Debt Finance 2026 Comparisons

Over the past year, the debt finance market in Puerto Rico has remained active, with steady transaction volume despite continued global economic uncertainty, inflationary pressures and relatively high interest rates. Despite a significant reduction in the amount of local and international financial institutions active in the market, local banks have continued to provide credit, while private credit funds and alternative lenders have played an increasingly important role across all segments of the market, particularly in real estate acquisition and asset-based financings. Market participants have adjusted to higher borrowing costs through tighter underwriting standards, increased pricing, and greater focus on collateral coverage and cash flow resilience.

Financing activity has been supported by ongoing investment in real estate (led by tourism, industrial and high-end residential sectors), infrastructure, manufacturing, energy, healthcare and hospitality industries, as well as refinancing and amendment transactions driven by maturity extensions and balance sheet management. An increase in the values of real estate across the board has further supported growth and opportunities in financing transactions, providing strong collateral at attractive loan-to-value ratios for local lenders.

Transaction timelines have lengthened due to enhanced diligence and documentation requirements, but deal flow has remained consistent. Overall, the market has demonstrated resilience, with lenders and borrowers adapting structures and terms to current economic conditions.

Over the past two decades, the local banking sector in Puerto Rico has undergone significant consolidation, resulting in a reduced number of institutions active in the credit market. This process began in the early 2000s with the exit of mainland US banks, including Citi and J.P. Morgan. Consolidation accelerated during the following decade as a result of a series of bank failures and Federal Deposit Insurance Corporation (FDIC)-assisted mergers involving local institutions such as Westernbank, R G Premier, Eurobank and Doral Bank. The departure of these institutions created a gap in local credit availability and provided opportunities for private credit funds to acquire distressed assets and establish private lending platforms.

More recently, in 2019–20, consolidation continued with the exit of the international banks Bank of Nova Scotia and Banco Santander, through the sale of their Puerto Rico operations to Oriental Bank and FirstBank Puerto Rico, respectively.

As a result, the market is now largely concentrated among a limited number of traditional financial institutions, led by Banco Popular de Puerto Rico, followed by FirstBank Puerto Rico, Oriental Bank, Banesco USA and newer entrant Nave Bank. The credit landscape is further complemented by approximately 90–100 credit unions with combined assets estimated at USD13.65 billion, with several larger co-operatives increasingly active in commercial real estate lending. Private lenders of varying size and scope also play an important role, including Parliament Capital, Commercial Equipment Finance, Popular Mezzanine Fund, Acrecent Financial/Sygnus Capital, Endeavor Capital and, for sub-prime commercial borrowers, B2B Funding. Finally, the Puerto Rico Department of Housing, through their Investment Portfolio for Growth, a US Department of Housing and Urban Development-sponsored programme, have also been actively lending to a select group of borrowers and/or projects perceived to have a strong positive effect in the local labour and development market.

Global geopolitical developments, including the ongoing conflict in the Middle East, the US intervention in Venezuela, elevated global interest rates and trade related tensions, have indirectly affected the Puerto Rico credit market, primarily through their impact on overall costs of living and inflationary pressures. Such pressures have had a direct effect on profitability and operating costs for the underlying borrowers. They have also had an indirect effect on pricing, underwriting standards and transaction timelines, rather than on deal activity.

On the positive side, US government trade and international business policies have created a positive flow of near-shoring, reshoring and manufacturing expansion on the island, which has also created credit opportunities for local financial institutions.

Lenders have responded to these conditions by increasing the focus on collateral quality, cash flow stability and sponsor support, while also expanding diligence requirements and documentation protections. This has resulted in longer transaction timelines and increased negotiation around financial covenants, reserve requirements and mandatory prepayment provisions. These trends have been particularly evident in real estate and project-related financings, where construction costs and supply chain disruptions remain relevant considerations.

