Puerto Rico Lays Out 5-Year Plan for Restructuring Its Debts

Trying to balance the demands of anxious island residents on one side and powerful financial institutions on the other, the governor of Puerto Rico announced a plan Wednesday for bailing the island out of debt that would require at least five years of bruising reform if it is to succeed.

In a speech live on television and online, the governor, Alejandro García Padilla, stepped up his populist talk, seeming to take the side of residents against investors, who would face losses on their Puerto Rico bonds if the plan goes into effect. “We may be publicly attacked by outside interests who will want to force us to pay,” Mr. García Padilla said. “They will attack us, because they’ll want to see us on our knees.”

But even as the governor sought to buoy the spirits of his fellow Puerto Ricans, who face what many say will be painful cutbacks in services under the plan, he also sought to show the island’s many creditors that they would be better off working with him than fighting his proposals.

Distillation of Debt

Officials estimate that the government of Puerto Rico will be $28 billion short of the amount it needs to operate normally over the next five years. The officials have proposed fiscal measures to close the gap but say they will not be enough, and Puerto Rico’s creditors will have to forfeit about $16 billion in scheduled debt payments.

By The New York Times

“If creditors are not willing to take part in this process, Puerto Rico will have no choice but to go ahead without them,” he said, adding that his preference was to get the creditors on board. Unilateral action, he said, “will result in years of litigation and defaults, and a major humanitarian crisis. It will force us to choose between paying a creditor, a teacher, a policeman or a nurse.
“These are decisions I’d prefer not to make, but I will make them if I have to,” he said.

The five-year plan, prepared by a working group formed by the governor, calls for restructuring about $47 billion of Puerto Rico’s $72 billion in total bond debt — meaning creditors would voluntarily accept reduced payments, although the plan did not specify the form the cuts would take, or how they would be apportioned among groups of creditors. Those details are to be negotiated in coming weeks.

The plan also calls for an ambitious package of economic reforms enabling the island to deliver public services and collect taxes more efficiently, stimulate business investment and job creation, and carry out long-overdue maintenance on roads, ports and bridges. It also proposes steps that include raising the tuition at the University of Puerto Rico, seeking a waiver from increases in the federal minimum wage, updating the government’s software to better track expenses, cutting health care costs, and contracting for-profit companies to run government properties, like roads and ports.

But virtually every element of the plan requires either concessions negotiated from creditors or legislation enacted in San Juan or Washington, suggesting a long and difficult road ahead.

While there was little public reaction to the plan from either side, institutional bond holders were said to be huddling in the wake of the speech, trying to decide their best course of action. Some people involved in those talks, who declined to be identified, said they thought the creditors would fare better if they stuck together, even though they include a wide range of individuals and institutions with divergent interests, from hedge funds to bond insurers to retired Puerto Ricans living on the island.

“Everybody’s still assessing and trying to figure out ways where they could take a stand,” one person said. “In a way, creditors can see they’re kind of being set up.”

Document: Puerto Rico’s Debt Plan

Puerto Rico might see an advantage in pitting the creditors against one another, the person said, so they would fight over which debts have priority instead of fighting head-on with Puerto Rico. The creditors’ interests can be in conflict, depending on the type of bonds they hold.

“We’re better off if we band together, and the trick will be overcoming those differences,” that person said.

However, Ted Hampton, a vice president at Moody’s Investors Service, was less than optimistic about cooperation among the creditors. “There is a high probability of protracted litigation,” he said. “It is unlikely that holders of the many Puerto Rico bonds will agree to forgo, or defer, substantial sums of promised principal and interest.”

Among the most striking aspects of the plan — and likely to be one of the most contentious — is the proposal to restructure Puerto Rico’s general obligation bonds, which were sold to investors with an explicit constitutional promise that timely repayment would take priority over all other expenditures on the island.

Puerto Rico stunned investors this summer by defaulting on another type of bond, but failing to pay general obligation debt when it is due is almost unheard-of.

For decades, general obligation bonds have been marketed as virtually default-proof, and a major restructuring of them now by Puerto Rico would raise unwelcome questions about the credibility of the time-honored “full faith and credit” pledge that stands behind such bonds. Puerto Rico is not proposing to walk away from its bonds completely, but to pay its investors less.

Doing that could put its new economic plan at odds with its Constitution, but officials said there was no choice: If Puerto Rico continued to pay its bondholders on schedule, it will run out of cash by next summer, according to official projections.

The plan offers an analysis showing that Puerto Rico has already preserved some of its cash by taking “extraordinary measures,” like delaying residents’ income tax refunds and liquidating the assets of three social-insurance funds. But even maneuvers like that cannot keep Puerto Rico afloat indefinitely, and the analysis showed that by next June, Puerto Rico’s cash would be completely exhausted.

The island has had such cash squeezes in the past, and it responded by simply borrowing more money, which is how it accumulated such a huge load of debt. Now, though, it has effectively lost its ability to borrow, and if it burns through its cash by next June, it will be unable to pay for essential public services — like policing and public education — that its Constitution also requires it to provide to residents of the island, who are United States citizens.

The island has been seeking support from Congress for a change in the federal bankruptcy code, which now specifies that no part of the Puerto Rican government has standing to seek relief in the federal bankruptcy courts. Puerto Rico has been pushing for some form of access to bankruptcy, but opinions differ about which parts of the government should qualify. In any case, the bills introduced so far have not moved.

Continue reading the main story

Members of the working group that devised the five-year plan said the lack of a legal framework would make its restructuring uniquely difficult.

To make sure the plan stays on track, it calls for establishing a financial control board. Such boards have been used in many parts of the United States to improve the governance of distressed cities, counties and school districts; they can sometimes impose unpopular fiscal measures that elected officials cannot.

The structures and powers of financial control boards can vary widely. Puerto Rico’s planners said they envisioned a five-member board of independent financial experts from the island and elsewhere. They would be selected from a slate of candidates nominated by various stakeholders, like bondholders and federal officials.

Arturo Porzecanski, distinguished economist in residence at American University, questioned whether the financial control board could do an adequate job if established at the direction of the Puerto Rican governor under Puerto Rican law.

“It’s like a drunkard locking up the alcohol and keeping the key,” he said. “The whole idea is that you’ve got to have some outside intervention.”

A version of this article appears in print on September 10, 2015, on page B1 of the New York edition with the headline: Puerto Rico Unveils Painful Plan for Islanders, and Bond Holders. Order Reprints| Today's Paper|Subscribe

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Puerto Rico Lays Out 5-Year Plan for Restructuring Its Debts

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