Who Are The Biggest Losers From The Puerto Rico Bankruptcy

Tyler Durden's picture

Back in 2013, markets tumbled (if briefly) on the news that Detroit would file for bankruptcy, at the time the biggest municipal bankruptcy in US history with over $18 billion in liabilities. Yesterday, algos barely even bothered to look up when Puerto Rico's governor announced that the US Commonwealth would submit Title III (aka bankruptcy) protection, despite a debt load of more than $70 billion, or nearly four times greater than Detroit's.

So does that mean that there are no losers or casualties (metaphorically speaking for now) from the bankruptcy filing? The answer is that in addition to the citizens of Puerto Rico of course, more than half of whom live in poverty and who are about to be crushed by even more austere financial conditions (that said, nobody ever complained when Puerto Rico was raking in the billions in debt), the biggest losers are a handful of hedge and mutual funds, all of whom were attracted by the island's high yields forgetting that yields were high in the first place for a reason.

Here's a list, courtesy of the WSJ:

  • At the top of the pile are plain vanilla mutual funds, which held about $14 billion of Puerto Rico’s outstanding bonds as of March, according to Morningstar Inc. Two fund families, OppenheimerFunds and Franklin Templeton Investments, held most of the debt. About 7% of Franklin’s debt was insured as of mid-March, the WSJ calculates, which also means that 93% was not and will suffer impairments.
  • General Obligation bondholders include: Aurelius Capital Management, Autonomy Capital and Monarch Alternative Capital LP,
  • Sales tax revenue-backed (Cofinas) bondholders: Scoggin Capital Management, GoldenTree Asset Management, Merced Capital, Tilden Park and Whitebox Advisors have held Cofinas.
  • Bonds insurers: roughly $12 billion of the island’s $70 billion in outstanding debt is insured. It will be up to the bond insurers to fill the gap when interest and maturity payments are missed. Insurers backed a wide swath of bonds from Puerto Rico, complicating the island’s ability to prioritize payments. Among the companies with the biggest exposure to Puerto Rico debt include Ambac Financial Group, National Public Finance Guarantee Corporation, Assured Guaranty Ltd. and Financial Guaranty Insurance Company

Some creditors put a positive spin on yesterday's events: one senior bondholder on Wednesday said Puerto Rico’s placement into bankruptcy protection was a positive development because it stayed litigation by competing groups of bondholders and was likely to clear the way toward a settlement.

Unfortunately, optimism may be premature: if Puerto Rico’s record bankruptcy follows the template of other municipal restructurings, general obligation bondholders may be in for a long ride, despite constitutional guarantees on their debt.

As Reuters points out, the island's constitution guarantees the debt of GO, or General Obligation, bondholders, while other debt, known as COFINA, is backed by revenue streams from tax proceeds. But in past bankruptcies, that has not meant much.

In five of six recent public bankruptcies in which the debtor defaulted on bonds, pensioners walked away with full recovery, while bondholders took haircuts, according to data from Moody’s Investors Service. Some case studies:

  • In Harrisburg, Pennsylvania, bondholders took a 25 cents on the dollar haircut
  • In Stockton, California, the haircut was 50 percent.
  • In Detroit, where pensioners suffered losses of about 18 percent, bondholders were slapped with a 75% haircur, taking home just 25 cents on the dollar

“If the market hasn’t taken this dynamic into account by now, you can imagine they will after Puerto Rico, given its enormous scale,” said bankruptcy expert Drew Dawson, a professor at the University of Miami School of Law.

When calculating recoveries there is another potential quirk .

Among Puerto Rico creditors, GO and COFINA debt are viewed as the two safest bets for decent recoveries. In theory, GO holders seemed to have an advantage out of court, where constitutional debt is seen as sacrosanct. Puerto Rico offered a restructuring that favored GO bonds over COFINAs.

But the opposite may be true in bankruptcy court, which prioritizes debt backed by a revenue stream, like COFINA, ahead of unsecured debt. “Bankruptcy totally changes the priority for those two bonds,” said George Schultze, hedge fund manager and head of Schultze Asset Management, which does not hold Puerto Rican debt.

Moody rates PR's GO and COFINA debt on equal footing, forecasting recoveries for both between 65 and 80 cents on the dollar, ahead of debt from Puerto Rican agencies like the Government Development Bank, which it sees as recovering less than 35 cents. “There is no precedent to really resolve which one is the stronger between GO and COFINA,” said Tim Blake, a managing director at Moody’s, noting that Title III was uniquely created under last year’s Puerto Rico rescue law, PROMESA.


Dawson said it is a tough call, but negotiating leverage “seems to have shifted, in the context of bankruptcy, to favor COFINA.”

Furthermore, contrasting statements by lawyers for the two creditor groups give a sense of each side’s confidence in the bankruptcy process.

