Puerto Rico's governor submitted a last-minute bill Wednesday that would let utilities and other public corporations restructure their debt, hoping to prevent a collapse of services as the U.S. territory struggles to emerge from a nearly eight-year recession and to appease bondholders.
The Senate approved the measure on its last day for voting on new bills before taking a break until August. Gov. Alejandro Garcia Padilla pushed for immediate approval, saying that if a state corporation crumbled under its debt, bondholders could seek an increase in rates and public services could be affected. Opposition legislators spoke against the measure, saying they were not given enough time to analyze the 275-page bill.
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Public corporations account for nearly 40 percent of the island's $70 billion debt load, with the state-owned power company carrying $9.3 billion in debt, the highway and transportation authority $7.1 billion and the water and sewer company $5.1 billion.
Garcia said that the bill aims to appease investors worried about a potential default and that it would strengthen the general fund, which has long been burdened by the financial needs of public corporations.
"This protects the government from having to restructure its debt," he said. "Public corporations are supposed to be self-sufficient, but they're not ... This provides an ultimate recourse that they currently don't have."
Garcia stressed that the measure does not apply to the government's general obligation debt and that it also excludes the island's 78 municipalities, the Government Development Bank and other entities.
Government Development Bank president David Chafey said the measure is not intended to allow public corporations to file for bankruptcy or seek liquidation, but rather to work first with creditors to reach an agreement. Both sides would have nine months to reach an agreement, and if none was reached, the case would go to court.
David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, said he expects bondholders of Puerto Rico's public corporations to possibly join forces to fight the measure if it's signed into law.
"The hard part is that it wasn't generally anticipated by the market," he said.
However, he said the measure provides a framework that would allow Puerto Rico to handle its debt without resorting to more extreme measures.
"Obviously, this is positive for the general obligation bonds of the commonwealth," he said in a phone interview. "That means there's a way to get a lot of debt cleared out of the system."
Tawil and others said union leaders and public employees would likely fight the measure, and that could lead to even more strikes.
Thousands of government workers were already protesting a fiscal emergency law that Garcia signed last week seeking $250 million in savings.
The Senate also approved a $9.6 billion budget late Tuesday, with the governor expected to soon sign what would be the territory's first balanced budget in more than a decade.