Despite these pressures, Puerto Rico’s credit market has shown resilience. Continued investment in real estate, hospitality, energy, infrastructure, manufacturing and regulated industries, together with refinancing and amendment activity driven by upcoming maturities, has sustained transaction volume. Many market participants expect heightened pricing discipline and enhanced diligence practices to persist in the near term, even if geopolitical conditions stabilise.

The main types of debt finance transactions in Puerto Rico include traditional acquisition and project financings, particularly in connection with real estate, energy and hospitality developments, as well as financings related to mergers and acquisitions involving manufacturing, commercial real estate and industrial businesses. Notwithstanding this activity, the majority of debt finance transactions on the island relate to small and medium-sized businesses. These financings typically involve small business owners, commercial real estate owners, smaller hospitality projects, professional practices, small and mid-sized manufacturing operations, general contractors and similar trades and businesses. Asset-based financing has also remained a significant component of the market, with a steady volume of new credit facilities, renewals and refinancing transactions.

Credit to the Puerto Rico government and government sponsored entities remains limited, notwithstanding the Commonwealth’s emergence from bankruptcy proceedings several years ago. As a result, municipal bond issuances have remained scarce – in fact largely absent – to date, although this dynamic may change in the near term. By contrast, credit activity involving public private partnerships has remained active, with Metropistas and Aerostar – the operators of most of Puerto Rico’s highways and the airport, respectively – having recently issued notes to finance acquisitions, operations and capital expenditures.

Securitisation activity has remained primarily focused on residential solar energy finance leases and retail instalment sales contracts, a segment that has been significantly affected by Sunnova’s recent bankruptcy filing. Mortgage and auto loan securitisation are currently uncommon, although certain larger financial institutions, including Banco Popular and FirstBank, may remain selectively active in this space.

The majority of loan transactions in Puerto Rico fall into two principal categories:

• real estate secured loans, whether for acquisition, development or refinancing purposes; and
• asset-based loans secured by personal property collateral pursuant to the Puerto Rico Commercial Transactions Act, which incorporates most of the provisions of the model Uniform Commercial Code (UCC) of the United States.

In practice, most loan transactions require both types of collateral, with lenders taking mortgages over real property together with security interests over personal property. Lenders generally require borrowers to encumber all or substantially all of their assets as security for the indebtedness.

Mezzanine financings, in the traditional sense of loans secured by equity interests in the borrower, are uncommon. Senior lenders typically require a pledge of the borrower’s equity interests as part of the primary collateral package, which largely precludes the use of true mezzanine structures. As a result, junior financing, with a few exceptions, is generally limited to US Small Business Administration 504 structured loans or to government-sponsored lenders, such as the Economic Development Bank or the Puerto Rico Department of Housing, which may take junior lien positions in highly subsidised loan transactions.

Larger loan transactions are frequently syndicated among local financial institutions. Syndication activity declined significantly during the second decade of the 2000s following disputes among lenders regarding enforcement actions and additional funding obligations in syndicated construction loans. In recent years, syndicated lending has regained prominence as banks seek to manage concentration risk and limit exposure to individual borrowers or transactions. Syndicated construction loans remain relatively uncommon, reflecting lingering risk aversion stemming from prior market experience. From a borrower’s perspective, syndicated loans entail increased reporting, oversight and administrative requirements due to differing lender policies and compliance systems. From a lender’s perspective, however, syndication facilitates the underwriting of larger transactions without requiring borrowers to engage investment bankers or access the capital markets, which would typically result in higher transaction costs.

Credit unions have also become increasingly active participants in syndicated lending. Recent hospitality financings in the approximately USD20 million dollar range have been underwritten exclusively by credit unions, a development that would have been unusual in prior years. In addition, certain transactions have combined credit union capital with private credit fund participation, providing additional liquidity and flexibility in the local credit market.

Notwithstanding these developments, syndicated loan activity remains largely concentrated among the principal local financial institutions, with Banco Popular de Puerto Rico and FirstBank Puerto Rico being the most active arrangers with Banesco showing an increased presence in the market.

