Puerto Rico sought relief on Wednesday under a law enacted to help the United States commonwealth restructure its massive debt load, paving the way for what could be the largest-ever bankruptcy case involving a US local government entity.
In doing so, the island’s authorities resorted to the so-called Title III provision of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), which was signed in June 2016 by then-President Barack Obama.
Title III of that law – a hybrid between Chapter 9 and Chapter 11 bankruptcy protection, designed for local governments (although Puerto Rico is excluded) and corporations, respectively, – provides a stay on all creditor litigation and would leave decisions on debt repayment in the hands of a court.
But it would not bring an end to talks aimed at reaching a restructuring agreement.
Title III can be resorted to when talks aimed at reaching a negotiated solution between Puerto Rico’s government and its creditors have been exhausted.
In a statement, Jose Carrion, the chairman of the Promesa-established Fiscal Oversight Board (JSF) that filed for the bankruptcy proceedings at the request of Puerto Rican Gov. Ricky Rossello’s administration, said the entity determined that the measure was necessary and appropriate.
He said it was the right path for protecting Puerto Rico’s residents and the interests of its creditors after a moratorium protecting the Caribbean island from creditor litigation expired on Monday.
The decision to opt for Title III was also backed by Rossello’s predecessor, Alejandro Garcia Padilla, and Rep. Luis Gutierrez, a Democrat from Illinois.
The next step is for US Supreme Court Chief Justice John Roberts to choose a judge to handle the bankruptcy case.
Puerto Rico, whose government owes more than $70 billion in bond debt, also has nearly $50 billion in pension liabilities as a consequence of a more than decade-long recession.
It also has suffered a massive exodus of members of its economically active population, who as US citizens can freely relocate to the mainland.