Puerto Rico announces huge, historic debt restructuring


Puerto Rico's congressionally mandated PROMESA financial oversight board filed for Title III bankruptcy-type protection from creditors in the United States Court for the District of Puerto Rico in the early morning of May 3. The cost of fully servicing that much debt would be about $3.5 million a year, NYT.

Ricardo Rosselló said Wednesday morning that the start of a Title III bankruptcy process for Puerto Rico was imminent.

Chairman of the Oversight Board José Carrión said the filing was made to "provide a method for the Commonwealth and its instrumentalities to achieve fiscal responsibility and access to the capital markets, " according to a press release.

Title III incorporates features of chapter 9, the section of the US bankruptcy code covering insolvent municipal entities.

Midnight, from Monday into Tuesday, marked the end of a freeze on creditor litigation under last year's federal rescue law known as PROMESA, created to encourage Puerto Rico and the oversight board to negotiate debt-cutting agreements with creditors. Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is a specific statutory vehicle that allows Puerto Rico and other US territories to restructure their debt.

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"That things are starting out in such a highly adversarial way strongly suggests this will be a long and contentious journey for Puerto Rico", said Matt Fabian, a partner at Municipal Market Analytics who closely tracks activity in the municipal bond market. The Commonwealth held several meetings with creditor representatives to come to an agreement.

"We're going to protect our people", the governor said hours after the USA territory was hit with multiple lawsuits from creditors seeking to recuperate the millions of dollars they invested in bonds issued by Puerto Rico's government, which has declared several defaults amid a 10-year recession.

In a record-setting move, Puerto Rico has filed for a form of bankruptcy protection that puts part of its monumental $70 billion debt in the hands of a federal judge.

Title III can be resorted to when talks aimed at reaching a negotiated solution between Puerto Ricos government and its creditors have been exhausted.

The bankruptcy process is a "positive step", says Ted Hampton, an analyst at Moody's Investors Service. "Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina". In 1942, the Franklin Roosevelt Administration instituted "Operation Bootstrap", with the goal of transitioning Puerto Rico's largely agrarian economy - seen at the time as unsustainable - into an industrial one.

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The territory's population has dropped by 10 percent since 2007.

While many of Puerto Rico's circumstances are unique, its case is also a warning sign for many American states and municipalities - such as IL and Philadelphia - that are facing some of the same strains, including rising pension costs, crumbling infrastructure, departing taxpayers and credit downgrades that make it more expensive to raise money.

Puerto Rico has approximately $74 billion of bond debt and $48 billion of unfunded pension liabilities. Puerto Rico has defaulted on $1.3 billion in principal payments since August 2015, roughly a month after the previous governor declared that the island's public debt was unpayable and called for a restructuring.

Filing a Title III bankruptcy would protect the island from lawsuits and give it more legal sway to impose the kinds of contractual alterations the plaintiffs are accusing it of undertaking illegally out of court. The judge will ultimately decide how and which Puerto Rico assets will be distributed to bondholders.

Negotiations revolved around a board-approved fiscal plan that allocates about $787 million a year to creditors for the next decade, less than a quarter of what they are owed.

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