The U.S. Supreme Court on Friday agreed to hear Puerto Rico's bid to reinstate a law that would allow restructuring of the U.S. territory's public agencies as the Caribbean island grapples with its huge debt load.
The high court will decide whether the 2014 law, known as the Recovery Act, conflicts with U.S. federal bankruptcy law. The court also took up a companion case filed by representatives of the publicly owned Government Development Bank for Puerto Rico.
The court noted in its brief order that Justice Samuel Alito will not participate in the case, meaning only eight justices will hear it. The court will hear oral arguments in the spring, with a ruling due by the end of June.
If the Supreme Court rules for Puerto Rico, the territory could place certain of its struggling public entities into bankruptcy.
Puerto Rico passed the law to give certain public corporations, with around $20 billion in debt, the ability to restructure financially in an orderly process.
That was struck down by a U.S. federal court in Puerto Rico in February. Investment funds that hold bonds issued by the Puerto Rico Electric Power Authority, or PREPA, argued in a lawsuit that the law contravened the U.S. bankruptcy code even though the code excludes Puerto Rico. A U.S. appeals court in July affirmed the lower-court decision.
Puerto Rico has said the lower-court decision leaves its public utilities in a legal "no-man's land" because neither federal law nor the island's own law permits the needed restructuring.
The dispute goes to the heart of Puerto Rico's efforts to restructure some $72 billion in debt. Puerto Rico wants a legal mechanism to allow it to impose payment reductions, or "haircuts," on some of its creditors, a prospect that has bondholders worried.
Several of Puerto Rico's creditors, as well as companies that insure its bonds, were involved in the city of Detroit's bankruptcy and have fresh recollections of the significant "haircuts" they took in that case.
Puerto Rico's governor, Alejandro Garcia Padilla, shocked investors in June when he said the island's debt, totaling $72 billion, was unpayable and required restructuring. The island has been in recession for nearly a decade.
PREPA, facing $8 billion in debt, has already reached a consensual agreement with some of its creditors. The agency's largest bondholder group agreed in September to accept 15 percent "haircuts" in exchange for new, healthier bonds. The agreement has not yet been finalized.