As The Puerto Rico Lawsuits Begin "A Bankruptcy Is A When, Not An If"

Tyler Durden's picture

Last July, Puerto Rico defaulted on hundreds of millions in debt, however under the PROMESA federal rescue law put together in the last minute, creditor litigation was put on hold - a kind of deferred debtor protection without the actual bankruptcy. The law was meant to encourage Puerto Rico and its federal financial oversight board to negotiate debt-cutting agreements with creditors. No deals were reached and on midnight of May 1 into Tuesday, the litigation freeze expired, opening the doors for creditors to take Puerto Rico to court, in hopes of blocking the next step in the Puerto Rico restructuring, namely Governor Ricardo Rossello's plan to impose drastic repayment cuts. As a reminder, Puerto Rico defaulted on $1.3 billion of principal owed since the previous governor declared the $70 billion public debt load unpayable in June 2015.

And as expected, on Tuesday Puerto Rico and its federal financial oversight board were flooded with the first lawsuits from stakeholders, with more expected in the coming days, which could ultimately push the insolvent U.S. territory into bankruptcy.  The lawsuits, according to Reuters, include complaints from holders of Puerto Rican sales-tax-backed debt, from general obligation bondholders and from bond insurer Ambac Assurance Corp.

  • The first group, those holding sales-tax backed debt known as the COFINA bondholders, allege that the island's debt-cutting plans violate the U.S. Constitution.
  • The second group, those holding general obligation debt which is guaranteed by the island's constitution, are demanding payment on $242.5 million of debt defaulted upon since July, including damages and interest of more than $102 million.
  • Finally, there is Ambac which insures $2.2 billion of Puerto Rican bonds, and which filed four lawsuits, including two against the island's government and another against U.S. Treasury Secretary Steven Mnuchin, seeking a lien on Puerto Rican rum taxes collected by the U.S. Treasury Department.

"Puerto Rico is no longer shielded from creditors rushing to the courthouse to lay claim to its assets - that includes the beaches, pieces of art, historical furniture and any assets whether they are nailed down or not. The people of Puerto Rico have had enough. The governor and the board have a moral imperative to act immediately" said Rep. Nydia Velazquez, a New York Democrat, who is calling on a federal control board overseeing Puerto Rico's finances to seek a court-supervised debt restructuring similar to Chapter 9.

So with the lawsuits now pouring in, and with $70 billion in debt, a 45% poverty rate and near-insolvent public health and pension systems, the torrent of litigation could force Puerto Rico into a so-called Title III proceeding - an in-court debt-cutting process similar to U.S. bankruptcy. In fact, various experts cited by Reuters, see Title III as inevitable, the only question is when.

"At some point, Puerto Rico might run up against an adverse court ruling it would rather not have," said Keefe Bruyette & Woods analyst Chas Tyson, who follows Puerto Rico.

 

"I continue to think (bankruptcy) is a when, not an if."

Yet while the creditors can finally pursue their contractual rights, they will hardly win many supporters in the court of public opinion, as most of them are hedge funds, and who may have accumulated PR debt at prices below prevailing. For example, the COFINA plaintiffs include such hedge funds like Aurelius, Cyrus Capital and Tilden Park, best known for its founder Josh Birnbaum who in 2010 defended Goldman in the infamous Carl "Shitty Deal" Levin hearing. In a lawsuit filed in federal court in Puerto Rico, they collectively accuse the U.S. commonwealth, Rossello and other officials of "angling to repurpose the tax revenue earmarked to pay COFINA debt, which they say violates the due process clause of the U.S. Constitution."

Further, they ask the court to block Rossello from implementing a blueprint for fiscal turnaround that was approved by the oversight board in March. According to that plan, the island is forecast to only have $800 million a year to pay debt, or less than a quarter of what it owes, implying draconian haircuts for all bondholders.

Among Ambac's lawsuits, two lodged complaints against the PR government, adding as defendants the island's oversight board and the board's seven members.The bond insurer, which may be on the hook should the island default, also aims to block not only the fiscal blueprint, but the filing of any Title III bankruptcy based on that blueprint. The insurer said in one lawsuit that Puerto Rico's oversight board exacerbated the island's abuses by "giving its imprimatur to an ongoing scheme ... that can only be called theft.”

AP puts things into perspective as follows: Puerto Rico could announce a historic, court-supervised restructuring for a portion of its $70 billion debt. By comparison, the U.S. city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest U.S. municipal bankruptcy ever. In fact, Puerto Rico's situation is more dire than Detroit's because the city, in part, had a firm set of rules in bankruptcy court, an option that the U.S. territory doesn't have, said Greg Clark, head of municipal research at Debtwire.

Ahead of the May 1 deadline, the government on Saturday offered to pay 50 cents on the dollar to holders of general obligation and sales-tax bonds backed by Puerto Rico's constitution. Bondholders rejected the offer.

