PR's Lawmaker in U.S. Congress Exploring Chapter 9 Change

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WASHINGTON — Puerto Rico Resident Commissioner Pedro Pierluisi is exploring whether Congress might be willing to amend the federal bankruptcy code to allow government-owned corporations in Puerto Rico to file for bankruptcy.

Pierluisi, a Democrat who is Puerto Rico's sole representative in Congress, described his efforts in a release issued 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.

"The process by which the governor of Puerto Rico and the territory's legislative assembly recently approved a local law to enable certain government-owned corporations to restructure their debt was characterized by haste, a lack of transparency, and no public debate about the suitability of alternative ways to address the problem," Pierluisi said Thursday.

"As Puerto Rico's only representative in Congress, and a member of the House Judiciary Committee, which has jurisdiction over the U.S. Bankruptcy Code, it is my responsibility to explore whether the process that applies in the states — and that has proven to work — should be available in the territory," he said. "That is why I intend to consult closely with leaders in the House and Senate, the White House, and other stakeholders regarding the prospect of federal legislation to eliminate the clause in the Bankruptcy Code that appears to prohibit government-owned corporations in Puerto Rico from filing under Chapter 9."

The federal bankruptcy code allows a debtor to reorganize under Chapter 9 only if that entity is a municipality, and defines "municipality" as a "political subdivision or public agency or instrumentality of a state." Another portion of the law says that "state" includes Puerto Rico, "except for the purpose of defining who may be a debtor under Chapter 9." This has led many, including Pierluisi and attorneys for the investment firms suing the island, to conclude that the law prohibits publicly-owned corporations in Puerto Rico from filing for bankruptcy.

Pierluisi, a strong advocate for Puerto Rican statehood who has argued that many of the commonwealth's financial issues could be solved if it received equal treatment under the law, said there is no reason for Puerto Rico to be treated differently in this respect. He issued a statement sharply critical of the governor's decision to pursue a solution through local law without examining the federal options.

"Instead of working in coordination with my office to determine if Chapter 9 can be amended to give Puerto Rico the same authority that states have for their instrumentalities, the governor had his delegation in the legislative assembly pass a 150-page bill in less than a day," Pierluisi said. "Within hours of the bill being signed into law," he continued "bond companies owning one-fifth of PREPA's bonds went to federal court to challenge the law's constitutionality. The independent credit rating agencies and the market for all of Puerto Rico's bonds have reacted in strongly negative fashion to the law."

Top Puerto Rico officials have defended the law, saying it is intended to allow struggling public corporations like PREPA to get their finances in order without being a drain on the general fund and further compromising the commonwealth's general obligation credit.

A lobbyist closely following the situation said that the Garcia Padilla administration sought guidance from the U.S. Treasury on the possibility of altering the federal bankruptcy code to allow Chapter 9 in Puerto Rico, and was told that it would take time. The governor subsequently chose to throw his efforts behind the local law solution, which was introduced and passed in a day.

The lobbyist said modifying the bankruptcy code could be viable if Puerto Rico, bondholders, banks, and others with a stake in the situation make it clear they want it.

Bondholders who have spoken with the lobbyist are split on whether Chapter 9 would be better than the local law. A lawyer who asked not to be identified said that Puerto Rico still has choices outside restructuring, such as asking the federal government to back it in refinancing its debt at a lower rate.

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.

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