Puerto Rico announces huge, historic debt restructuring

May 06, 2017, 01:51
Puerto Rico announces huge, historic debt restructuring

Puerto Rico's $70 billion debt crisis has forced it to seek a form of bankruptcy protection in the largest bankruptcy in the history of USA municipal bonds, Gov. Ricardo Rosselló announced Wednesday. Title III, which is similar to the Chapter 9 bankruptcy, allows Puerto Rico and other U.S. territories to restructure their debt under the supervision of a federal judge. Puerto Rico is preparing to cut public employee benefits, increase tax revenue, hike water rates and privatize government operations, among other things. However, the judge will first need approval from the federal control board that was authorized by Congress previous year to oversee the island's finances.

The lawsuits are expected to be among several filed as bondholders seek to recover the money they invested in Puerto Rico government bonds.

The lawsuit comes after the island's government failed to negotiate any deal with bondholders.

Puerto Rico and its federal financial oversight board faced a handful of lawsuits from stakeholders on Tuesday, which could ultimately push the ailing US territory into bankruptcy, and more are expected in the coming days.

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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. Any write-downs also would impact bond insurers Assured Guaranty Ltd., MBIA Inc. and Ambac Financial Group, which have guaranteed billions of dollars of Puerto Rico's bonds.

Puerto Rico's benchmark 2035 general obligation bond rose modestly on Tuesday in light volume, gaining 0.65 point in price to bid 64.75, according to Thomson Reuters data.

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Puerto Rico has filed for bankruptcy and sought relief under a law enacted to help the United States commonwealth restructure its massive debt load, a media report said.

While Detroit's case was resolved in a couple of years, it is unclear how long it will take for Puerto Rico.

The total includes about $74 billion in bond debt and $49 million in unfunded pension obligations.

Puerto Rico's case will be the first ever heard under a federal law for insolvent territories, called Promesa, which was enacted last summer; the Obama administration had warned that a "humanitarian crisis" would ensue if Puerto Rico were not given extraordinary powers to abrogate debt.

Rossello's fiscal plan for the island, approved by the oversight board in March, forecasts Puerto Rico having only $800 million a year to pay debt, less than a quarter of what it owes.

The island has been mired in recession for over 10 years, causing many Puerto Ricans to migrate to the 50 states.

Puerto Rico's Governor Ricardo Rosselló has filed for bankruptcy in federal court.

The U.S. territory's restructuring could ultimately set a precedent for the U.S. municipal bond market, although it's unclear whether it will regain immediate access, said Matt Freund, co-CIO and head of fixed income strategies at asset manager Calamos Investments.

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