But the biggest wildcard is what happens not so much to the creditors - who will be fine no matter the outcome - but to the ordinary people of Puerto Rico if the island does go bankrupt.  Puerto Rican officials have already imposed austerity measures, including cuts to worker benefits and pensions, and have said debt cuts are needed to spare the island from even more severe cuts to quality of life.

Two years ago we (and German finmin Wolfgang Schauble) joked that Puerto Rico could be the American Greece. Now with a Puerto Rico bankruptcy "only a question of when", it is unfortunately no longer a joke.

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Cognitive Dissonance's picture

Yes...but can PR discharge it's student loan debt when in bankruptcy?

That's the question no one is asking.

/sarc

Creepy_Azz_Crackaah's picture

First, thanks for the click-bait.  It's been WAY too long.

Second, some Dear Leader Obama appointed "judge" will decide that all of Puerto Rico's debts and obligations are null and void because they are of Hispanic heritage and making them pay for what they spend is rayciss.  It says so in the Constitution.

LetThemEatRand's picture

PR will be bailed out because there are bankers who will lose money if it is not.  Just watch.

JackT's picture

Agree on the bailout. First in wins. Once the states start to go then second and third have a good chance but the fourth, fifth...?

MoreFreedom's picture

I'll bet there are bankers holding all different classes of debt, some backed by the full faith and credit of PR (which include all those hedge funds) and others (all the PR government worker pensions, and lots of Puerto Ricans who hold debt as well - sold as a good investment, which are inferior to better classes of debt). And then there are the bankers who are invested in the credit insurer.

Philo Beddoe's picture

Clicked thinking there would be more pictures. Nope. Adios. 

Gead's picture

did the same - clickbait does tend to get me too.  The pic was from 2013:

https://nycparadelife.files.wordpress.com/2013/06/puerto-rican-parade-20...

there, fixed it.

Creepy_Azz_Crackaah's picture

Oh, GAWD!!!  That closeup of them is nasty.  The clickbait needs more work.

booboo's picture

Good God man, after 21 the girls grow titanic asses and mustaches.

radio man's picture

The road to hell is paved with what? Oh hell, this is too perverse even for my jaded imagination.

Jtrillian's picture

The GREATER DEPRESSION will be led by a tsunami of defaults.  PR is just one of MANY!!!

radio man's picture

So was it Harry Dent or George Soros who "shorted" PR? Let the stink storm commence.

Buck Johnson's picture

Exactly.  The US can't really bailout PR because politicians with states in trouble (most of them if not all) would want to be bailed out also.  If the federal govt. want to break rules in regard to PR and bailing out essentially one state aka PR then the politicians will want their bail out for their states also.  That is why the fed won't do it.

 

 

Whodathunkit's picture

How can anyone live in an island paradise with access to Walmart and Costco not be solvent? A FUcKING tragedy

booboo's picture

75% on the island is on the .gov dole, you do the math.

Buck Johnson's picture

Exactly, most of the island is living off of the govt. dole and/or work for govt..  This is going to end badly for them.

 

1.21 jigawatts's picture

PR should have their Jews call the Jews at the Fed

and ask them if they can hit the PRINT button.

yogibear's picture

They can have our Fed, they like to print. 

Conax's picture

They shall be forced to repossess Puerto Rico.

It could be a new tv show, Repo Puerto Rico.

Dog and his maul could go down there and steal back airplanes and stuff.

moorewasthebestbond's picture

"Full faith and credit"

 

Bailout in 3...2...1

Secret Weapon's picture

I only clicked this link because of the hot PR chick with the belly button the size of a charcoal briquette.

847328_3527's picture

I dated a Puerto Rican girl one time. Very warm family and superb looking girl. The upper and middle classes of PRs are really nice people. Sadly, most of the ones who migrate to the USA are the driftwood and quasi-criminals.

booboo's picture

"I dated a Puerto Rican girl one time."

I guess you must have got a peak of the mother and her bubble butt.

847328_3527's picture

Actually, the lite skinned Puerto Ricans are more like people from Spain and most stay pretty thin, unlike Mexican girls whom for some reason might look fantastic when they are teens but gradually gain a huUUUUUUUUUUUUge amount of weight. Everyone in her family was thin and most whiter then me with a sun tan.

silverer's picture

I always said those bonds were a great deal. Take out a second mortgage I said. And buy Anglo Spanish shares while you're at it. Meet you later for lunch, Baron Danglars.

all-priced-in's picture

Get your gonorrhea - get your HIV - get your chlamydia - get your crotch rot of all types -  bring it home to your wife and kids no extra charge!!

 

Come to Puerto Rico - it is an itch you will scratch for the rest of your life!

 

No amount of US federal money will cure this disease.

 

 

 

Grandad Grumps's picture

Banruptcy is good for all. It means FREEDOM from the banks.

Khan Bodin's picture

How hard could it be to digitally conjure or print whatever amount of currency necessary for Poerto Rico to continue unbunkrupt?

itstippy's picture

It wouldn't be hard at all.  Just declare the place "strategically vital to National Security" or some such shit and tack it on to the defense budget.

