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Floating Ashore: An Overview of Puerto Rico's Financial Crisis and Potential Restructuring Alternatives

BY Steven B. Smith
June 02, 2014

Chapter 9 of the United States Bankruptcy Code, long considered a rare vehicle of last resort for eligible government entities, has recently become an increasingly prominent consideration as a method to relieve crippling financial bond obligations. For the Commonwealth of Puerto Rico, however, as a territory of the United States, relief under Chapter 9 is not an option for solving its staggering $70 billion debt and estimated $850 million deficit for the 2014 fiscal year. A restructuring of Puerto Rico's finances, therefore, must come from alternative strategies. This article provides an overview of Puerto Rico's debt crisis; sets forth the textual basis for Puerto Rico's exclusion from Chapter 9 of the Bankruptcy Code; and explores potential alternative strategies for Puerto Rico to restructure its finances.

Puerto Rico's Debt Crisis

Puerto Rico bonds have long been attractive to investors for several reasons, including: 1) triple tax-exempt status (i.e., from federal, state, and local income taxes); and 2) Puerto Rico “general obligation” bonds are backed by the full faith and credit of the Puerto Rican government with a first-priority lien on the revenues of Puerto Rico. The Puerto Rican government has historically used these bonds not only as a means of long-term investment, but also as a short-term stimulus and method to finance its deficits.

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