Puerto Rico’s bid for Ch. 9 inclusion heard in Congress
The U.S. House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing Thursday on H.R. 870, known as the “Puerto Rico Chapter 9 Uniformity Act of 2015,” which drew a bi-partisan delegation from the island to express support for inclusion.
The broad-based support also included the private sector, which is standing behind the bill that would empower the government of Puerto Rico to authorize one or more of its government-owned corporations to restructure their debts under Chapter 9 of the federal bankruptcy code if they become insolvent, as all state governments are already empowered to do under current federal law.
“Among law professors and lawyers that specialize in bankruptcy law, support for the legislation appears to be unanimous. The bill has been endorsed by the National Bankruptcy Conference, which is composed of about 60 top scholars and practitioners in the field of bankruptcy law,” said Puerto Rico’s Resident Commissioner Pedro Pierluisi, who proposed the bill in Congress.
“In addition, some of the most respected subject-matter experts in the country have written to the Committee individually to express their support for the bill,” said Pierluisi.
Three of the four witnesses at Thursday’s hearing testified in support of H.R. 870, namely John Pottow, law professor at the University of Michigan Law School; Robert Donohue, managing director of Municipal Market Analytics; and Puerto Rico Government Development Bank President Melba Acosta.
“The GDB believes it is of critical importance that Puerto Rico have the right to reorganize the debt of its public corporations in an orderly fashion, and strongly supports any measure that would provide Puerto Rico with this right, such as H.R. 870,” Acosta said during her testimony.
In her prepared remarks, Acosta noted that the fiscal and economic situation in the Commonwealth has reached a critical moment, and the Legislative Assembly has declared a fiscal emergency in Puerto Rico.
“Puerto Rico has been disproportionately impacted by the recession, and unprecedented economic difficulties have contributed to rising budget deficits at all levels of government, including Puerto Rico’s public corporations,” she said.
The House Judiciary Committee received statements and letters in support of H.R. 870 from scholars, practicing attorneys, and stakeholders in the investment community. The vast majority of Puerto Rico’s creditors and other stakeholders within the investment community supports the bill, Pierluisi said.
Aside from Acosta, Senate President Eduardo Bhatia and former Gov. Luis Fortuño back the bill.
“The Puerto Rico House and Senate have adopted a concurrent resolution urging enactment of the bill, and nine former presidents of the GDB from both local political parties have signed a joint letter in support of the bill,” Pierluisi said. “In addition, 13 private-sector trade associations on the island have signed a memorandum of agreement endorsing the bill. The bill also enjoys support from Banco Popular, Puerto Rico’s largest bank.”
The list of supporters local trade group behind the bill includes the Puerto Rico Chamber of Commerce, the Puerto Rico Manufacturers Association, the Puerto Rico Pharmaceutical Industry Association, the Puerto Rico United Retailers Association, the Puerto Rico Association of Financial Professionals, the Puerto Rico Certified Public Accountants Association, the Puerto Rico Mortgage Bankers Association and the Puerto Rico General Contractors Association, among others.
Furthermore, 32 funds who own billions of dollars in Puerto Rico bonds submitted a letter in support of the bill to Congress, Pierluisi said.
“So far as I can tell, the opposition to this bill comes from a very small subset of investment firms. Respectfully, I believe the arguments they have put forward cannot withstand meaningful scrutiny, and I hope that Congress will not allow such objections to frustrate forward movement on this widely-supported bill,” said Pierluisi.
Pueroto Rico’s public corporations have historically financed their deficits by relying on the central government in Puerto Rico, loans from the GDB or private sector banks, and capital market financings. However, at present, neither the central government nor the GDB have the liquidity to shore up deficits or finance necessary capital expenditures at these public corporations.
Last year, the Puerto Rico Legislature adopted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act in a bid to allow public corporations to address their fiscal problems, which García-Padilla signed into law. However, the U.S. District Court declared the mandate unconstitutional in February, a decision the GDB has appealed.
“Ultimately, the GDB believes the appeal will be successful, but there would be no need for the Recovery Act if the U.S. Bankruptcy Code is amended so that Chapter 9 applies to Puerto Rico,” Acosta said.
Debt-adjustment tools like those found in Chapter 9 could allow Puerto Rico to get it’s fiscal situation back on track, something investors have seen as favorable.