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 In a major boon for a U.S. commonwealth facing some $72 billion in
debt, Puerto Rico will get a chance to argue before the top U.S.
court that its proposed restructuring law, invalidated by courts
earlier this year, is its best chance to pull itself out of a nearly
decade-long recession.
The Supreme Court will decide whether a 2014 law known as the
Recovery Act conflicts with U.S. federal bankruptcy law. The court
also took up a companion case filed by representatives of the
publicly owned Government Development Bank (GDB) for Puerto Rico.
"We are pleased with (the) Supreme Court’s decision," said GDB
President Melba Acosta. "The Recovery Act was designed to provide a
structured process for Puerto Rico's government entities and their
creditors to restructure the debt of those entities in an orderly
fashion."
 Puerto Rico's creditors have argued that a bankruptcy mechanism
would give the Caribbean island an unfair legal authority to impose
deep repayment cuts.
The case goes to the heart of Puerto Rico’s efforts to restructure
the $72 billion in total debt, which Governor Alejandro Garcia
Padilla has called “unpayable,” calling for concessions from
creditors.
As a U.S. territory, the island is excluded from statutes that allow
U.S. states to put cities, towns and agencies into bankruptcy.
Puerto Rico passed the Recovery Act seeking similar authority to put
into bankruptcy agencies holding a combined $20 billion of the
island’s debt.
The creditors that first challenged the law, including mutual fund
giants Franklin Advisers and OppenheimerFunds, said the measure
contravened the U.S. bankruptcy code even though the code excludes
Puerto Rico.
A U.S. federal court in Puerto Rico nixed the law in February, and a
U.S. appeals court affirmed the decision in July.
If the Supreme Court reverses and rules for Puerto Rico, the
territory could place into bankruptcy agencies like the Puerto Rico
Electric Power Authority (PREPA), which faces more than $8 billion
of debt, and the Puerto Rico Highways & Transportation Authority
(PRHTA), with about $4.6 billion of debt.
The court will hear oral arguments in the spring, with a ruling due
by the end of June. ALITO RECUSED
Justice Samuel Alito will not participate, meaning only eight
justices will hear the case. Alito's most recent financial
disclosure statement showed he has invested in two Franklin funds
that, according to Franklin’s website, have assets in Puerto Rican
municipal bonds.
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With debt restructuring talks ongoing throughout the island, it was
not clear whether Puerto Rico would utilize a bankruptcy statute,
but the threat of one could give the territory leverage in the
discussions.
The case is one of several paths Puerto Rico is taking to gain
access to bankruptcy laws. The territory's U.S. congressional
representative has introduced a bill to give the island the same
bankruptcy access as other states, while the U.S. Treasury has
supported giving Puerto Rico itself the right to file bankruptcy.
Nicholos Venditti, a portfolio manager at Thornburg Investment
Management, said the Supreme Court's decision to hear the case would
negatively impact Puerto Rico bond prices.
"When the law was initially ruled unconstitutional, bondholders
looked at that as a kind of big win for them," Venditti said.
Now that the Supreme Court has taken the case, Venditti added, "If
I'm Puerto Rico, I'm looking at this as kind of a big win."
Stephen Spencer, an adviser to some of the law's challengers,
declined to comment on Friday. Barbara Morgan, a spokeswoman for the
governor’s office, had no immediate comment.
In U.S. congressional testimony earlier in the week, Spencer said
bankruptcy would be "a bailout of Puerto Rican municipal
corporations on the backs of hundreds of thousands" of investors.
(Reporting by Lawrence Hurley in Washington and Nick Brown in San
Juan; additional reporting by Megan Davies; Editing by Will Dunham)
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