Judge releases Puerto Rico from bankruptcy protection

A federal judge on Tuesday approved a plan to restructure Puerto Rico’s bond debt, which had plunged the U.S. territory into the country’s largest municipal bankruptcy in history.

Judge Laura Taylor Swain ruled in favor of the Plan of Adjustment that was years in the making, through arduous negotiations between the island’s Fiscal Oversight Board, debtors and the government.

According to Board officials, the plan will reduce Puerto Rico’s debt by 80 percent and save the island more than $50 billion in debt payments.

Puerto Rico Gov. Pedro Pierluisi said the approval of the plan “represents a great step for the economic recovery of our island.”

“The agreement, although imperfect, is very good for Puerto Rico and it protects our pensioners, the university and our municipalities, which serve our people,” added Pierluisi.

Key debtors like BlackRock Financial Management Inc. and Silver Point Capital LP supported the plan, according to a report by The Wall Street Journal.

The agreement is a relative win for investors, who at one point held debt valued at 21 cents on the dollar of its value before Puerto Rico’s bankruptcy-like process in 2016 and the hurricanes that further destabilized the economy in 2017.

The benchmark value of those bonds has since risen to around 90 cents on the dollar, according to the Journal.

Swain’s resolution is also welcome news for Puerto Rico’s government, which will be able to use its debt service savings on public programs.

Oversight Board Chairman David Skeel and Executive Director Natalie Jaresko addressed the ruling in detail late Tuesday.

“We have accomplished what many thought was impossible,” said Jaresko.

“Of every dollar in taxes and fees collected by the commonwealth, just 7.2 cents will go to debt service,” she added. 

Before the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) in 2016, 25 cents out of every taxpayer dollar was spent on debt service.

The plan approved Tuesday includes guardrails that regulate Puerto Rico’s future debt issuance.

The guardrails include debt issuances capped at 7.94 percent of the prior year’s debt policy revenues, long-term borrowing limited to capital improvements, maturities capped at 30 years, and a requirement for any refinancing to provide cash flow savings.

“The Oversight Board welcomes Judge Swain’s decision. We owe Judge Swain a debt of gratitude for her tireless leadership, her exemplary diligence, and her dedication to a fair solution to Puerto Rico’s debt crisis,” said Skeel and Jaresko in a statement. 

“Puerto Rico’s inability to pay its debt has hampered the economic recovery and affected the lives of residents. Puerto Rico needs to continue to reform itself to ensure a prosperous future for and determined by its people,” they added.

The exit from bankruptcy-like procedures — there is no legal basis for a U.S. territory’s formal bankruptcy — will not mean Puerto Rico can do away with the Oversight Board.

Under the 2016 law, which instituted the Board, the territory must execute four consecutive balanced yearly budgets to dissolve the Board.

Puerto Rico is projecting budget surpluses through the mid-2030s, boosted by the debt deal and federal coronavirus pandemic spending, but could still face struggles funding its pension system, which owes its present and future retirees an estimated $55 billion.

“We are hopeful… that we will be able to put the process in motion so that this year will be the first balanced budget,” said Skeel. 

That means the Board will be in place for at least three more years, but for its mandate to end, Puerto Rico needs to accomplish a set of statutory goals set by Promesa, beyond the four balanced budgets.

“We will not stay a day longer than the mandate,” said Jaresko.

Updated: 5:35 p.m.