Typical real estate secured loan transactions in Puerto Rico follow documentation structures similar to those used in mainland United States transactions. Standard documentation generally includes a credit agreement, a promissory note, one or more mortgage notes, one or more mortgage deeds, a mortgage note pledge agreement, a security agreement covering personal property collateral, account control agreements for deposit accounts, personal and/or corporate guaranties, a pledge of the borrower’s equity interests, and an assignment of leases and rents. Depending on the structure and complexity of the transaction, the documentation may also include an intercreditor agreement or a subordination agreement.

For asset-based loan transactions, the documentation largely mirrors that used in real estate secured financings, except that mortgage notes, mortgage deeds and mortgage note pledge agreements are not required. Instead, the collateral package is primarily documented through security agreements, control agreements and related personal property perfection instruments.

Prior or existing banking relationships, the borrower’s liquidity profile, the sponsor’s character and level of sophistication, and the strategic desirability of the borrower’s financing needs from the lender’s perspective have a material impact on the terms and conditions of debt financings in Puerto Rico. Given the relatively small size of the local business and financial community, lenders actively compete for larger, well capitalised and repeat borrowers. As a result, those borrowers often enjoy significant negotiating leverage and are able to obtain more flexible covenant packages, reduced pricing, limited or no recourse structures and other borrower favourable terms.

By contrast, small and medium-sized businesses generally have limited bargaining power and are more likely to be subject to stricter underwriting standards and more lender protective documentation. These borrowers frequently face higher pricing, tighter financial covenants, enhanced reporting obligations and broader collateral and guaranty requirements. In many cases, the availability of credit is driven less by structural flexibility and more by the lender’s risk mitigation objectives, leaving smaller borrowers with little ability to negotiate key commercial terms.

This dynamic is particularly evident in the treatment of guaranties. The majority of loans in Puerto Rico require joint and several personal guaranties from sponsors. However, larger or more sophisticated borrowers, borrowers with strong balance sheets and those with long-standing relationships with local financial institutions may be able to negotiate non-recourse or limited-recourse structures, carve-outs or other meaningful limitations on sponsor liability. As a result, access to favourable financing terms in Puerto Rico is often closely tied to borrower scale, liquidity and relationship history rather than to transaction structure alone.

Puerto Rico real estate and notarial law is based on Spanish civil law and includes a number of jurisdiction-specific requirements. As a result, debt secured by real estate requires the execution of mortgage notes and mortgage note pledges that may differ significantly from the mortgage or deed of trust structures commonly used in the mainland United States. Borrowers and US-based counsel are often unfamiliar with certain execution formalities, including the requirement that deeds and mortgage notes be executed in wet signatures before a notary public within the Commonwealth of Puerto Rico.

Aside from these notarial and real estate-specific considerations, the vast majority of legal and commercial terms in Puerto Rico loan documentation closely mirror those used in other United States jurisdictions.

Standard security packages for real estate secured loans will require:

• one or more mortgage notes, which must be executed in wet signatures before a notary public within the Commonwealth of Puerto Rico;
• one or more mortgage deeds, which must be executed in wet signatures before a notary public within the Commonwealth of Puerto Rico;
• a mortgage note pledge agreement;
• a blanket security agreement covering personal property collateral;
• account control agreements for deposit accounts;
• personal and/or corporate guaranties;
• a pledge of the borrower’s equity interests; and
• an assignment of leases and rents.

Mortgages must be filed and recorded in the Registry of the Property of Puerto Rico in order to be enforceable against the underlying real property. An unrecorded mortgage may not be enforced against the property, even though the borrower would remain personally liable for the underlying debt. By contrast, assignments of leases and rents are not recordable in Puerto Rico and are also excluded from coverage under the Puerto Rico Commercial Transactions Act. As a result, assignments of leases and rents are governed by the assignment provisions of the Puerto Rico Civil Code. It is nevertheless common practice to file a UCC financing statement with the Puerto Rico Department of State in connection with leases, primarily to provide notice to third parties of the existence of the assignment.

