Filing For Bankruptcy Isn't The Right Solution For Puerto Rico

When I testified before the Senate Energy and Natural Resources Committee last month, I was the only voice among a panel of esteemed colleagues to oppose allowing Puerto Rico’s electric utility, known as PREPA, to file for Chapter 9 bankruptcy.

I stand by that testimony, not because I have a lack of empathy for the residents of Puerto Rico, but rather, just the opposite. I believe that changing the current law to allow PREPA to file for Chapter 9 restructuring would be a further setback for the island’s economy.

A declaration of bankruptcy would effectively dry up PREPA’s access to the capital markets for the foreseeable future, making borrowing new money extremely costly, if available at all, erecting yet another obstacle to the recovery of the already stagnant economy.

While PREPA is just part of a much larger fiscal crisis, I believe a consensual settlement where all stakeholders address PREPA’s near term liquidity needs by better aligning its financial obligations with its revenues is achievable and would set an encouraging precedent for further progress across all of Puerto Rico government. Part and parcel of such progress must be a commitment by PREPA to increased efficiencies, along with timely regulatory rate-setting to a level sufficient to cover both operating costs and debt service–a key component of PREPA’s original promise to investors, many of whom reside on the island.

During the hearing, Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts raised the specter of so-called “vulture” investors profiting from Puerto Rico’s economic demise. While I share their distaste for these opportunistic investors, who represent a minority of Puerto Rico debtholders, the sad fact remains that following a Chapter 9 restructuring, “vultures” might be the only ones willing to provide PREPA with needed capital, of course at rates far above market levels.

Certainly, funds will no longer come from small investors, like the young mother from Virginia who emailed me after the hearing to see if I might be able to help. You see, her former investment advisor had encouraged her family to load up on Puerto Rican bonds, safe from both taxation and bankruptcy. I could almost feel her tears through the email as she wondered whether she would ever get anything back if Puerto Rico and its agencies were allowed to file for Chapter 9. I didn’t have an answer for her, nor did I have the heart to tell her that there was still a type of investor that would be willing to help her, but only to the tune of pennies on her dollars.

Investors like her, as well as the large mutual funds holding the retirement hopes of many, will bear the brunt of the decisions on Puerto Rico’s future. Debt investors loaned money to the Commonwealth and its public agencies with the expectation that they would receive their funds back with interest. They did not choose to be equity holders (“co-owners of PREPA”), subject to making or losing money depending upon the ups and downs of the utility’s performance. They just looked forward to receiving their money back so they would be in a position to loan it again in the future.

If Puerto Rico’s fiscal house is to survive and be repaired, ongoing investment will be a key component of any long-term solution. Resolving issues with debtholders in a consensual manner, rather than through a forced Chapter 9 restructuring, will go a long way toward ensuring that funds at reasonable cost will be available to Puerto Rico and its agencies well into the future.

Members of the Senate Judiciary Committee meeting this week to discuss the situation in Puerto Rico need to focus on the potential perils of Chapter 9 and what it could really mean for the territory’s fiscal future. They need to question these advocates of Chapter 9 about the long-term harms it could cause for Puerto Rico and its citizens.





If Puerto Rico’s fiscal house is to survive and be repaired, ongoing investment will be a key component of any long-term solution. (AP Photo/Ricardo Arduengo)


Steven M. Fetter
Filing For Bankruptcy Isn't The Right Solution For Puerto Rico

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