Healthcare battle may delay Title III bankruptcy for Puerto Rico

WASHINGTON (Reuters) - An adviser to Puerto Rico Governor Ricardo Rossello said on Wednesday the distressed U.S. territory would not necessarily file for bankruptcy if it failed to reach a debt restructuring deal with creditors before Monday's negotiating deadline.

"It depends on legal actions, if (creditors) go after our officials,” Elias Sanchez, Rossello’s liaison to Puerto Rico’s federal financial oversight board, told Reuters at an event in Washington where Rossello spoke. “Maybe, but maybe not, too.”

Sanchez’s comments were the latest indication Puerto Rico's leadership does not view bankruptcy as the immediate certainty that many experts and people involved in the talks expect.

Under the federal Puerto Rico rescue law, PROMESA, Puerto Rico has until Monday to negotiate with stakeholders on a plan to reduce its crushing $70 billion debt load, or else open itself to lawsuits from creditors.

There may be key political reasons for Rossello to delay bankruptcy until the end of the fiscal year on June 30 — even if forbearance efforts fail, and the island must defend a swarm of lawsuits in the short term.

Bankruptcy could sabotage Rossello’s top-priority efforts to secure federal funding for the island’s near-insolvent Medicaid system, the federal health insurance system for the poor.

Sanchez previously voiced wariness about the unpredictability of a court process, and Reuters reported last week the island was urging creditors to sign a deal to extend the Monday deadline.

To be sure, the island could seek to enter a Title III bankruptcy at any time. It is the federal oversight board, not the governor, that makes the final call on doing so.

“The cost-benefit analysis (of delaying) makes sense,” said David Tawil, whose fund, Maglan Capital, traded out of its positions in Puerto Rican debt. “It’s only two months.”

With talks going nowhere as the deadline nears, filing a so-called Title III proceeding under PROMESA - an in-court debt workout, akin to U.S. bankruptcy - is seen as a way for Puerto Rico to protect itself from lawsuits, and arm itself with legal sway to impose harsh repayment cuts.

But Republican lawmakers in Washington, already inclined to view healthcare funding as a bailout, would be even harder pressed to agree to Medicaid assistance for an island already slashing its debt in court, said a creditor source familiar with lobbying efforts. 

That could change if Puerto Rico secures funding before Monday. U.S. Senate Democratic leader Chuck Schumer said on Tuesday that Democrats were angling for a Puerto Rico healthcare provision in a massive spending bill to fund the federal government through Sept. 30.

On Wednesday evening, President Donald Trump expressed his disapproval for the plan in a tweet, stating: “Democrats are trying to bail out insurance companies from disastrous #ObamaCare, and Puerto Rico with your tax dollars. Sad!”

Another rationale for delaying bankruptcy: an island-wide plebiscite on June 11 asking Puerto Ricans to choose between U.S. statehood and independence.

Although the referendum is not expected to resonate with federal lawmakers, Rossello, a statehood proponent, nonetheless may be loath to hurt his side’s chances by being associated with a bankruptcy.

(Reporting by Nick Brown; Additional reporting by Robin Respaut in San Francisco; Editing by Daniel Bases and Peter Cooney)