Puerto Rico's attempt at passing a law that would enable the US territory to restructure debts has been struck down by the US Supreme court.
Excluded from being able to use Chapter 9, Puerto Rico passed the Recovery Act in 2014 which would allow the territory to put public entities into bankruptcy, thus forcing haircuts to creditors such as Franklin Advisors and OppenheimerFunds. However in a very definitive 5-2 ruling handed down this morning from the US Supreme Court, the law was struck down, providing at least temporary relief for bondholders.
From Bloomberg
The U.S. Supreme Court struck down a Puerto Rico law that would have let its public utilities restructure their debt over the objection of creditors. The ruling leaves it to Congress to help the island resolve its fiscal crisis.
Siding with bondholders challenging the law, the court ruled 5-2 that the measure was barred under federal bankruptcy law.
The Recovery Act, as the local law was known, would have directly affected more than $20 billion in utility debt and given the commonwealth more leverage in handling the rest of the $70 billion it owes.
The island and its agencies face a $2 billion payment due July 1. Puerto Rico defaulted May 1 on $370 million of Government Development Bank debt. Prices on some commonwealth debt increased Monday after the ruling.
A Puerto Rico Aqueduct and Sewer Authority bond rallied on the news.
Federal law lets states authorize bankruptcy filings by public utilities and other municipalities but bars Puerto Rico and the District of Columbia from doing the same thing. Puerto Rico sought to get around that provision in 2014 by passing a local law that offers an option similar to bankruptcy.
Writing for the Supreme Court majority, Justice Clarence Thomas said Congress didn’t authorize Puerto Rico to take that step.
"Our constitutional structure does not permit this court to rewrite the statute that Congress has enacted," Thomas wrote.
Justices Sonia Sotomayor and Ruth Bader Ginsburg dissented. They said Puerto Rico was right that Congress didn’t mean to leave the island without access to either federal or local restructuring law.
"Congress could step in to resolve Puerto Rico’s crisis," said Sotomayor, whose parents were born in Puerto Rico. "But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe water."
The decision leaves Puerto Rico dependent on Congress to extricate the island from its difficulties. Lawmakers are working on legislation that would create a federal oversight board to help manage the island’s budgets and supervise a debt restructuring. A ruling backing the Recovery Act might have given Puerto Rico and its allies more leverage in that process.
Congress will now have to change legislation in order to allow Puerto Rico to enter bankruptcy in order to restructure its debts, something that is already in progress. As we reported, the House has passed a bill last week that would allow for an oversight board to be appointed by Congress and the president which will determine whether and when to initiate debt restructuring – the bill has now been handed off to the Senate.
via http://ift.tt/25XBS24 Tyler Durden