SAN JUAN, Puerto Rico (AP) — Puerto Rican officials sought Thursday to convince U.S. legislators that the island's financially struggling public corporations should be allowed to restructure their debt under the federal bankruptcy code.
The push comes after a federal judge ruled that a local debt-restructuring law pushed through last year by Puerto Rico's governor was unconstitutional.
Melba Acosta, president of Puerto Rico's Government Development Bank, was among those who testified before a U.S. House Judiciary Committee hearing in Washington.
"The fiscal and economic situation in Puerto Rico has reached a critical moment," she said. "If the public corporations default on their obligations and there is no clear legal regime, creditors may attempt to engage in a race to the courthouse."
Puerto Rico's delegate to Congress, Pedro Pierluisi, has filed a bill seeking to allow the island's state-owned corporations to file for Chapter 9 bankruptcy if needed. It would not apply to debt issued directly by Puerto Rico's government.
The U.S. territory is in its eighth year of recession and is struggling to reduce $73 billion in public debt, with public corporations accounting for nearly 40 percent of that amount. Investors have grown increasingly concerned that the island's Electric Energy Authority, which has about $9 million in debts, could be one of the first to possibly go bankrupt.
Moody's Investors Service said in a report last week that Puerto Rico might default on its debt in the next two years.
The island sold a record $3.5 billion in bonds last year, and it expects to soon issue $2 billion more, backed by a proposed excise tax increase on crude oil. The revenue would help strengthen the finances of the Highway and Transportation Authority, which owes $2.2 billion to Puerto Rico's Government Development Bank, about 21 percent of the bank's portfolio.
Acosta said if the bill is not approved, it will become more expensive for the government to borrow money and make it harder for public corporations to become self-sufficient.
Puerto Rico is currently the third-largest issuer of municipal bonds in the United States.
One of the committee's members, Rep. Darrell Issa, stressed that if federal bankruptcy protection was extended to Puerto Rico government entities, it should not be retroactive. He also wondered whether a financial control board should be created.
Critics say the bill would affect $48 billion worth of Puerto Rico municipal bonds and hurt bondholders.
"Puerto Rican law already provides an alternative: receivership," said Thomas Mayer, who represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds Inc.
The two companies filed a lawsuit that led a federal judge to strike down the island's debt-restructuring law this month.
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