Puerto Rico hit with lawsuit after litigation freeze expires
- Author: Zachary Reyes May 04, 2017,
May 04, 2017, 16:12
Prior to enactment of the legislation, Puerto Rico would have been barred from any bankruptcy filing as a U.S. territory. The announcement marks the biggest bankruptcy-type process ever for the US municipal bond market.
Puerto Rico has over $70 billion in bond debt and $50 billion in pension obligations.
"Given the deficit that we have inherited, it is my responsibility to guarantee the best interests of the Puerto Rican people", Governor Ricardo Rosselló said Wednesday.
Bankruptcy won't be an easy process. The debt is a result of Puerto Rico's use of municipal bonds. They are angry about the bankruptcy filing because they fear now they won't get paid back all the money they are owed. Historically, Puerto Rico was barred from declaring bankruptcy. More than 45 percent of the 3.4 million USA residents on the island live below the poverty line, with the unemployment rate more than double the United States national average.
The island's financial crisis is so bad that Congress installed a Fiscal Oversight Board to call the shots a year ago. The board stopped trying to negotiate with creditors this week and filed for bankruptcy.
"The economy of Puerto Rico will be put on hold for years", said Andrew Rosenberg, adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders.
Last week President Trump suddenly added fuel to those fires, saying on Twitter that there should be no "bailout" for Puerto Rico. He repeated that again in a recent tweet. He said he did not yet have details on the breakdown of those debts.
Puerto Rico is preparing to cut public employee benefits, increase tax revenue, hike water rates and privatize government operations, among other things. The cost of fully servicing that much debt would be about $3.5 million a year, NYT.
At the same time, Puerto Rico's efforts to coax its creditors to agree to concessions have gone nowhere.
Instead, Puerto Rico will petition a judge for relief under a new federal law for insolvent territorial governments, called Promesa. There is no existing body of court precedent for Promesa, but the island's creditors - who range from hedge fund managers to mom-and-pop investors - are bracing for a titanic battle. But he said embracing a bankruptcy-like process could be an option if negotiations fail.
In its filing, Puerto Rico's federal oversight board expressed optimism about the legal wrangling to come.
Spanish-speaking Puerto Rico is one of several U.S. overseas territories with no voting representation in the Congress.
Title III is an in-court debt restructuring process akin to US bankruptcy protection, as Puerto Rico is barred from traditional bankruptcy because it is a USA territory. The U.S. territory set a record in 2014, according to Bloomberg News, by being 181 days late.