For asset-based lending transactions, the security package is generally similar, although the scope of the security agreement may be limited to specific categories of personal property collateral, such as equipment, inventory and/or accounts receivable. The remaining security package typically includes:

• account control agreements for deposit accounts;
• personal and/or corporate guaranties; and
• a pledge of the borrower’s equity interests.

Depending on the nature of the collateral, particularly with respect to equipment, inventory, accounts receivable, contracts and contract rights, and general intangibles, the filing of a UCC 1 financing statement is required to perfect the lender’s security interest in such collateral.

Mortgages must be filed and recorded in the Registry of the Property of Puerto Rico in order to be enforceable against the underlying real property. An unrecorded mortgage may not be enforced against the property, even though the borrower would remain personally liable for the underlying debt. By contrast, assignments of leases and rents are not recordable in Puerto Rico and are also excluded from coverage under the Puerto Rico Commercial Transactions Act. As a result, assignments of leases and rents are governed by the assignment provisions of the Puerto Rico Civil Code. It is nevertheless common practice to file a UCC-1 financing statement with the Puerto Rico Department of State in connection with leases, primarily to provide notice to third parties of the existence of the assignment.

With respect to personal property collateral, particularly equipment, inventory, accounts receivable, contracts and contract rights, and general intangibles, the filing of a UCC 1 financing statement is generally required to perfect the lender’s security interest in such collateral. In the case of certificated securities, perfection additionally requires registration of the pledge and delivery of the original instrument to the lender with a blank endorsement. Similarly, for pledges of membership interests, to the extent that the interests are certificated, the borrower’s limited liability company agreement must opt into Article 8 of the Puerto Rico Commercial Transactions Act in order to permit perfection of the lien over the certificate. With respect to deposit accounts and marketable securities accounts, perfection is achieved through control or possession, typically by means of an account control agreement executed by the borrower, the lender and the relevant financial institution or custodian.

Intercreditor agreements are common practice in Puerto Rico when a borrower has multiple operations and/or multiple banking relationships. These arrangements are used to establish the relative priority and rights of each lender with respect to shared collateral or, alternatively, to allocate specific collateral to a particular lender to the exclusion of others. Intercreditor agreements are also frequently used in syndicated loan transactions to govern the relationship among the lenders, clarify their respective rights and obligations, and regulate the exercise of remedies and interactions with the borrower.

In Puerto Rico, priority and ranking with respect to collateral are generally governed by the principle of “first in time, first in right”, as reflected in both the Registry of the Property of Puerto Rico, which governs real estate collateral, and the Puerto Rico Commercial Transactions Registry, which governs personal property collateral (other than assignments of leases). As a result, if a mortgagee fails to file and record its mortgage and another mortgage or monetary lien is recorded first, the creditor who filed earlier will have priority over the subsequently recorded mortgage.

A similar priority framework applies to personal property collateral. If a borrower grants a creditor a blanket lien or a lien over specific categories of personal property and that creditor fails to perfect its security interest by filing a UCC 1 financing statement in the Puerto Rico Commercial Transactions Registry, another creditor may subsequently obtain and perfect a competing lien over the same collateral and gain priority over the earlier, unperfected security interest.

Purchase money security interests in personal property are also recognised under Puerto Rico law. Creditors that comply with the specific requirements of the Puerto Rico Commercial Transactions Act may obtain superpriority over other creditors holding liens on the same collateral, including creditors with prior blanket liens. This form of superpriority, however, is limited to personal property collateral and is not available with respect to real estate.

Notwithstanding the default statutory priority rules, lien ranking and enforcement rights with respect to both real estate and personal property collateral may be contractually modified through subordination agreements and intercreditor arrangements. In practice, lenders will typically require that loans made by sponsors, shareholders or affiliates of a borrower be expressly subordinated to the lender’s indebtedness. Similarly, seller financed obligations are commonly required to be subordinated as a condition to third party financing.

