My colleague Alex Pollock does not tire of wisely reminding us of a fundamental law of finance: “Loans which cannot be paid will not be paid.” If ever that law applied, it has to be in Puerto Rico where many years of weak economic growth and poor financial management have highly compromised the island’s public finances, putting it in a position where it cannot fully honor its loan obligations. The question remains, however, whether the combined interests of Puerto Rican bondholders, and those of the island itself, would better be served within a bankruptcy framework as opposed to having creditors pursue their interests through the courts in a disorderly manner.
By now it should be clear that Puerto Rico cannot fully service its US$72 billion debt mountain even if it had the will to do so. Indeed, the recent authoritative Krueger report found that, even if Puerto Rico were to adopt strict budget measures and to somehow revive its economy from a ten-year downward spiral, it would still only be able to repay around 65% of its debt obligations over the next ten years. Needless to add, if economic growth were not revived and if the government were to falter in implementing tough budget measures, the island would only be able to service a very much lower proportion of its maturing debt obligations.
The island’s inability to fully meet its debt commitments necessarily implies that its bondholders will collectively suffer large losses. This would be the case whether or not the US Congress affords Puerto Rico the opportunity to avail itself of bankruptcy procedures that are legally denied to the island presently. The key question for Puerto Rican bondholders as a group is whether or not they stand to recoup a higher proportion of their bond claims with the continued absence of bankruptcy procedures for the island as opposed to the case with the introduction of such bankruptcy procedures.
In the absence of bankruptcy procedures, it would seem most probable that the holders of Puerto Rico’s eighteen different bond issues will rush to press their individual claims in the courts. This would lead to a messy and protracted litigation process. To be sure, in that process some individual bondholders with greater bond contractual protection might gain. However, they would do so at the expense of other bondholders without such protection. They would also do so at the expense of the island’s economy, which would further reduce Puerto Rico’s ability to repay.
All of this might make bondholders as a group want to reflect on Pollock’s fundamental law of finance that loans that cannot be repaid will not be repaid. They might also make bondholders want to consider whether they might stand to gain more by having an orderly bankruptcy procedure in place for the island rather than having a disorderly asset grab in which both the island and bondholders as a group stand to lose.
By now it should be clear that Puerto Rico cannot fully service its US$72 billion debt mountain even if it had the will to do so. Indeed, the recent authoritative Krueger report found that, even if Puerto Rico were to adopt strict budget measures and to somehow revive its economy from a ten-year downward spiral, it would still only be able to repay around 65% of its debt obligations over the next ten years. Needless to add, if economic growth were not revived and if the government were to falter in implementing tough budget measures, the island would only be able to service a very much lower proportion of its maturing debt obligations.
The island’s inability to fully meet its debt commitments necessarily implies that its bondholders will collectively suffer large losses. This would be the case whether or not the US Congress affords Puerto Rico the opportunity to avail itself of bankruptcy procedures that are legally denied to the island presently. The key question for Puerto Rican bondholders as a group is whether or not they stand to recoup a higher proportion of their bond claims with the continued absence of bankruptcy procedures for the island as opposed to the case with the introduction of such bankruptcy procedures.In the absence of bankruptcy procedures, it would seem most probable that the holders of Puerto Rico’s eighteen different bond issues will rush to press their individual claims in the courts. This would lead to a messy and protracted litigation process. To be sure, in that process some individual bondholders with greater bond contractual protection might gain. However, they would do so at the expense of other bondholders without such protection. They would also do so at the expense of the island’s economy, which would further reduce Puerto Rico’s ability to repay.
All of this might make bondholders as a group want to reflect on Pollock’s fundamental law of finance that loans that cannot be repaid will not be repaid. They might also make bondholders want to consider whether they might stand to gain more by having an orderly bankruptcy procedure in place for the island rather than having a disorderly asset grab in which both the island and bondholders as a group stand to lose.
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