Puerto Rico’s Bankruptcy Exit Isn’t the Finish Line

When I first saw the news on Tuesday that Puerto Rico’s bankruptcy judge had approved its debt-restructuring plan, allowing the commonwealth to begin to exit this painful, almost five-year chapter of its history, I had to stop and think. After all, the island’s drawn-out struggle with its creditors has been in the background during most of my professional career, dating back to when I helped chronicle its financial collapse as part of Bloomberg News’s municipal-bond team in the mid-2010s.

I want to say what Governor Pedro Pierluisi told my colleague Michelle Kaske ahead of the approval. “The bankruptcy of the commonwealth has been like a dark cloud on top of Puerto Rico for too long,” he said. “It is a new day for the government and the economy of Puerto Rico.”

Of course, exiting a bankruptcy that began in May 2017 and that was prolonged by hurricanes and a global pandemic should be framed as reason for optimism for all Puerto Ricans. However, it’s just as important to have a clear understanding that this restructuring plan, even if it lops off tens of billions of dollars of debt, is not a cure-all for what snared the commonwealth in an economic tailspin in the first place. A lot of hard work still remains to put the island on a sustainable fiscal path.

For one thing, it sure looks as if Puerto Rico, after more than $1 billion in costs, still couldn’t do much through bankruptcy to impair the holders of its general obligation bonds and commonwealth-backed securities. While those bonds will total only $7.4 billion now instead of $18.8 billion, investors will also get about $7 billion in cash upfront and billions of dollars worth of “contingent” debt that will pay if sales-tax collections exceed projections. It always seemed impossible that bondholders would be made whole — but this agreement isn’t all that far off. The legacy debt should be swapped out for the new obligations by March 15.