Filing For Bankruptcy Isn’t The Right Solution For Puerto Rico

POST WRITTEN BY
Steven M. Fetter
Mr. Fetter is president of the energy advisory firm Regulation UnFettered.

If Puerto Rico’s fiscal house is to survive and be repaired, ongoing investment will be a key component of any long-term solution. (AP Photo/Ricardo Arduengo)

If Puerto Rico’s fiscal house is to survive and be repaired, ongoing investment will be a key component of any long-term solution. (AP Photo/Ricardo Arduengo)

When I testified before the Senate Energy and Natural Resources Committee last month, I was the only voice among a panel of esteemed colleagues to oppose allowing Puerto Rico’s electric utility, known as PREPA, to file for Chapter 9 bankruptcy.

I stand by that testimony, not because I have a lack of empathy for the residents of Puerto Rico, but rather, just the opposite. I believe that changing the current law to allow PREPA to file for Chapter 9 restructuring would be a further setback for the island’s economy.

A declaration of bankruptcy would effectively dry up PREPA’s access to the capital markets for the foreseeable future, making borrowing new money extremely costly, if available at all, erecting yet another obstacle to the recovery of the already stagnant economy.

While PREPA is just part of a much larger fiscal crisis, I believe a consensual settlement where all stakeholders address PREPA’s near term liquidity needs by better aligning its financial obligations with its revenues is achievable and would set an encouraging precedent for further progress across all of Puerto Rico government. Part and parcel of such progress must be a commitment by PREPA to increased efficiencies, along with timely regulatory rate-setting to a level sufficient to cover both operating costs and debt service–a key component of PREPA’s original promise to investors, many of whom reside on the island.

During the hearing, Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts raised the specter of so-called “vulture” investors profiting from Puerto Rico’s economic demise. While I share their distaste for these opportunistic investors, who represent a minority of Puerto Rico debtholders, the sad fact remains that following a Chapter 9 restructuring, “vultures” might be the only ones willing to provide PREPA with needed capital, of course at rates far above market levels.

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