Second Puerto Rico Filing Likely Harbinger of More to Come

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By Daniel Gill

Puerto Rico filed May 5 a second court action designed to restructure its vast municipal bond and other debts, this time specifically as to a class of bonds designed to be paid by sales tax in the island commonwealth.

This second action filed under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act of 2016—PROMESA (Spanish for ‘promise')—is likely a harbinger of more Title III actions expected to be filed in the days or weeks ahead.

The government of Puerto Rico filed the first action May 3, initiating the single largest municipal restructuring action in U.S. history. According to a statement filed in that case by the Oversight Board created by Congress to drive Puerto Rico’s restructuring and financial rehabilitation, the island territory is facing a financial and humanitarian crisis, with high unemployment and poverty and a decline in population and revenue.

The island has already defaulted on significant amounts of its more than $70 billion of bond obligations and faces serious shortfalls in its public pension accounts.

Puerto Rico is obligated under many different classes of municipal debt. According to Ted Hampton, lead Puerto Rico analyst for Moody’s Investors Service, in light of this second filing it appears that the original petition was filed with respect to the island’s general obligation, or GO, bond debts, Hampton told Bloomberg BNA in a May 8 phone call.

This second filing is on behalf of bonds supported by sales tax revenues, known by the acronym Cofina. It is expected that the holders of GO and Cofina bonds—both of which are rated higher than the other bond obligations by Moody’s—will fight over Puerto Rico’s sales tax revenues, Hampton told Bloomberg BNA on April 26.

The separate filings are necessary because each separate debtor entity must file its own proceedings, an attorney familiar with the litigation told Bloomberg BNA on May 8.

We can expect to see more filings, representing the different security types of debts in the case, Hampton said.

Pursuant to PROMESA, the two (and any future) cases can be consolidated so as to be administered jointly. If the Oversight Board moves for such administrative consolidation, the same judge appointed by Chief Justice John G. Roberts Jr.—Laura Taylor Swain of the Southern District of New York—would preside over the subsequent cases as well.

Melissa Jacoby, professor at University of North Carolina School of Law, told Bloomberg BNA in a May 8 email that she expects that the cases will be administratively consolidated.

While Promesa expressly allows for joint administration of affiliated Title III cases, it also expresses that nothing in the law “shall be construed as authorizing substantive consolidation of the cases of affiliated debtors.”

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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