Puerto Rico’s Pathway Forward Without Bankruptcy

After Puerto Rico Governor Alejandro Garcia Padilla announced in June that the island cannot pay its $72 billion debt, there has been an effort to rewrite contracts by granting Puerto Rico access to Chapter 9 bankruptcy.

A recent deal between the island’s state-owned power authority and a group of bondholders demonstrates that bankruptcy is not the island’s only option.

The Puerto Rico Electric Power Authority, or PREPA, has issued about $9 billion of the island’s $72 billion in debt. PREPA’s problems span decades of failed management, including inefficient operations, overstaffing and outdated technologies.

For the past two years, PREPA has been under the direction of Chief Restructuring Officer Lisa Donahue, tasked with attempting to turn the authority around.

After much negotiation, a group representing about 35 percent of PREPA’s bondholders announced on Wednesday a tentative deal with the utility. Bondholders would receive 85% of the face value of their current junk-rated bonds in exchange for new, investment-grade securities carrying lower interest rates between 4 percent and 5.5 percent.

A cash-out option will likely be available for risk-averse investors willing to incur more significant losses.

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If agreed to by most other PREPA bondholders, the deal would reduce PREPA’s debt principal by about $670 million, saving the authority more than $700 million in principal and interest payments over the next five years. Moreover, it would help provide the investment PREPA needs to modernize its antiquated technologies.

Establishing a pathway forward beyond just debt reduction is crucial for PREPA and other indebted Puerto Rican institutions.

The island is in the midst of an economic crisis.

Without solutions that address that crisis, no amount of restructuring or debt write-offs will solve the island’s financial woes.

Garcia Padilla commented that the deal shows the potential benefits of both sides working together towards a long-term solution:

“The terms announced today are the next step towards PREPA obtaining the necessary liquidity to invest in its infrastructure, which will also have the impact of creating jobs, further spurring economic growth. These are all critical aspects of the Island’s economic recovery plan… I hope this process – and its outcome – will further confirm our commitment to work collaboratively with our creditors to find satisfactory solutions for them and the people of Puerto Rico and their families.”

Donahue also praised the agreement, saying it “sends a positive message to the market that there is a way to get a consensual deal that is equitable for both parties.”

This agreement shows fair solutions can be reached without changing the rules of the game. While investors in Puerto Rican bonds are likely to suffer significant losses, those losses should come through negotiations under existing law, not through lobbying efforts in Washington.