Puerto Rico announces historic debt restructuring in court
- Author: Zachary Reyes May 04, 2017,
May 04, 2017, 16:29
But "unlike Detroit, there isn't billions of unencumbered artwork to fund a restructuring" in Puerto Rico, said David Tawil, whose fund, Maglan Capital, held Puerto Rico general obligation debt but has since sold it.
The Petition follows unsuccessful negotiations with bondholders regarding the Commonwealth's massive debt load that ended with a series of legal actions filed against the Commonwealth and others initiated the moment the legal stay provisions of PROMESA expired on May 1, 2017. The governor issued a 10-year spending plan that earmarked $800 million a year to pay interest and principal on bond debt, a fraction of the $35 billion due in such payments over the next decade.
One proposal for partial repayment of the debt was rejected over the weekend. Puerto Rico already faced about a dozen lawsuits before the litigation freeze was implemented as part of a rescue package that U.S. Congress approved a year ago.
Puerto Rico is preparing to cut public employee benefits, increase tax revenue, hike water rates and privatize government operations, among other things.
"It is my wish that the Government's Title III processes accelerate the negotiation process by bringing the greatest possible consensus", the governor said in the statement, which was in Spanish.
The debt was born out of a 25-year economic disaster that left the territory running a deficit year after year, taking out loans just to keep the lights on. Puerto Rico was authorized to take this legal route under a restructuring plan adopted by Congress past year. "It could mean everything from slightly higher taxes to. modest adjustments to noncritical services.to concessions by bondholders". Austerity measures meant residents of Puerto Rico - who are US citizens - experienced slashes in government services.
Puerto Rico and its agencies owe $73 billion to creditors, dwarfing the roughly $18 billion owed by the city of Detroit when it entered what was previously the largest municipal bankruptcy in 2013.
In June 2016, Congress passed a law, PROMESA, that created a special oversight board to tackle Puerto Rico's debt problem.
With its creditors at its heels and its coffers depleted, Puerto Rico sought what is essentially bankruptcy relief in federal court on Wednesday, the first time in history that an American state or territory had taken the extraordinary measure. He and Gov. Ricardo Rossello stressed that despite activating a process to restructure a portion of Puerto Rico's debt in court, they are still pursuing talks with creditors. But the underlying principles are the same.
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. This practice led to a rapid accumulation of debt and Puerto Rico's current debt crisis.
The other option has always been to strike a deal without involving the courts.
It is unclear at this stage how much Puerto Rico's creditors can expect to recover.