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Puerto Rico Weighs Restructuring Alternative

NEW YORK (The Deal) -- The addition of a potential restructuring alternative for Puerto Rico's public corporations has not produced a clear winner.

The Commonwealth of Puerto Rico's new restructuring framework for the corporations and the possibility of extending Chapter 9 bankruptcy to them both have advantages and disadvantages, sources said.

In June, the commonwealth passed a law commonly known as the Recovery Act that provides a framework for Puerto Rico's public corporations to restructure, which they had no formal way to do before. The act, however, has been plagued by investor litigation.

Partly in response to the lawsuits, Puerto Rico's resident commissioner and congressional representative, Pedro Pierluisi, introduced legislation in the U.S. House of Representatives on July 31 that would amend the U.S. Bankruptcy Code to give Puerto Rico's government the right to authorize some of its public corporations to restructure under Chapter 9. (All 50 states under the Bankruptcy Code can employ Chapter 9, but each state individually decides whether it permits its municipalities to employ the legislation.)

For bondholders, both solutions have pros and cons: sources said the Recovery Act provides some elements that are designed to be more creditor-friendly than Chapter 9, while a Chapter 9 extension would remove the uncertainty that comes with a brand new framework.

"The commonwealth intentionally drafted its [Recovery] Act to provide creditors a better deal than Chapter 9 requires," one source familiar with the situation said. The source explained that the Recovery Act requires public corporations to maximize the amounts distributable to creditors and also requires them to give creditors a 10-year note entitling them to half of free cash flow.

Still, "Puerto Rico's public corporations will be able to restructure successfully under Chapter 9. ... Congress has the absolute right to preempt the [Recovery] Act with Chapter 9, and there is no reason for Puerto Rico to object," the source concluded.

The National Bankruptcy Conference endorsed Pierluisi's Chapter 9 extension bill in a July 31 press release, noting that opening Chapter 9 to the commonwealth "would ensure immediate access to debt adjustment for Puerto Rico on a less constitutionally contested basis than the commonwealth's [Recovery] Act."

Fitch Ratings also came out Wednesday, Aug. 6, in support of the extension of Chapter 9 to Puerto Rico.

"Clarifying the rules for restructuring and aligning them to a federal standard with understandable precedent, albeit limited, and providing a federal forum for the proceeding would benefit bondholders. It would also protect the commonwealth from claims it is acting unjustly or arbitrarily and contrary to accepted norms," the ratings agency said.