Investors Beware: Bonds and Amending the Constitution

Today, three PPD (Manuel Natal, Luis Vega & Luis Torres) members of the Puerto Rico House of Representatives announced that tomorrow, they will be filing a Joint Resolution to consult the People of the Island whether to amend the Constitution “to permit the renegotiation of the Government’s debt and of the public corporations recognizing the importance that it does not impair or subordinate to it other socioeconomic development priorities of our people. Among these priorities are: the financing of cheaper energy; cheaper drinking water, strategic investment in infrastructure that encourages private investment and job creation; schools with teachers and materials that students need; special education programs; and better and more far reaching health services for the whole island.”

Natal Alvelo reminded us that PC 2003, which he wrote, seeks a 4-year moratorium on debt service, extendable for 3 additional years. In addition, PC 2314, also of Natal Alvelo’s authorship, calls for the creation of a Special Independent Commission to review all debt issues to determine which are legal and which are illegal. The illegal debt would be rejected. Witch hunt anyone?

At this time, we do not know how much support this Constitutional Amendment or the abovementioned measures have. Suffice it to say that if approved, they are tantamount to Puerto Rico rejecting its General Obligation debt, at least temporarily. Fortunately, Article VII of the Puerto Rico Constitution requires that the Joint Resolution be approved by 2/3’s of the legislative assembly in order for it to be put to popular vote, which would need to be held with the general election, unless ¾ of the legislature so approved it, which then could be at any time. Since the PPD has only a 3-vote majority in the House, it is unlikely it will be approved.

Even if this amendment was approved by the electorate, it would be subject to challenge in federal court for impairment of contractual obligations, see, United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011), and Romer v. Evans, 517 U.S. 620 (1996) (state constitution is not free from federal scrutiny).

As to PC 2003 and PC 2314, they were filed in 2014 and have not been moved in the House. This does not mean, as we saw with the Recovery Act, that they could not be approved, if need be, in one day. Investors need to monitor the situation closely.


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