DividendsOfficials in the U.S. Virgin Islands continue to watch closely the situation in Puerto Rico, where the territory has been unable to make service payments on its roughly $70 billion in debt. The crisis has become so severe that the Puerto Rican government has had to make drastic cuts to healthcare, public safety and education—and a high-ranking U.S. federal government official has warned that the situation could quickly become a humanitarian crisis, as well.

Puerto Rico defaulted on three different classes of bonds on May 1, failing to make most of a $422 million payment. The government must make an additional $2 billion in payments July 1, and it looks to be nowhere near a point at which it will be able to meet that obligation.

On May 19, Republicans in the U.S. House of Representatives finally struck a bipartisan deal with the Obama administration, possibly allowing Puerto Rico to restructure its debt in a way that resembles bankruptcy. As part of the deal, the territorial government will need to submit budget plans and financial statements to a federal panel. While the measure is promising, it’s yet to be seen whether lawmakers will actually pass it in the House—not to mention if and when the U.S. Senate may take action on its version of the bill.

It’s important to note that the government of Puerto Rico is currently not allowed to file for bankruptcy protection like an individual or business. And because it is a U.S. territory and not an independent nation, it cannot seek relief from the International Monetary Fund.

Effects on other US territories

The way Congress responds to the Puerto Rican debt crisis could have an impact on the U.S. Virgin Islands, a territory that often relies on tax-exempt bonds to help fund essential services and key infrastructure projects. This is common in U.S. territories, which often do not receive the same federal funding opportunities compared to states.

One of the proposals offered in recent months has been to allow Puerto Rico to file for what’s been referred to as “Super Chapter 9” bankruptcy. This would give the territory the ability to restructure all of its debts, including general obligation debt—something that’s not offered to states facing difficult financial circumstances.

If Super Chapter 9 were to be implemented, some worry it could negatively affect the ability of U.S. territories to offer attractive tax-exempt bonds and other incentives to the market, as there would be a new, substantial risk factor that investors would need to confront. Considering this risk, investors would likely demand higher interest rates and better returns.

While this measure could help Puerto Rico resolve its financial challenges, leaders in other U.S. territories have been vocal in their opposition to this “back door” bankruptcy option. Thus, government officials and business leaders in the U.S. Virgin Islands are keeping a close watch on the situation and how the U.S. federal government ultimately decides to handle it.


Tom Bolt is Chair of the Government Relations Practice Group at BoltNagi PC,  a widely respected and well-established law firm serving clients throughout the U.S. Virgin Islands.