fact that Puerto Rico, like the 50 states, is not eligible for bankruptcy. Reassuring investors and credit rating agencies has been a recent theme for Pierluisi, who traveled to New York in mid-July and spent time meeting with rating analysts and investment bankers to urge them to keep the faith in Puerto Rico.
Bankruptcy experts have floated the idea of having the federal government backstop Puerto Rico debt so that it could be refinanced at a lower rate, but most observers view that as politically difficult if not impossible. U.S. Treasury officials have repeatedly denied that any "bailout" of Puerto Rico is under consideration, but the federal government has offered Puerto Rico technical guidance in the past.
