A few years ago, a prominent Puerto Rican lawyer was musing over who was responsible for Puerto Rico’s financial woes. “It was no one’s fault, but everyone’s to blame,” he remarked. The comment is simple yet powerful, as it captures Puerto Rico’s complex finances, tenuous political standing, and the aftermath of Hurricanes Irene and Maria.
While it is difficult to identity the “everyone” the lawyer had in mind, Puerto Rico’s reliance on the capital debt markets to deal with its fiscal problems is ultimately to blame. Municipal bond debt became the remedy for Puerto Rico to finance its way out of a declining economy, deteriorating infrastructure, and a steady exodus of Puerto Ricans immigrating to the U.S. mainland.
As Puerto Rico’s debt ballooned, the financial markets began to take notice. In 2014, debt credit agencies downgraded the island’s bond debt to junk status, effectively shutting off its access to the bond market. The island’s inability to access financing to deal with budgetary imbalances forced it to use its savings to pay down debt. In 2015, the situation became so dire that then-Governor Alejandro Garcia Padilla commented that Puerto Rico was in a “death spiral” and that its inability pay back nearly $73 billion in debt was a “matter of math and not politics.”
Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016 to restructure the island’s debt and provide a fiscal framework. PROMESA also created a Financial Oversight and Management Board (FOMB) to negotiate with creditors. In 2017, after failing to reach a resolution with the island’s creditors, Puerto Rico filed the largest municipal bankruptcy in U.S. history with over $70 billion in bond debt and more than $50 billion in unfunded pension liabilities.
This month’s JCR explores the complicated issues related to Puerto Rico’s bankruptcy. Sean Gumbs of FTI Inc. and Robert Gordon of Jenner & Block LLP focus on one of the island’s most vulnerable creditor groups: the Official Committee of Retired Employees of the Commonwealth of Puerto Rico. Their article chronicles the important role the committee’s legal and financial professionals played in ensuring a successful outcome for 167,000 retired public employees.
Scott A. Lewis of Chapman and Cutler LLP discusses the precedential effects Puerto Rico’s financial distress have had and will have on municipal bankruptcy/finance. The article focuses on three important cases arising from the crisis.
Matthew Rodrigue and Christina Song of Miller Buckfire & Co. provide an overview of Title III and Title VI of PROMESA, the primary mechanisms used to restructure Puerto Rico’s debt. Their article also examines key takeaways in the successful negotiations between the FOMB, the government of Puerto Rico, and key constituents.
Francisco Padilla, an independent consultant, chronicles the efforts to improve Puerto Rico’s electric power authority. Following Hurricane Maria, which decimated Puerto Rico’s electrical grid and exposed the island’s dated infrastructure, the article provides a summary of key events in the ongoing restructuring of the Puerto Rico Electric Power Authority and efforts to modernize the utility.
Finally, I provide an article focused on the impact of the Jones Act on the island’s economy. The article provides historical context regarding the establishment of the Jones Act and discusses its effect on Puerto Rico’s maritime industry, its residents, and its future economic growth.
After completing a grueling debt restructuring process, Puerto Rico formally exited bankruptcy on March 15, 2022. Armed with a leaner balance sheet and a sound fiscal foundation, Puerto Rico can finally begin to attract much needed foreign investment. The island should feel sanguine about its prospects with burgeoning industries in agriculture, biosciences, and eco-tourism. Hopefully, the cumulative effects of these converging trends will break up the island’s decade-long financial “hurricane” and usher in a new era of stability.
