The U.S. Supreme Court rejected Puerto Rico’s bid to let its public utilities restructure bonds over the objection of creditors, leaving the island’s $70 billion debt crisis squarely in the hands of Congress.
Siding with investors, the court ruled 5-2 on Monday that Puerto Rico’s measure was barred under federal bankruptcy rules. The island’s debt gained after the decision, with some utility bonds jumping more than 3 cents on the dollar. Still, most of Puerto Rico’s debt is still trading at levels that signal further defaults are expected.
A decade-long economic slump has driven Puerto Rico to the brink of bankruptcy. The island has missed several payments this year and faces its biggest hurdle yet on July 1 when $2 billion in debt comes due. U.S. lawmakers are preparing to place its finances under direct federal oversight, and the Supreme Court ruling confirms that all roads to a debt settlement now lead via Washington.
But he said markets had already assumed that Congress would make the key decisions. The court ruling brings “some incremental relief for investors, but it doesn’t change the landscape for Puerto Rico securities,” Hanson said.
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A Puerto Rico Aqueduct and Sewer Authority bond maturing in 2038 changed hands at 72.25 cents on the dollar at 10:33 a.m. in New York, up from an average 68.8 cents on the dollar on Friday, according to data compiled by Bloomberg. The island’s general-obligation bonds maturing in 2037, the most senior form of debt, traded for 63.75 cents after the ruling, up from an average of 62.1 cents Friday.
Those prices show that investors don’t expect to get paid in full. Governor Alejandro Garcia Padilla has said Puerto Rico can’t cover what it owes without shutting off services crucial to the island’s 3.5 million residents, nearly half of whom live in poverty. The economic slump has been exacerbated by population flight to the U.S. mainland, and by the arrival of the Zika virus this year.
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 its obligations.
Instead, a settlement may be imposed by the seven-member financial oversight board due to be set up under legislation that passed the U.S. House last week. The Senate plans to take up the measure before the July 1 deadline.