By Gabe Rubin
January 12, 2016 at 3:59 pm ET
A comprehensive solution to Puerto Rico’s debt crisis has so far eluded lawmakers. So they are tackling smaller parts of the debt burden, such as the $9 billion debt owed by Puerto Rico Electric Power Authority, or PREPA.
That may prove just as difficult.
Absent a Chapter 9 bankruptcy plan for the Puerto Rican utility, it will run out of money during the first half of 2016, said Lisa Donahue, the chief restructuring officer at PREPA, at a Tuesday hearing.
“Today, PREPA owes approximately $9 billion to its bondholders and fuel-line lenders and continues to face very serious liquidity constraints,” she said.
The hearing, held by a subcommittee of the Committee on Natural Resources, illustrated the distance between Democrats and Republicans on reaching a legislative solution to the island’s dire debt issues.
As Puerto Rico’s creditors jockey for position to protect, or at least salvage, their investments in Puerto Rican bonds, Congress’ response has been roiled by disagreements over whether to allow a special dispensation for the island to declare bankruptcy. It can’t declare bankruptcy without an act of Congress.
Most Democrats believe Chapter 9 is the only way to prevent a major humanitarian crisis on the island. Most Republicans, however, prefer a plan that involves transitional aid and significant economic reforms, perhaps imposed with the help of a financial-control board.
“Congress is denying Puerto Rico the ability to have an orderly restructuring of its unpayable debt. It’s a major reason for the debt crisis. It’s the main barrier to recovery,” said Rep. Raúl Grijalva (D-Ariz.) at Tuesday’s hearing.
Republicans on the committee for the most part targeted their questions at reforming PREPA specifically, rather than a systemic response to Puerto Rico’s fiscal crisis.
“You don’t need Congress to help you be responsible,” said Rep. Raúl Labrador (R-Idaho), the only Republican member of Congress born in Puerto Rico. He said the island should pursue major economic reforms before any congressional action is considered.
Puerto Rican debt is issued in numerous forms. PREPA is one of 18 public utilities in Puerto Rico that issues bonds to finance its operations. It also represents one of the largest fractions of the island’s $72 billion in debt. Puerto Rico’s infrastructure is widely agreed to be outdated and inadequate. That exacerbates the commonwealth’s fiscal problems by limiting economic growth due to an unreliable power supply and high energy costs.
PREPA has reached a restructuring agreement with 70 percent of its creditors, but in order to fully reach an agreement, bankruptcy proceedings may be necessary, according to Donahue. “In a typical situation, a bankruptcy process permits a supermajority of creditors to bind all creditors. It reduces the free-rider and holdout problem,” she said.
Speaker Paul Ryan (R-Wis.) has called on Congress to come up with a solution to the Puerto Rican debt crisis by the end of March. The Senate has held several hearings on the matter and the House is expected to hold more in the coming weeks.
Gabe Rubin previously worked at Morning Consult as a reporter covering finance.