Disaster Relief Loan on Tap for Puerto Rico

With Puerto Rico’s government strapped for cash and facing the possibility of a shutdown at the end of the month, Congress is preparing to step in and approve $4.9 billion in loans for the U.S. territory as the island attempts to recover from Hurricane Maria.

The measure the House is considering, with a vote possible as soon as this week, would authorize the loan to come out of a Federal Emergency Management Agency fund for disaster relief. In total, the supplemental legislation announced by the House Appropriations Committee on Wednesday would provide $36.5 billion in relief funding for areas damaged by hurricanes and parts of the western United States affected by wildfires.

The federal loan provisions matter for Puerto Rico because the commonwealth is emerging from a debt crisis, which the 114th Congress addressed through a debt restructuring law known as PROMESA. At the time of the law’s enactment in June 2016, San Juan was more than $70 billion in debt.

Lawmakers on Capitol Hill who were involved in the debate over the law have said that the statute’s restructuring process needs to be respected as Puerto Rico embarks on the road to recovery following last month’s storm.

“There’s no need to redo that legislation,” House Speaker Paul Ryan (R-Wis.) told reporters on Wednesday. “Like we did in Katrina with New Orleans, when a local unit government gets its tax base wiped out, there is a loan program to help replace that tax base on an emergency basis. That is something we just added to this bill, because their tax base has been wiped out.”

Using FEMA funds to extend credit to Puerto Rico is a somewhat inventive solution to the problem of how to fund the territory in an emergency while maintaining payments to creditors who are already invested in Puerto Rico bonds. Had the White House requested a line of credit from the U.S. Treasury, that line would have been “super-senior” to all other commonwealth debt obligations, sources familiar with the issue said.

That could have had a broader effect on the commonwealth bond market and could have led bondholders to take an additional haircut on their investment. Using the FEMA funds helps avoid that scenario.

Under the House legislation, the Treasury Department would have a role in determining the terms of the loan Congress might authorize, but the Department of Homeland Security would take the lead because of its responsibility for FEMA.

Brandon Barford, a partner at the Washington-based advisory firm Beacon Policy Advisors LLC, said the two agencies have “a ton of authority” to determine key elements of the loan.

“Money is going to flow — there will not be a liquidity event — but there is complete and utter discretion for DHS and Treasury to determine the terms of the loans,” Barford said Wednesday.

Federal disaster relief loans generally have low interest rates. Cate Long, a municipal bond researcher who works for Puerto Rico bondholders, told Morning Consult this week that a $4.9 billion loan with a 20-year term at 3 percent would lead to annual debt-service payments totaling $326 million. For a 30-year loan at 3.25 percent, the commonwealth would pay $256 million annually.

Even though the bill proposes lending the funds to Puerto Rico, the federal government could later turn the money into a grant, in effect, if the executive branch decides to cancel the debt. Hurricane Katrina, to which Ryan alluded, is an oft-cited example of a time when federal loans ended up being forgiven.