Enforcement and collection of debt secured by a mortgage in Puerto Rico is governed by the Real Property Registry Act of the Commonwealth of Puerto Rico and generally follows a judicial foreclosure process. While the precise timeline may vary depending on the complexity of the case and the borrower’s litigation strategy, mortgage enforcement typically proceeds as follows.

• The creditor provides notice of default to the borrower, observes any applicable cure periods set forth in the loan documents and accelerates the indebtedness upon the borrower’s failure to cure the default.
• The creditor files a complaint for the foreclosure of mortgage and collection of money, generally before the Puerto Rico Court of First Instance (or, at times subject to certain requirements, before the United States District Court for the District of Puerto Rico).
• If the borrower does not raise substantive defences, the court may enter summary judgment in favour of the creditor. In cases that are not resolved summarily, judgment is entered following trial.
• Following the entry of judgment, the borrower may file an appeal, which typically results in a stay of the foreclosure proceedings. Appeals in Puerto Rico are procedurally accessible and relatively inexpensive, and borrowers frequently pursue appellate remedies as a means of delaying enforcement, even where the likelihood of success on the merits is limited.
• Once the appellate process is exhausted, which may take several months, the creditor requests execution of the judgment from the trial court.
• The foreclosure process then proceeds through one to three judicial foreclosure sales, with the minimum bid for each sale having been pre-established in the mortgage documents. The creditor is permitted to credit bid at any of the foreclosure sales and is not required to complete all three sales before taking title to the property.
• Following foreclosure, the creditor may pursue post-foreclosure remedies, including the eviction of occupants and the cancellation of junior liens affecting the property.

The foregoing process typically takes no less than nine months to complete and, in cases involving particularly litigious or vexatious borrowers, may extend for several years – in some instances up to five years. Delays are most commonly driven by procedural appeals, interim motions and other defensive litigation tactics, which, while often unsuccessful on the merits, can significantly prolong enforcement timelines.

With respect to personal property collateral, enforcement is governed by the Puerto Rico Commercial Transactions Act. That statute permits secured creditors to exercise self-help remedies in limited circumstances, provided that enforcement can be carried out without disturbing the peace. Self-help enforcement is commonly used in connection with accounts receivable, general intangibles, deposit accounts, marketable securities accounts and certain contractual rights, but is less frequently exercised with respect to equipment and inventory, which typically require the creditor to take physical possession of the collateral.

Nevertheless, the Commercial Transactions Act allows creditors to enforce security interests over equipment and inventory through self-help, so long as such enforcement does not involve a disturbance of the peace. Puerto Rico case law has interpreted actions such as breaking locks or forcing entry to repossess collateral as constituting a disturbance of the peace, potentially exposing the creditor to liability for damages. In addition, self-help remedies are also available with respect to assignments of leases and rents, pursuant to which the creditor may notify tenants of the assignment and demand that rental payments be remitted directly to the creditor.

In those cases in which self-help remedies are not available or are impractical, judicial enforcement of security interests over personal property collateral will be required. Judicial enforcement is governed by the Puerto Rico Commercial Transactions Act and generally follows a court supervised process similar in structure to mortgage enforcement proceedings. However, unlike real estate foreclosures, enforcement against personal property collateral does not typically require a formal foreclosure sale process or multiple public auctions. Instead, the court may authorise the seizure, disposition or other enforcement measures with respect to the collateral, depending on its nature, location and the relief requested by the secured creditor.

Foreclosure of an equity pledge is likewise governed by the Puerto Rico Commercial Transactions Act and closely mirrors the enforcement framework set forth in the model UCC. Upon the occurrence of an event of default, a secured creditor holding a pledge over equity interests may choose among several enforcement alternatives, subject to compliance with applicable notice and commercial reasonableness requirements. These alternatives include strict foreclosure, judicial foreclosure or enforcement through a private or public sale of the pledged equity interests.