Joebloinvestor's picture

Watch them play the race card.

Duc888's picture

 

 

Does the fact that the IRS being registered in PR have any effect on that agency should PR go tits up? 

spanish inquisition's picture

Puerto RICO.... No bankers will be harmed during these negotiations...

gregga777's picture

Fuck the banking gangsters with wire brushes and then send them to the guillotines to alleviate their suffering.

 

 

blue51's picture

Where can I see that mexican guy with the missing teeth  laughing , with the subtitles about how saps bought the bonds ?

wisehiney's picture

The Pirates and the Patriots, and the most excellent Black Freedmen, and the French and Spanish ancestors.

And the superstitious old free slaves with their super funky voodoo.

And the blends of their architecture.

And their cooking.

And their music.

But mostly their attitude.

In the old vieux carre.

So sweet to see and inhale when the magnolias bloom.

And the sweet earthy scent of the river bottom and the swamps.

And the Wilderness Patriots who fired their guns and ran the Mightiest Army in the World through the briars and the brambles.

You know they ran so hard the hounds couldn't catch them.

But that old Carribean mystique.

Would make it time for a cool breeze.

 

gregga777's picture

The United States CONgress should pass a law excluding hedge funds from recovering so much as one cent in any bankruptcy negotiations or court ordered litigation.  The hedge fund scumbags have been subsidized by the Goldman Sachs Feral Reserve Systems free money for billionaires program for decades.  They don't deserve to recover anything from anyone in a bankruptcy proceeding.  Fuck the hedge fund scumbags with a wire brush and then send them to the guillotines to alleviate their suffering.

gregga777's picture

AMBAC, as a sophisticated party, does not deserve to recover anything from Puerto Rico.  AMBAC should have known that there was no way Puerto Rico could ever pay back their debt.  The people at AMBAC are your typical Intellectual Yet Idiot class ruling morons.  Any person on the street could have told them that Puerto Rico would default on $70 BILLION in debt.  But, the IYI classes ruling morons were picking up pennies in front of a steamroller by insuring Puerto Rico's debt.  Now AMBAC richly deserves to be rolled flat by that steamroller.  Fuck them and the hedge funds.  

soyungato's picture

A fifth referandum is to be held next month to decide if PR will become a state of the US or be independent. I suspect the PR natives will vote for full statehood, unfortunately.

Stormtrooper's picture

Statehood would be to their advantage because, as a sovereign state, they could just default on their debts(numerous states have done this in the past).  The Feds and their court system, as the agent of the states,  would no longer have any legal control over the financial direction of Puerto Rico.  However, they could still provide a huge transfer of aid to PR so the American taxpayer would still get screwed.

Hey PR, vote to become your own nation so that we don't have to pay for your past debts.

gallistic's picture

You clearly do not know a thing about the history behind all this.

It all started with a USAmerican colonizing invasion in 1898.

It continued with violent repression and extermination of everything Puerto Rican, and every person and organization who, as you propose, wanted "to become their own nation" by the US.

The colonial status was cemented in 1952 with a farcial "Free Associated State" devised and promulgated by the US to avoid condemnation in the eyes of the world and UN decolonization council.

So here we are...

Rusty Shorts's picture

1898 huh, isn't that when the US invaded Cuba? BTW, I heard that the IRS is based in PR?

darteaus's picture

The bankruptcy has already happened, the recognition is what's happening.

Sonny Brakes's picture

How is it that when an economy collapses the debt doesn't collapse with it? Isn't debt the major cause of an economic collapse. Am I the only one who sees this straight line connection between the two? Lenders should be made to suffer along with the economy if they are the ones allowing the bubble to grow out of control in the first place.

As an analogy, our addictions are there to try and kill us, when they success in killing us our addiction dies along with us. Debt seems to be something that just can't be killed. I suppose that there'll always be a someone equally vulnerable to addiction to replace those that do die. Some dealers have no qualms watching their clients die. I can only counsel people to not assume debt if they can help it.

gallistic's picture

Not to worry folks. This thing will be solved in a jiffy.

Natalie Jaresko, sub-par transnational capital mercenary,  failed money manager, IMF stooge, US.gov hack, all-around scum of the earth, recent savior of Ukraine's finances, and many, many other things has arrived on the island to take over the Federal Fiscal Control Board of Puerto Rico.

Although she is illegitimate and unelected, right now she is more powerful than the head of state.

See how that works?

While the Island is subjected to severe austerity measures and massive neoliberal privatization in order to "restructure" its economy and pay its 72 billion dollar debt to her masters, Jaresko will making $625,000 a year, with her true compensation package greatly exceeding that. It includes traveling, moving, security costs, vehicles, chauffeur, "benefits", insider sweetheart deals, and any and all unnamed expenses covered by the Puerto Rican government.

The eagle has landed; all is well...

Herdee's picture

Legalize Cannabis and send it to the mainland.