WASHINGTON – Treasury Department and Puerto Rico officials are talking about a way to restructure the territory’s debt without bankruptcy or other legislation, according to sources familiar with the idea.
Under the draft proposal, which is still under discussion, holders of the bonds of Puerto Rico and its authorities, which represent a range of credits, would be encouraged to trade in their bonds for some of a so-called “superbond” that would be backed by employment and other taxes that Treasury collects for the territory and possibly some of the island’s tax revenues.
Treasury would not be issuing any bonds. It would just administer the tax revenue account for Puerto Rico. The department would act as a kind of intermediary but would not be providing the territory with any kind of direct financial assistance or any guarantee.
The concept of a “superbond” just refers to a tender offer/debt exchange where a superbond is created from the bonds of the many credits of Puerto Rico and its authorities and is backed by a much broader range of taxes than those that back the individual bonds of the territory and its authorities.
Bondholders could exchange their Puerto Rico and authority debt for some of the superbond at a negotiated rate. The idea is that bondholders would feel safer with the Treasury Department’s involvement as a kind of administrator and would benefit from the broad array of taxes backing the superbond. While bondholders would get less debt, there would be a greater chance they would be repaid.
It’s not clear that any legislation would be needed for this arrangement, sources said. But officials from Puerto Rico and its authorities would have to agree to the debt exchange and bondholders would have to be persuaded to exchange their debt for some of the superbond.
Parts of the proposal were first reported by the Wall Street Journal.
A Treasury spokesperson said the administration “has no plans to provide a bailout to Puerto Rico” and that it is “inaccurate to suggest that Treasury is in talks to undertake any of Puerto Rico’s financial obligations.”
“Puerto Rico’s officials have routinely presented a range of ideas to help the Commonwealth return to a sustainable economic path,” the spokesperson said. "We continue to believe that the best path forward is for Congress to grant Puerto Rico access to an orderly restructuring regime.”
Puerto Rico’s finances have been spiraling downward and it has roughly $72 billion of outstanding debt. Puerto Rico’s Gov. Garcia Padilla has said the territory cannot repay its debt with restructuring. While some U.S. Democrats in the House and Senate have introduced legislation authorizing Congress to give Puerto Rico’s authorities access to Chapter 9 bankruptcy protection like municipalities have in many states, Republicans have generally opposed the bills, saying the territory needs to do more to get its financial house in order.
Some groups are pushing for the creation of a federal financial control board that would help straighten out the territory’s finances and debt. But this proposal has been controversial as well, particularly with the territory’s residents.
