SOURCE ALERT: Andrew Dawson Explains Puerto Rico's Debt Restructuring

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Andrew Dawson

Andrew Dawson

Puerto Rico has a $2 billion debt payment due on July 1, which Puerto Rico’s governor has stated it will not be able to pay. While there have already been significant missed payments from Puerto Rico, a default on this payment would be particularly significant. Miami Law’s Andrew B. Dawson explains the significance of this deadline and what options remain open to the financially distressed island territory if it is unable to pay.

Dawson is an Associate Professor of Law at the University of Miami School of Law, teaching courses in bankruptcy, secured transactions, and contracts. He has recently published scholarship on Detroit’s struggles to renegotiate its bondholder and pension debts, and he is currently writing on the interaction of federal and state laws in the realm of municipal insolvency.

What makes the July 1 deadline so important?

This debt payment includes an $800 million payment on Puerto Rico’s general obligation bonds. These bonds enjoy priority payment under the territory’s constitution – meaning they’re supposed to be paid before other expenses. Missing this payment would add fodder to the current bondholder litigation as holders of these bonds have particularly strong grounds here to enforce their obligations. Second, if Puerto Rico misses this payment, we can expect many more defaults to follow on the island’s other debts. Missing this payment is a bit like a homeowner missing a mortgage payment – if you cannot pay your mortgage, that’s trouble both because the bank can foreclose and because that means you’re not likely paying your credit card, telephone, cable, or other bills either.

Why can’t Puerto Rico follow Detroit’s path, restructuring its debts through bankruptcy law?

The Bankruptcy Code provides states with a tool to restructure municipal debts, enabling them to re-negotiate the entity’s debts and impose that plan on all creditors – as Michigan was able to do with Detroit. For reasons entirely unexplained, Congress took this option away from Puerto Rico in 1984. Since then, Puerto Rico, unlike the fifty states, has been unable to use the bankruptcy process to renegotiate the debts owed by its cities, counties, or public utilities.

Can Puerto Rico address this situation on its own?

Without a bankruptcy option, Puerto Rico tried to address the debts of its public corporations – such as its public utilities – by passing a law known as the Recovery Act. That Act aimed to fill the gap Congress opened in 1984 when it excluded Puerto Rico from the municipal bankruptcy option. The Supreme Court ruled this past week, however, that Congress did not intend to give Puerto Rico – or any state – the option of restructuring debts under local law. Financial restructuring of municipal debts can be imposed on creditors through bankruptcy, or not at all. This leaves the island looking to Congress for a solution.

What solutions, if any, may come from Congress?

Currently, the House has passed the Puerto Rico Oversight, Management, and Economic Stability Act, known as PROMESA, which would give Puerto Rico access to bankruptcy-like relief. While everyone seems to agree that some such relief is necessary, the sticking point for PROMESA is that this relief comes with significant strings attached. Namely, the bill would create an Oversight Board charged with overseeing Puerto Rico’s finances.

What is so controversial about an Oversight Board?

The Oversight Board would consist of seven individuals appointed by the U.S. President – without input from the citizens of Puerto Rico – and it would have broad powers to impose austerity measures. The Board has been described as the being the “grown-up in the room” to help Puerto Rico gets its fiscal house in order. This clearly has a paternalistic and colonialist feel to it, which makes it a particularly touchy subject. At the same time, such a board is not unique. Congress created a similar oversight board for Washington, D.C. in the 1990s. And even though bankruptcy law purports to leave political and governmental powers in the hands of the state, a municipal bankruptcy filing can impose restrictions on local expenditures, albeit more indirectly than we can expect to see under PROMESA.

@DrewProf #muniland #PROMESA

CONTACT: Catharine Skipp at 305-773-5801 or cskipp@law.miami.edu