Bankruptcy for Puerto Rico?

Last week, the PROMESA oversight board commenced a federal restructuring initiative under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in the U.S. District Court of the District of Puerto Rico. Prior to the filing, Gov. Ricardo Rosselló announced that his administration has asked the PROMESA board to approve the filing.

The PROMESA board attached a statement to the filing saying that “Puerto Rico can no longer fully pay its debt and pay for government services. Nor can Puerto Rico refinance its debt – it no longer has access to the capital markets. In short, Puerto Rico’s crisis has reached a breaking point.”

Title III is a specific statutory vehicle created in PROMESA that allows Puerto Rico and other U.S. territories to restructure their debt.  The oversight board certified that Puerto Rico met the requirements of PROMESA’s section 206(a), which requires that prior to restructuring, an entity must make good-faith efforts to reach a consensual restructuring with creditors, adopt procedures necessary to deliver timely audited financial statements; and make public draft financial statements and other information related to the possible restructuring.

The filing also contains a promise that the board, along with the government of Puerto Rico, “will continue efforts to negotiate, preferably through consensual deals with all constituencies, a comprehensive debt restructuring through a Title III plan of adjustment.”

The filing further contains a list of creditors and of those creditors who filed lawsuits against Puerto Rico and the oversight board.The total owed is about $74 billion, with $13.3 billion in general obligation bonds, $4.5 billion guaranteed by the government, $17.6 billion issued by COFINA and backed by sales and use tax, $9 billion in PREPA debt, and $49 billion in pensions.

The statement also reviews the history of Puerto Rico’s debt crisis, including the fiscal plan provided by the previous government in November 2016, which was rejected by the board, and the new plan from the current government, which was certified in March of 2017.

In addition, the PROMESA board reviewed Puerto Rico’s economic indicators:

  • GNP Decline since 2007: from 2007–2016, Puerto Rico’s Gross National Product (“GNP”) declined by over 14%,11 while total employment in Puerto Rico fell from 1.25 million to fewer than 1 million;
  • Unemployment Rate: In October 2016, Puerto Rico’s unemployment rate was 12.1%, and only 987,606 persons were employed, down 23% from 1,277,559 employed persons in December 2006;
  • Labor Participation Rate: the labor participation rate has plummeted to 40%, two-thirds of the level on the U.S. mainland;
  • Drop in Economic Activity Index: the Economic Activity Index composed of four factors (payroll employment, electric power generation, cement sales, and gasoline consumption) fell from 160.0 to 124.1 between August 2005 and August 2016;
  • Population Decline: since 2007, Puerto Rico’s population has declined approximately 10% down to less than 3.41 million people in 2016;
  • Poverty and Unemployment: according to the U.S. Census Bureau’s 2015 community survey, 46.1% of Puerto Rico’s residents live below the federal poverty level compared to the national average of 14.7%, and 36% of the residents of Detroit, whose financial distress was viewed by many as uniquely devastating. Puerto Rico’s is more so. For Puerto Rico children under age 5, 63.7% live under the federal poverty level, compared to the national average of 22.8%. Median household income in Puerto Rico was $18,626 in 2015, as compared to $56,515 in the United States, and to $27,862 in Detroit in 2011;
  • Public Debt as a Percentage of Income: Puerto Rico has approximately $74 billion of bond debt and $48 billion of unfunded pension liabilities. As of 2012, Puerto Rico’s public debt as a percentage of aggregate income was 100.7%, as compared to 29% for New York, which has the highest ratio of public debt to income in the United States (the average is 16.8%).

On Friday morning, it was announced that U.S. Supreme Court Chief Justice John Roberts chose U.S. District Court Judge Laura Taylor Swain to preside over Puerto Rico’s Title III proceeding.

The oversight board and the Puerto Rico government both express optimism that the Title III process will ultimately lead to a path forward through the economic crisis to new prosperity for Puerto Rico and ultimate satisfaction of creditors.

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