In a strict foreclosure, the secured creditor accepts the pledged equity interests in full or partial satisfaction of the secured obligations, subject to the consent of the pledgor and, in certain circumstances, the absence of objection from other lienholders. In a judicial foreclosure, the creditor seeks court intervention to foreclose the pledge and determine the disposition of the equity interests. Alternatively, the creditor may pursue enforcement through a private or public sale of the pledged equity interests, provided that the sale is conducted in a commercially reasonable manner and that proper notice is given to the debtor and other interested parties.

In practice, enforcement through private sale is commonly preferred where the pledged equity interests represent ownership of an operating business or a single-purpose entity holding valuable assets, as it affords greater flexibility and control over the timing and structure of the disposition. Regardless of the enforcement method selected, equity pledge foreclosures in Puerto Rico generally follow well-established UCC principles, with courts placing significant emphasis on procedural compliance and commercial reasonableness in evaluating creditor actions.

The enforcement of foreign judgments in Puerto Rico generally requires the initiation of an exequatur proceeding before the Puerto Rico Court of First Instance. Through this process, the local court is asked to recognise and declare enforceable a judgment rendered by a court outside the Commonwealth, whether from another United States jurisdiction or from a foreign country. Puerto Rico courts do not automatically enforce foreign judgments and will not revisit the merits of the underlying dispute, but instead focus on whether the judgment satisfies the requirements for recognition under Puerto Rico law.

In an exequatur proceeding, the party seeking enforcement must typically demonstrate that the foreign court had proper jurisdiction over the parties and the subject matter, that the defendant was afforded due process and adequate notice, and that the judgment is final, valid and enforceable in the jurisdiction where it was rendered. Puerto Rico courts will also consider whether recognition of the judgment would violate public policy or fundamental principles of justice applicable in the Commonwealth.

Judgments rendered by courts of other United States jurisdictions are generally afforded substantial deference and, absent procedural defects or due process concerns, are routinely recognised and enforced. Judgments issued by foreign country courts are subject to a more detailed review, particularly with respect to jurisdiction, service of process, reciprocity and public policy considerations. Defendants may raise limited defences in the exequatur proceeding, but may not relitigate the substantive issues decided by the foreign court.

Once a foreign judgment is recognised through the exequatur process, it becomes enforceable in Puerto Rico in the same manner as a local judgment. The prevailing party may then pursue all available enforcement remedies, including attachment, execution against assets and other collection measures permitted under Puerto Rico law.

Outside of the bankruptcy process, which is governed by the United States Bankruptcy Code (Title 11 of the United States Code), there are no separate rescue or reorganisation procedures under Puerto Rico law. Insolvency proceedings involving Puerto Rico debtors are therefore conducted exclusively under the federal bankruptcy framework. The United States Bankruptcy Code pre-empts Puerto Rico statutory and case law to the extent they relate to insolvency, the collective treatment of creditors and the restructuring or discharge of debt, while local law continues to govern creditors’ rights and enforcement remedies outside of bankruptcy.

Insolvency proceedings involving Puerto Rico debtors are governed by the United States Bankruptcy Code. As a result, the principal insolvency law considerations relevant to debt financings in Puerto Rico are largely consistent with those applicable in other United States jurisdictions, subject to the interaction between federal bankruptcy law and Puerto Rico law governing security interests, priorities and enforcement outside of bankruptcy.

Upon the commencement of a bankruptcy case, lenders’ enforcement rights are generally subject to the automatic stay imposed under the Bankruptcy Code, which temporarily prohibits foreclosure actions, collection efforts and the exercise of remedies against the debtor or its property. Secured creditors retain their liens and security interests during the bankruptcy process, but enforcement is stayed unless relief from the automatic stay is granted by the bankruptcy court. Lenders may seek stay relief where collateral is declining in value, where adequate protection is lacking or where the debtor has no equity in the collateral and the property is not necessary for an effective reorganisation.

