After a long debate over whether or not remedy the debt crisis in Puerto Rico with bankruptcy, the pro-reform side appeared to have won. While the Obama White House has pushed strongly for bankruptcy, Congressional leaders instead pushed as equally strong for key reforms in the government and economic sectors in the Commonwealth. The result was the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), introduced by Rep. Sean Duffy (R-WI) as well as Reps. Rob Bishop (R-UT) and Jim Sensenbrenner (R-WI). Overall, this legislation would create an Oversight Board that would oversee both the restructuring of Puerto Rico’s debts and the much needed reforms.
As a result of Treasury Department input, PROMESA has changed and some of the language in the current version weakens it, and is in need of changes. Specifically, the language of Title III in general and Section 314c will allow what is essentially a super Chapter 9 like process of debt restructuring that could ultimately be worse than Chapter 9 bankruptcy.
While Title VI creates a process for addressing the debts, if the debts are not resolved, under Title III the Oversight Board can restructure the debts of any of the Commonwealth’s instrumentalities, and creditors can be crammed down in ways that clearly are not intended under PROMESA as it was written in Congress. Under Section 314c, the control board can unilaterally haircut debt without the approval of a single group of creditors. This capability is not available in Chapter 9 or Chapter 11.
Under 314c, the debts could well be managed in a way that would be very much a Super Chapter 9, paying off creditors at cents on the dollars, creating an even worse result than even a “Rhodes Chapter 9” that was granted to the city of Detroit. Clearly this is a far worse result than intended by the Congressional supporters of PROMESA. Congress has heard the message, after the debate, which is that reforms, not Super Chapter 9, should be the answer to the debt crisis in Puerto Rico.
The language of 314c must be changed to allow the process of debt restructuring with agreement of the different classes of creditors involved. Only this voluntary process, presided over by the Oversight Board, without the allowance of what is essentially a Super Chapter 9 bankruptcy type debt restructuring, will allow the intended result of PROMESA to go forward. Otherwise, the process could lead to the result that clearly did not prevail in the debate – bankruptcy for Puerto Rico.
A bankruptcy process wouldn’t simply diminish the value of abstract assets owned by invisible investors. It must be remembered that large funds held by millions of Americans, many including assets they are relying on for their retirement, are affected by the restructuring of
the debts in Puerto Rico. A radical “haircutting” of the debts that could come about would be quite detrimental to millions of Americans who are looking forward to retiring soon.
Our political leaders need to do what’s right by Puerto Rico and Americans alike, and make the needed changes to ensure the well-guided pro-reform approach of PROMESA without allowing the economically damaging prospect of a Super Chapter 9 like result that could happen via the current language of 314c. This legislation needs to be fixed to close the door on a bankruptcy type result.