The Cable

Cash-Strapped Puerto Rico Wins a Temporary Financial Reprieve

Puerto Rico got a financial lifeline when its creditors agreed to take a 15 percent haircut.

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Puerto Rico has taken an important step toward restructuring its massive $72 billion debt load, with some of its creditors agreeing to take a 15 percent loss that would give the financially starving U.S. commonwealth a breather from having to repay some of the $9 billion its power utility owes.

The deadline for the ad hoc bondholder group and the Puerto Rico Electric Power Authority, or PREPA, to come to an agreement on how much the utility would pay back was Sept. 1. The authority said the new agreement provides both short- and long-term relief; it reduces the principal PREPA owes by $670 million now, and saves it more than $700 million in principal and interest over the next five years.

“We are pleased that the ad hoc group realized the benefit of our shared burden solution,” PREPA’s chief restructuring officer Lisa Donahue said in a statement. “We will continue to focus on finalizing consensual agreements with the other creditors so that we can continue to implement PREPA’s transformation.”

The compromise between Puerto Rico and the bondholder group, which includes hedge funds and traditional municipal bond investors such as Fir Tree Partners, Centerbridge Partners, and Davidson Kempner Capital Management, is an encouraging sign that San Juan will be able to convince others it owes to take a so-called “haircut” — a lender getting paid back less than what it lent. In late June, Governor Alejandro García Padilla admitted that his island was unable to pay back the money it has borrowed to make up budget deficits.

Since then, he has been scrambling to find assistance. According to Bloomberg, if Puerto Rico is able to restructure all of its debt, the move would be the largest ever in the $3.6 trillion municipal bond market.

For years, San Juan has been stuck in a cycle of population flight and “anemic economic growth. Because Puerto Rico is a U.S. commonwealth, it is not eligible for Chapter 9 bankruptcy protection, something that sets up an orderly process for creditors to get paid back some of what they’re owed. American cities unable to pay their bills, like Detroit, have used Chapter 9 to manage unpayable financial obligations.

Efforts in the House and the Senate to grant Puerto Rico Chapter 9 protection have gone nowhere. The White House and the Federal Reserve have also said “no” to a traditional bailout that would be similar to the one Greece received from the European Union in August.

García Padilla has conceded his only hope is to convince creditors to yield. The power utility’s restructuring is a promising start on a difficult road to convince the island’s other bondholders to do the same.

Photo credit: Joe Raedle/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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