Puerto Rico files for bankruptcy protection under special law

The oversight board was empowered under legislation known as the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, to submit a plan to a court with the power to impose a settlement.

SAN JUAN, Puerto Rico (AP) — Bondholders are taking action against Puerto Rico after a freeze on litigation that protected the USA territory from lawsuits expired amid an economic crisis.

If that's the case, Puerto Rico's bankruptcy would be almost five times bigger than Detroit's, which set a record in 2013.

The move comes a day after several major creditors sued the US territory and its Governor Ricardo Rossello over defaults on the island's $70 billion in bonds. While the USVI's overall tax-supported debt at $2 billion is much lower than Puerto Rico's $53 billion in tax-supported debt, per capita debt is about a third higher: $19,000 in the USVI compared with $12,000 for Puerto Rico.

In addition to its debt, Puerto Rico is facing a 45 percent poverty rate, a shrinking population and unemployment more than twice the USA average.

The process that Puerto Rico has undertaken is a prelude to bankruptcy, but in this case it is tailored for governments. Puerto Rico is not technically a municipality and therefore isn't covered by US bankruptcy law under Chapter 9, but a federal oversight board was created by a bill passed in Congress under President Barack Obama last June that grants the commonwealth bankruptcy-like protections. Under Title III, the manner in which the case goes forward will be under the control of a U.S. District Judge, appointed by Chief Justice John Roberts, rather than a bankruptcy judge.

A legal stay protecting Puerto Rico from lawsuits expired Monday night without standstill agreements with creditors in place.

The prices of Puerto Rico's major bonds were little changed after the announcement.

"Title III was especially compelled by the commonwealth's need to restructure $49 billion of pension liabilities", the oversight board said in Wednesday's filing.

The decision to resolve a portion of the debt in court is the largest effort ever made by a USA government to shield itself from creditors. The city was able to reach an agreed debt restructuring with stakeholders, in part by soliciting huge contributions from philanthropic foundations so it did not need to sell the city's art collection. Unless negotiations result in a consensual.

In a statement, Jose Carrion, the chairman of the Promesa-established Fiscal Oversight Board (JSF) that filed for the bankruptcy proceedings at the request of Puerto Rican Governor Ricky Rossello's administration, said the entity determined that the measure was necessary and appropriate. The board signaled in negotiations this month it wouldn't consider paying creditors more than the plan allowed, according to people familiar with the matter.

Rossello said negotiations with bondholders had failed, forcing the government to seek relief through a bankruptcy-like move available under Title III of a federal law called Promesa.

The bankruptcy process is a "positive step", says Ted Hampton, an analyst at Moody's Investors Service.

Creditors called it a slap in the face, saying the board wasn't trying in good faith to reach a consensus and avoid litigation.

  • Zachary Reyes