Guarantees provided by non-debtor affiliates or sponsors are not automatically stayed unless the guarantor is also a debtor in bankruptcy, although courts may in limited circumstances extend stay protection to non-debtors. Outside of bankruptcy, enforcement of guarantees and security interests continues to be governed by Puerto Rico law.

The Bankruptcy Code provides for the avoidance of certain pre-bankruptcy transfers, including preferential transfers and fraudulent conveyances. Payments made to creditors within the statutory preference period prior to the bankruptcy filing may be subject to avoidance if they enable the creditor to receive more than it would have received in a hypothetical liquidation. In addition, transfers made with actual intent to hinder, delay or defraud creditors, or for less than reasonably equivalent value while the debtor was insolvent, may be subject to claw-back as fraudulent transfers. These avoidance powers apply equally in Puerto Rico and may affect pre-bankruptcy repayments, collateral grants, restructuring or forbearance agreements, guarantees and lien enhancements.

Under the Bankruptcy Code, claims may be equitably subordinated if a creditor has engaged in inequitable conduct that resulted in injury to other creditors or conferred an unfair advantage on the offending creditor. While equitable subordination is applied sparingly and typically requires egregious conduct, it remains a relevant consideration, particularly in cases involving insider lenders, sponsors or affiliates that exercise control over the debtor or participate in transactions that disadvantage other creditors.

The order of payment in insolvency proceedings is governed by the priority scheme established under the Bankruptcy Code. Secured creditors are generally entitled to payment from the proceeds of their collateral, subject to the payment of certain costs and the provision of adequate protection. Administrative expenses of the bankruptcy estate, including post-petition financing and professional fees, typically enjoy priority over pre-petition unsecured claims. Unsecured creditors are paid in accordance with statutory priorities, with equity holders ranking last. Puerto Rico law governing lien validity, perfection and priority remains relevant in determining the extent and enforceability of secured claims within the bankruptcy framework.

Another important consideration for secured creditors within the bankruptcy framework is the use of, and authorisation to use, cash collateral. Creditors holding liens over inventory, accounts receivable, leases and rents, general intangibles, contracts and deposit or securities accounts may request that the bankruptcy court prohibit the debtor from using cash proceeds existing or generated from such collateral without the creditor’s consent. Restrictions on the use of cash collateral often serve as a key leverage point for secured creditors, enabling them to negotiate adequate protection payments, replacement liens or other protections during the pendency of the bankruptcy proceedings, as well as to influence the overall treatment of their claims while the automatic stay remains in effect.

The tax treatment of debt financings in Puerto Rico is influenced by a combination of local tax law and federal United States tax principles, and tax considerations frequently play a role in structuring financing transactions, particularly in cross-border contexts. While Puerto Rico does not impose traditional stamp taxes on loan agreements and/or promissory notes, mortgages and certain related documents are subject to statutory notarial fees and registration fees upon filing in the Registry of the Property, which may represent a material transaction cost in real estate secured financings. Typical documentary stamps and transaction fees will range from 1% to 2% of the mortgage transaction amount.

Interest paid on loans to non-Puerto Rico lenders may be subject to Puerto Rico withholding tax, unless an exemption or reduced rate applies. As a result, lenders and borrowers frequently structure transactions to qualify for available exemptions, including exemptions applicable to certain financial institutions, qualifying lenders or particular categories of indebtedness. The availability of exemptions and the applicable withholding treatment are typically evaluated on a transaction-by-transaction basis and may influence the selection of lending entities, the location of lenders and the overall structure of the financing.

Puerto Rico does not impose thin capitalisation rules in the same manner as certain foreign jurisdictions; however, debt equity characterisation remains a relevant consideration for tax purposes. Transactions involving related party debt, shareholder loans or sponsor financing are commonly reviewed to ensure that the indebtedness is respected as bona fide debt and not recharacterised as equity.

