Puerto Rico’s Public Debts: Accumulation and Restructuring

Puerto Rico’s public debts totaled just over $70 billion when the Puerto Rico Oversight, Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30, 2016. Most of those debts are now in the midst of perhaps the largest restructuring of public debt in U.S. history. By way of comparison, the City of Detroit had about $18 billion in debt when it entered bankruptcy in 2013. Puerto Rico’s debt restructuring could also become one of the most expensive ever, with professional fees projected to exceed $1 billion. The precarity of Puerto Rico’s fiscal troubles became widely known in mid-2013. The restructuring of Puerto Rico’s public debts could inform future federal responses to fiscal strains faced by some state and local governments.

PROMESA created two paths for debt restructuring and established a Financial Oversight and Management Board (FOMB; Oversight Board). Title III established a debt restructuring process that draws on the Bankruptcy Code. Title VI set up a debt restructuring process similar to some sovereign debt procedures. U.S. District Court Judge Laura Taylor Swain was chosen to preside over Title III cases. PROMESA conditioned the Oversight Board’s termination on Puerto Rico’s ability to access “short-term and long-term credit markets at reasonable interest rates.” Restructuring of the island’s debts is a likely prerequisite to that access. The Oversight Board, after delays due to Hurricanes Irma and María in September 2017, led efforts to restructure the island’s public debts through litigation and negotiations with the Puerto Rican government, hedge funds, bond insurers, and others.

Puerto Rico’s public debts fall into four categories: general obligation (GO) bonds and other debt payable through the main Treasury accounts of the Commonwealth of Puerto Rico (CPR); sales-tax-backed debt known by its Spanish acronym COFINA and other revenue-backed debt; debt of public corporations such as the Puerto Rico Electric Power Authority (PREPA); and debt issued by local county-like governments (municipios) and other smaller entities. In February 2019, a federal district court judge confirmed the plan to restructure COFINA debt. Bonds with a par value of $17.6 billion were then exchanged for $12 billion in new bonds. After several postponements in proceedings to restructure debts of the island’s central government, in early February 2021 the Oversight Board announced an agreement with “certain bondholders” to restructure GO and related debts. The Board filed the corresponding amended plan with the Title III court on March 8, 2021. On May 4, 2021, the Title III court scheduled a hearing for July 13, 2021, on the adequacy of disclosures describing the plan.