(Adds statement from GDB)
By Edward Krudy
SAN JUAN/NEW YORK, Feb 9 (Reuters) - Puerto Rico said on Monday it would appeal a U.S. ruling that voided the island’s restructuring law, saying it left the U.S. commonwealth in legal limbo and struggling to find a way to manage its debt load.
Late on Friday, a federal judge ruled that Puerto Rico’s so-called Recovery Act, which made some of its agencies eligible for court-supervised debt restructuring, violated the U.S. constitution by allowing a state government to modify municipal debt.
“We are left deprived of the only instrument available to manage our debt in an organized form,” Puerto Rico Justice Secretary Cesar Miranda said in a statement. “The practical effect of the decision is to allow disorder in collecting of public corporation debt.”
Puerto Rico’s appeal is expected to kick off lengthy litigation with a hard-to-predict outcome, possibly delaying a final resolution for months.
Puerto Rico-based legal analyst John Mudd said the commonwealth’s government would have 28 days to ask for a reconsideration and 30 days to file an appeal, and it would likely take a year for the First Circuit Court of Appeals in Boston to rule on the case.
Puerto Rico’s justice secretary did not provide a timeline for an appeal.
The decision could also encourage the U.S. Congress to adopt a bill allowing Puerto Rico to use Chapter 9 of the U.S. Bankruptcy Code, some analysts and investors speculated.
The bill was introduced in July by Puerto Rico’s representative in Congress, Pedro Pierluisi, who said Puerto Rico should focus on Chapter 9 rather than insisting it has the right to enact a local bankruptcy law.
“I am sure that, if we go to Congress with a single voice to seek the same treatment that the states receive under Chapter 9, we can achieve this objective,” Pierluisi said in a statement.
The island, struggling with debts of more than $70 billion, passed its restructuring act in June to give public corporations a framework to restructure debt and ring-fence the government from a potential bankruptcy.
U.S. law forbids Puerto Rico’s government and its entities from restructuring debt under Chapter 9, which was used for Detroit last year.
Miranda said the decision to void the act was “incorrect in law,” that there were no legal impediments to Puerto Rico approving the law and that its legal remedies remained in force. The decision leaves the island in legal limbo without an organized structure to negotiate existing debt, he said.
The ruling comes as Puerto Rico tries to negotiate a $2 billion bond sale to which hedge funds and other creditors would subscribe before facing large demands for funds in June.
Puerto Rico needs that lifeline to stabilize its finances. Its financing arm, the Government Development Bank (GDB), saw liquidity fall sharply at the end of last year.
The hedge funds still plan to support the deal, said a source familiar with their thinking.
“The Recovery Act was as much a signal as a tool that the public corporations are on their own,” said the source, who asked not to be named as details of the deal are not yet public. “For us nothing material has significantly changed.”
Robert Donahue, analyst at Municipal Market Advisors, said that without the GDB’s ability to subsidize deficits, Puerto Rico “faces threats to public safety and essential services” and would claim emergency powers to protect key assets.
GDB President Melba Acosta Febo said in a statement that the court’s decision was a temporary setback. He added that it was important that creditors and other “constituents of political entities” benefit from mechanisms to adjust their debts.
The ruling has implications for debt of around $20 billion in several public corporations covered under the act, including $9 billion at electric power authority PREPA.
General obligation bonds, or GOs, are repaid by tax revenues from the central budget while public corporation bonds are generally repaid by revenues from those corporations.
Puerto Rico’s general obligation bonds carrying a coupon of 8 percent and maturing in 2035 traded at an average price of 81.404 cents on the dollar, down from 83.577 cents on Friday.
The island’s power authority bonds rallied from distressed levels as the loss of the Recovery Act left officials with less leverage in negotiations with bondholders over a restructuring at PREPA.
Bonds of the Puerto Rico Electric Power Authority carrying a coupon of 5 percent and maturing in 2018 jumped to 59 cents on the dollar from 50.562 cents when they last traded on Feb. 4. (Reporting by Reuters in San Juan, Edward Krudy in New York, writing by Edward Krudy and Megan Davies; Editing by Jeffrey Benkoe, Meredith Mazzilli and Christian Plumb)