In addition, the forgiveness or cancellation of indebtedness is generally treated as ordinary income under the Puerto Rico Internal Revenue Code, which is a significant consideration for borrowers in distressed, workout or restructuring scenarios. As a result, loan modifications, principal reductions, debt exchanges or negotiated write downs may give rise to material tax liabilities for borrowers at precisely the time when liquidity is most constrained. These potential tax consequences are often a critical factor in structuring workouts and forbearance arrangements and may affect the timing, form and economics of negotiated restructurings.

Puerto Rico tax law does provide certain exceptions and exclusions from the recognition of debt forgiveness as ordinary income, most notably where the borrower is able to demonstrate that it was insolvent at the time the debt was forgiven. Other limited exclusions may apply depending on the nature of the indebtedness, the identity of the lender and the specific structure of the transaction. As a result, tax analysis is typically an integral component of debt restructurings and distressed financings in Puerto Rico, and borrowers frequently co-ordinate closely with tax advisers to mitigate unintended tax consequences and preserve the viability of restructuring solutions.

Regulatory considerations in debt financings in Puerto Rico generally depend on the nature of the lender, the borrower and the underlying business or collateral. Banks, credit unions and other regulated financial institutions are subject to oversight by federal and local regulators, including capital, concentration and underwriting requirements, which may influence credit availability, pricing and structure. These regulatory constraints have become increasingly relevant in larger transactions, and in syndicated financings, where concentration limits and risk management policies often drive deal terms.

Non-bank lenders, private credit funds and alternative financing sources are generally subject to fewer prudential regulatory requirements, which has allowed them to play a growing role in the local credit market. However, depending on the structure of the transaction, licensing, registration or disclosure requirements may apply, particularly in connection with consumer-facing products, equipment financing or specialised lending activities.

Certain industries are subject to sector-specific regulatory regimes that directly affect financing transactions. Borrowers operating in regulated industries such as energy, healthcare, telecommunications, financial services, insurance and gaming may be subject to restrictions on indebtedness, lien creation, change of control provisions or dividend distributions. In such cases, regulatory approvals or notifications may be required in connection with the granting of security interests, the enforcement of remedies or the transfer of ownership interests following a default.

In cross-border transactions, additional considerations may arise from the interaction between Puerto Rico law, US federal law and foreign regulatory regimes. While Puerto Rico is part of the United States for federal law purposes, it is treated as a separate tax jurisdiction, which can create complexity in structuring financings involving mainland US or foreign lenders. As a result, regulatory and tax diligence is often an integral component of debt financings involving Puerto Rico borrowers or assets.

In Puerto Rico, debt finance transactions have several jurisdiction-specific features and cross-border considerations, some of which have been discussed hereinbefore, which are important to address in respect of enforceability, compliance and tax efficiency. Certain financing documents, particularly mortgages over real property, must be notarised and filed and recorded in the Registry of the Property of Puerto Rico in order to be enforceable against the underlying real property, while corporate authority for executing debt instruments must align with the entity’s organisational and corporate documents to avoid challenges to enforceability.

Use of proceeds may be restricted, especially in transactions involving tax-exempt bonds, government-backed loans or related-party financing, which may also be subject to Puerto Rico’s interest deductibility limitations on excessive debt. While Puerto Rico does not require works council consent, collective bargaining agreements or labour obligations may indirectly impact financial restructurings or operational decisions. Cross-border issues include withholding taxes on interest paid to foreign lenders, compliance with US Office of Foreign Assets Control (OFAC) and anti-money laundering rules, and adherence to transfer pricing regulations for related-party debt. Governing law and forum selection clauses are critical for international lenders to ensure enforceability, and certain filings or approvals may be required for financing by municipalities, government-owned entities or regulated banks. Overall, Puerto Rico blends US-style commercial law with civil-law formalities and local tax, labour and regulatory requirements, creating a unique framework that must be carefully navigated in both domestic and cross-border debt transactions.