WASHINGTON — The U.S. Supreme Court is unlikely to take up the Commonwealth of Puerto Rico's recent request to reconsider a law rejected twice by lower courts that would give Puerto Rican public entities the ability to restructure their debt, according to several legal experts.
Puerto Rico made the request in a petition filed with the high court on Friday, after the lower courts found the commonwealth's Puerto Rico Public Corporation Debt Enforcement and Recovery Act was unenforceable because it violated the U.S. bankruptcy code.
In a third supplement to its preliminary official statement for a $750 million bond issue, the Puerto Rico Aqueduct and Sewer Authority said it "does not have a need to seek relief under the Recovery Act even if [it is] ultimately upheld" nor would it need restructuring under Chapter 9 bankruptcy protection, if the commonwealth was granted that option.
Chapman Strategic Advisors managing director James Spiotto said the territory's petition to the Supreme Court is unlikely to be accepted because there is no original jurisdiction that would require the Supreme Court to take the case. The high court justices typically only accept other cases through a writ of certiorari when the cases are deemed "appropriate and worthy of hearing," which is generally "far less than 1%" of cases, Spiotto said. The Supreme Court also may accept cases where there is a conflict among different courts of appeal, a dispute that is hotly contested, or if the courts find both sides of a case have merit.
"While obviously Puerto Rico is arguing differently, in both opinions by the district court and the appellate court, they were very strong that they believe the basis for their opinion was not one of debate or conflict but settled law," Spiotto said. "It's an uphill battle to get cert granted anyway and this is certainly going to be an uphill battle."
Puerto Rico's legislature enacted the Recovery Act last year to allow the commonwealth's cash-strapped utilities to restructure, but most recently the U.S. Court of Appeals for the First Circuit in Boston said the law violated Section 903(1) of the U.S. bankruptcy code, which prohibits states from passing laws that would allow their public entities to restructure without the approval of those entities' creditors. Puerto Rico was considered a state under the bankruptcy law even though it differs from all other states by not having the power to allow Chapter 9 bankruptcy among its municipalities. Robert Klausner, the principal in the law firm of Klausner, Kaufman, Jensen & Levinson, said the Supreme Court may take the case up to make the legal classification of Puerto Rico as a state under Section 903(1) of the U.S. bankruptcy code definitive, but, like Spiotto, acknowledged the high court does not take many cases and that two proposed bills in Congress seeking Chapter 9 powers in Puerto Rico may be the island's only option.
"As with any Supreme Court case, the likelihood [of acceptance] is small," Klausner said. "I never say never, but I think that this issue is almost assuredly an issue for Congress to address."
In its Supreme Court petition, the commonwealth argued the circuit court's decision exposes Puerto Rico to "the worst of both worlds" by not entitling the island to the benefits of Chapter 9 while simultaneously forcing the territory, which the petition said is in the "midst of a financial meltdown," to deal with the burdens with which Chapter 9 is meant to help.
"On the one hand, Congress created a federal mechanism for states to restructure their municipal debts while, on the other, Congress limited their ability to restructure those debts outside that mechanism," the petition said. "It makes no sense to read a limitation on Chapter 9 to apply to a jurisdiction, like Puerto Rico, that is outside the scope of that Chapter in the first place."
In a separate statement on Monday, Gov. Alejandro Garcia Padilla's chief of staff Victor Suarez Melendez said in a statement the petition would not affect the way the commonwealth was thinking about its latest bond issue, reaffirming they "currently do not contemplate PRASA necessitating a restructuring of its debt."
Meanwhile, PRASA's bond sale has been delayed by potential buyers' concerns over their rights if PRASA were to become insolvent, Reuters reported. The buyers want legal provisions making it clear bondholders could appoint a receiver if needed.
PRASA is trying to move forward with its $750 million bond issue, despite being rated as very speculative and junk by the three rating agencies.
"I heard the PRASA pricing was $300 million short of getting the deal done with an 8% coupon priced at a 10% yield to maturity," a New York source told The Bond Buyer on Friday. "Supposedly, more hedge funds would care, but were pressing for stronger covenant protections."
Ian Rasmussen, senior director at Fitch Ratings, said most investors in PRASA assume that their debt would be restructured. He believes investors are hesitant to invest out of uncertainty about any restructuring.
Contacted on Monday, PRASA chief financial officer Efraín Acosta refused to comment about the bonds. A source connected with the bond sale said its sale is under consideration day-to-day.
Some potential investors have been involved with negotiating the terms of the sale and some have not, Rasmussen said. Those outside the discussions feel left hesitant and with a lack of understanding.
If PRASA succeeds at selling the bonds at reasonable terms, it would be a success for Puerto Rico and would bring stability to its bonds, Rasmussen said.
