Even though the situation is dire in Puerto Rico and time is running out, we have yet to hear from our Congress. A default on its debt will throw Puerto Rico’s government and people, along with the $3.7 trillion municipal bond market, into turmoil.
One of Puerto Rico’s chief restructuring advisors, former Detroit bankruptcy Judge Steven Rhodes, sounded frustrated with Congress in an article last month in Caribbean Business.
Judge Rhodes, who oversaw Detroit’s $18 billion bankruptcy, pleaded with Congress in interviews recently to allow Puerto Rico to use Chapter 9 of the U.S. Bankruptcy Code to provide an orderly restructuring of the Government’s debt and the debt of its public corporations. Congress appeared unmoved and is unlikely to offer bankruptcy help for the Island.
Puerto Rico’s financials “suggest that it is going to run out of money very soon. It is suffering a liquidity crisis, and I’m not sure it will have any choice in the issue of default,” Rhodes said.
“Rhodes has previously urged Congress to include the commonwealth under Chapter 9 of the U.S. Bankruptcy Code, providing an orderly mechanism to address its public corporations’ debt woes,” according to the article. “‘There’s no reason to force Puerto Rico to undergo this process without Chapter 9 protection. Without bankruptcy relief, Puerto Rico will face a chaotic future. Congress should make available to Puerto Rico the same relief available to virtually every other insolvent entity or person in this country, relief under our federal bankruptcy laws. And it should do so with the urgency that the problem demands.’”
Puerto Rico has almost $700 million in debt payments due in December 2015 and January 2016. It doesn’t have any clue as to where it will get the money and is heading for a default on its general obligation bonds.
Former U.S. Treasury Secretary Larry Summers recently announced his support for the Treasury Department’s proposal to allow for a bankruptcy filing by Puerto Rico. In an Op Ed he penned last month in the Washington Post, Summers argues that Puerto Rico’s “rate of decline is only likely to increase, as Puerto Rico starves basic public functions to service its debts to the greatest extent possible, and eventually default in an uncontrolled way that produces financial chaos.”
Summers argues that without help from Congress and the federal government, Puerto Rico is doomed and the hardship that its citizens will face is unimaginable.
“Unfortunately, that is what lies ahead for Puerto Rico without federal government action,” Summers wrote. “Already Puerto Rico’s debt exceeds its gross national product, and debt service takes one-third of its tax revenue, compared with the 5 percent average for U.S. states. Debts are currently being serviced only through emergency measures that cannot be sustained even to the end of the year. This is well recognized by markets. The benchmark Puerto Rican bond carries yields of over 11 percent, and in some cases, Puerto Rican bonds trade at only 30 cents on the dollar.”
Sadly, investors who hold large positions in UBS-Puerto Rico Closed End Funds are in for a shocking awakening when they see their monthly statements in the New Year.
Puerto Rico needs help and fast, and advocates like Judge Rhodes and Larry Summers make sense. Hello, Congress, are you listening?
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit http://www.ubspuertoricofunds.com/.