Puerto Rico hit with 1st lawsuit from bondholders

Anita Tucker
May 6, 2017

Puerto Rico's financial oversight board on Wednesday filed for a form of bankruptcy protection under last year's federal rescue law known as PROMESA, touching off the biggest bankruptcy in the history of the US municipal debt market.

But the governor remains in a hard position, trying to balance fiscal belt-tightening with the demands of residents and placating the federal oversight board while campaigning for USA statehood ahead of a plebiscite on Puerto Rico's political status.

The financial crisis that has caused Puerto Rico's current problems has been decades in the making - and much of it is attributable to seven decades of US policy that gave with one hand while taking away with the other. Rather, Congress passed a law last year specifically to deal with Puerto Rico's debt problem, which has been simmering for years. Given the size of the debt, it would be the largest such insolvency in US history, far outstripping Detroit's $18 billion restructuring in 2013.

He said it was the right path for protecting Puerto Rico's residents and the interests of its creditors after a moratorium protecting the Caribbean island from creditor litigation expired on Monday. The judge will ultimately decide how and which Puerto Rico assets will be distributed to bondholders.

Today, Title III may be all that stands between order and the kind of economic chaos suffered by the people of Germany during the Weimar period following World War I. Understandably, investors who are affected by the crisis are greatly concerned about what will happen next.

"We have sustained our position to negotiate in good faith, but before the current scenario, we choose to protect our people, " Puerto Rico Governor Ricardo Rossello said in a tweet Wednesday.

Puerto Rico's collapse also shows the pressure than can emerge when retirement systems run out of cash.

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As The Wall Street Journal reports, Puerto Rico will now "face off against angry hedge funds, mutual funds and bond insurers in the court-supervised proceeding known as Title III, a legal mechanism created by Congress to restructure debts by force if negotiations broke down".

The fiscal turnaround blueprint has been the bane of island creditors, forecasting that Puerto Rico will have only $800 million a year to pay its debt, less than a quarter of what it owes, auguring big haircuts for all bondholders.

The island said in a May 3 court filing that is restructuring its debt as its economic and financial crisis reaches "a breaking point".

An earlier version of this article misstated the annual cost of fully servicing Puerto Rico's $73 billion in bond debt. Nor did it have a big effect on Puerto Rico bonds: a commonwealth general obligation with an 8 percent coupon, one of the island's most-actively traded securities, changed hands for an average of 65.2 cents on the dollar Thursday, up from 64.7 cents on Tuesday, ahead of the court filing.

Soto's 9th District includes the largest Puerto Rican population in Central Florida, many of them who have moved to the area to find work and many more who still have family on the island.

The decision to seek federal protection means that any lawsuits that have been filed will be stopped and a restructuring plan will be made.

Other reports by My Hot News

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