Hurricane aftermath complicates Puerto Rico debt restructuring
Puerto Rico, still recovering from Hurricane Maria, is at least $73 billion in debt. Hurricane Maria created even more potential debt and has made it difficult to continue with certain cases. The islands will most likely need tens of billions of additional dollars to help recover from the damage. The territory is currently restructuring a part of its debt through the Title 3 process, which is the equivalent of filing bankruptcy. This is a fairly rare occurrence. Since 2010, only nine local governments have filed for bankruptcy.
Judge Laura Swain, the judge who is overseeing the islands’ bankruptcy case, has ruled that Puerto Rico is required to keep paying pension bondholders while she decides whether or not the investors also have a right to retirement contributions that are made to government workers. Puerto Rico currently has about $3 billion dollars’ worth of outstanding pension bonds. Every month, they owe approximately $13.9 million in interest to holders of the debt. They sold bonds in 2008 in an attempt to boost funding levels for their retirement system. Their retirement program is the most poorly funded among US states and territories and is running out of cash. Pension bonds that will mature in 2038 that were traded on December 20, 2017 went for an average price of 25.5 cents on the dollar, which is down from 38.1 cents on September 18. Hurricane Maria hit on September 20.
Judge Swain decides what rights bondholders may have to past and future retirement contributions and whether or not the government must keep paying the creditors. She has said that the amount of the regular payments will be based on the interest due to the holders.
Pension bondholders and the retirement system for government system for government employees began fighting in court before the Commonwealth filed bankruptcy in May. After the filing, the two sides worked out a temporary deal which allowed bondholders to collect payments until at least October 31 while they waited for the judge to make a final ruling on the collateral dispute. When the hurricane struck in September, the resolution to the dispute was delayed.
Judge Swain has yet to say when she will rule of the collateral fight. If bondholders win, they would have the right to be paid from retirement contributions made by the various Puerto Rican government agencies on behalf of the employees. If they lose, the bondholders would become unsecured creditors and likely see their recoveries fall. They would most likely also lose the right to the adequate protection payments.