From a bankruptcy standpoint, the amendment would place
The combination of fiscal challenge, weak economic performance and limited market access has led the Commonwealth government to a point where increasingly difficult choices are required. In June the Commonwealth government enacted the Recovery Act. Given the economic and fiscal pressures facing the Commonwealth itself and its need to provide proper service levels for its citizens, its ability to continue to provide meaningful ongoing financial support to its public corporations going forward would be challenging, in Fitch's view.
The Recovery Act is an effort to fill the void resulting from the absence of a federal bankruptcy alternative. The Commonwealth has attempted to forge its own framework for orderly debt restructuring applicable to its public corporations, including the
The Recovery Act specifically excluded the Commonwealth's general obligation debt and certain instrumentalities of the Commonwealth, including the
The enactment of the Recovery Act signaled a further level of fiscal stress within the Commonwealth and resulted in Fitch rating action on debt obligations of PREPA, PRASA, and COFINA. The adoption of the Recovery Act also spawned litigation and market volatility, potentially increasing the challenge to market access for the Commonwealth and its public corporations. The litigation challenging the Recovery Act will likely be costly to the Commonwealth, a distraction from more important governance activity and will continuously shroud the outcome of any proceedings or agreements entered into under the terms of the Recovery Act with uncertainty.
The Recovery Act has provisions that mimic to a degree those in Chapter 9, but are also different in important ways. The extension of Chapter 9 of the US Code would not of course alleviate the immediate financial stress which PREPA currently faces. However, clarifying the rules for restructuring and aligning them to a federal standard with understandable precedent, albeit limited, and providing a federal forum for the proceeding would benefit bondholders. It would also protect the Commonwealth from claims it is acting unjustly or arbitrarily and contrary to accepted norms.
The range of options available to the Commonwealth and its municipalities and public instrumentalities would be the same as those available in other states. Additionally, the administration of the proceedings and the outcomes would have the same underpinning as the outcomes for other Chapter 9 cases such as
Fitch's recent action aligning the rating on obligations of COFINA to the Commonwealth general obligation debt reflects the more uncertain legal environment that exists in
Fitch believes that the extension of Chapter 9 of the US Code to
As a municipality COFINA could file under Chapter 9 only if authorized by the Commonwealth and only if it could show that it is "insolvent" and had made a good faith effort to negotiate with its creditors or that such negotiation was not practical. General fiscal distress in the Commonwealth would not support a filing by COFINA. That the conditions for filing have been met independently by COFINA would need to be demonstrated in a neutral federal forum in a
The consequent reduction of the legal risk and uncertainty surrounding the Commonwealth's ability to adopt and apply a similar restructuring act to COFINA debt in the event of Commonwealth fiscal distress, and the limited ability of COFINA to file under Chapter 9 would necessarily be factored into Fitch's ratings of COFINA debt obligations. In Fitch's view, the extension of Chapter 9 to the Commonwealth could support ratings of COFINA debt at levels above the Commonwealth general obligation debt. Fitch would need to review COFINA ratings at the time Chapter 9 was amended and the rating outcome would depend upon the credit specifics at that time, including the general health of the Puerto Rican economy.
Additional information is available on www.fitchratings.com.
Source: Fitch Ratings
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