A federal control board overseeing Puerto Rico's finances announced Friday that it will allow the U.S. territory to ask a court to restructure roughly $9 billion in debt held by the island's power company if needed, angering bondholders who had reached a tentative deal with the company as they brace for a multimillion-dollar default.
The board's decision to scrap the deal that took nearly three years to complete has been criticized by some in U.S. Congress as well, but the board said the step was needed to protect an island mired in a decade-long recession. It warned the deal would have led to higher power bills and made it more expensive to live and do business in Puerto Rico.
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"This is one of the key steps to moving forward," said board member David Skeel of the opportunity to restructure the debt in court. "The Puerto Rico Electric Power Authority is absolutely essential to the financial recovery of the island."
The board said its decision does not prevent negotiations with bondholders from continuing as the power company is expected to default on more than $400 million due July 1, which would mark its first default.
"We are hopeful we will make progress," said Natalie Jaresko, the board's executive director.
The company has long been accused of corruption and has struggled to update aging infrastructure, with Puerto Rico suffering an island-wide blackout last year that lasted a couple of days.
A bondholders' group said Friday that its offer to provide the power company with $170 million in liquidity and relend its portion of the July 1 payment as part of the deal was still on the table. But it warned it would take action if the government goes to court for a bankruptcy-like process known as Title III.
"We do not plan to legally enforce our rights unless and until a Title III process, which would simply leave us no choice," the group said.
Two companies that insure bonds issued by the power company filed lawsuits against the board this week to try and save the deal.
U.S. Rep. Rob Bishop of Utah, chairman of the House Natural Resources Committee, accused the board this week of deviating from a plan created last year by Congress to provide Puerto Rico with economic stability.
"The board's rejection of this agreement, with no clear path forward, poses more questions as to the island's economic future, and Congress will want answers to those questions," he said.
Board chairman Jose Carrion said he respected Bishop's perspective but that he believes the process is working as the island seeks to restructure a portion of its $73 billion public debt load.
The board on Friday also approved a $9.5 billion government budget with amendments, including an additional $13 million cut to Puerto Rico's legislative branch. Carlos Mendez, president of Puerto Rico's House of Representatives, said the cut would force the government to lay off at least 600 employees.
Still on the table are furloughs for public employees, the reduction or elimination of a Christmas bonus, and a 10 percent cut to a public pension system facing nearly $50 billion in liabilities.
Puerto Rico Sen. Eduardo Bhatia spoke during the meeting's public comment period and said he wanted a clear answer on whether any of those measures would be implemented.
"There is nothing more fundamental for public workers to know if they are going to be partly laid off," he said. "It only fuels uncertainty that at this stage of the game should not exist."
The board said those measures might be needed if the administration of Gov. Ricardo Rossello does not meet certain fiscal requirements. Rossello has repeatedly said he would not impose such measures, and the board said the issue could go to court.