(Bloomberg) -- Puerto Rico’s $123 billion bankruptcy case opens Wednesday in a San Juan courtroom, with protesters expected outside, three lawyer-packed courtrooms inside and a request from the judge to leave the cologne at home.
The 3.5-hour hearing will most likely be a get-acquainted session for U.S. District Judge Laura Taylor Swain, on assignment from Manhattan, and a battalion of attorneys representing the island’s insolvent government, its bondholders, and current and retired public workers. One of the few substantive issues on the docket so far is the retirees’ request for an official committee -- to be funded by the commonwealth -- to represent their interests.
But bigger fights are brewing. Puerto Rico says it can only cover about $8 billion of $33.4 billion in bond payments due through 2026. Rival creditors have sued in different courts for the right to be paid first. Active and retired government workers, meanwhile, are facing a potential 10 percent cut in pension costs and looking to shield their benefits.
“It’s ‘Go’ time,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which oversees $5.8 billion of municipal bonds, including insured Puerto Rico debt. “Everybody’s going to be pitching for what they think is fair from their perspective. But it still really comes down to what the island can afford to pay. And what that economy can actually afford is not going to make anybody happy.”
A federal oversight board, created by Congress last year to untangle the island’s fiscal crisis, put Puerto Rico and its sales-tax agency under court protection this month invoking a form of bankruptcy also devised by Congress.
In its May 3 filing, the board outlined a fiscal plan that calls for freezing pay raises for government workers, privatizing some services, and cutting subsidies to cities and the University of Puerto Rico. The plan would shift the cost of “premium” health-care services to patients and try to fix a $48 billion public-pension shortfall. It doesn’t specify how it intends to accomplish any of those goals.
Under the plan, mutual funds, hedge funds and other debt holders get paid after basic government services are provided for. Creditors have balked at the outline and demanded a list of services the board deems essential.
Ultimately, Swain will have the final say about who gets paid first and how much the government should spend on services. Before then, she’ll make more modest decisions, such as whether all hearings will take place in San Juan, or someplace else, like her home courtroom in New York, where many of the top lawyers in the case are based.
But she has made one thing clear in her order setting up Wednesday’s hearing:
“Those in attendance at the hearing in Courtroom 3 are requested to refrain from wearing cologne or perfume.”
The case is In re Commonwealth of Puerto Rico, 17-03283, U.S. District Court, District of Puerto Rico (San Juan).