Susheel Kirpalani, a lawyer for a COFINA investor group, on Wednesday called the filing “sound public policy.” All along, COFINA holders have favored the bankruptcy route.


But Andrew Rosenberg, a lawyer for a GO bond group, said “the economy of Puerto Rico will be put on hold for years” in a bankruptcy.

GO creditors could appeal to the court claiming that the the Title III bankruptcy was filed without meeting are requirements, although that route is unlikely to yield results.

Reuters also notes another key issue that remains in limbo for debt holders is what the island defines as an "essential service." Under Puerto Rico's constitution, it cannot cut repayments to GO creditors except to maintain essential services.

All told, “this will be a field day for litigation, including over who has priority and whether the bankruptcy is even authorized,” said Schultze. “It could even go to the Supreme Court.”

Meanwhile, muni creditor of other distressed territories may be starting to sweat. Just this week, the Pennsylvania Department of Revenue said that April’s tax collections came in $537 million below expectations, or 13.5% below expectations. That means the state’s overall shortfall 10 months through the fiscal year is more than $1 billion. Could Harrisburg, or Philadelphia, be next?

And could Meredith Whitney's forecast of mass municipal defaults - now nearly 7 years old - finally start to materialize?

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wee-weed up's picture

The biggest losers could be the US taxpayers - let's hope Trump tells them to Fuck Off when the Puerto Ricans come for a bailout.

OpTwoMistic's picture

If the fed rushes in then you know there were derivatives.

The_Juggernaut's picture

Biggest winners? Parasite lawyers.

HooRAY4rSIDE's picture

Biggest Losers = Bernardo, Riff, & Tony

Biggest Winner = Officer Krupky

blueberry100's picture

Two weeks from today, my house sells & Im moving into my 2005 Montana MiniVan. being a Nam vet & past 65, I get $70.00

each day, even on the week ends. Going to travel & teach Billiards fro FREE.  Bought a bunch of silver in 2002, only sold a little

in 2011, they said it was going to 70.00.. still waiting LOL.. good luck everyone

Raffie's picture

This will be bad.

Think of the rum shortages that will come and everyone will say - WHY IS THE RUM GONE?

estebanDido's picture

Who is going to tell Wall Street to fuck off? Remember is there is a bail out, which I doubt, it will be to to pay Wall Street. Like always.

lordkoos's picture

Not to jolt anyones navel gazing, but the biggest losers will almost certainly be the Puerto Rican people.

Muppet's picture

@wee-we, "when the Puerto Ricans come for a bailout."


PR already came for a bailout and Paul Ryan has already led and passed a bill providing USA taxpayer backing.    Recall however that Ryan said "a bailout will not be needed as we have established a blue ribbon pabel of experts to guide PR away from default.... therefore, bailouts will never become a reality or need be something US taxpayer have to worry about.  We are backing PR only to ease their rates and lending limits."


Opps.  Thank you Paul Ryan.  We may now all bend over.



Caveman93's picture

So we're back to the final 50 States left to go then? Awesome!

HooRAY4rSIDE's picture

Your math is wrong ~ Take out PR & we're down to 56

BidnessMan's picture

Give Barack a break - the number of US states is not a subject covered in school in Indonesia.

swamp's picture

debt: 70B

population: 3.5M

average per person?


crumbling infastructure, impoverished population, where do ya think the slush fund dumping site money went?




MrSteve's picture

My slide rule math says it is $20K per person.

logicalman's picture

You must be old!

Can't remember the last time I heard mention of the good old slide rule!


headhunt's picture

The cash went to overpaid communist unions, their pal politicians and of course the overpaid communist employees and their fat pensions

Alien 851's picture

Headhunt,  there, it is now up to date.

The cash went to overpaid  unions, their pal politicians and of course the overpaid employees and their fat pensions

Stormtrooper's picture

$20k each.  Pocket change.  Pay up and move on.

I am Jobe's picture

USA should be competing with Greece.Bitchezz will be lining up to selll pussifes of course in the USA, it means nasty diseases or women who are just so stupid can't fuck em 

skinwalker's picture

I say make the population work as toilets for wandering vagrants until the debt is paid off!

Just kidding.

Things get real interesting when some of the real states start going under: NJ, Illinois, maybe even cali.

Rainman's picture

hmmm .. I seem to recall PR was/is 25% of the HY muni bond index.

VWAndy's picture

 No banks were harmed in this clusterfuck.

Tejano's picture

"A field day for litigation"

hooligan2009's picture

the swiss bank, UBS (and CS?) was all over PR like a rash

UBS sold a lot of the Puerto Rico funds, which were mostly concentrated in the debt of the Caribbean island's government. The funds have declined as much as 75 percent from their initial prices from 2008. Losses began in mid-2013 and were linked to a general weakness in municipal bond markets and Puerto Rican debt. UBS is facing trials against hundreds of arbitration claims by investors filed with FINRA (Financial Industry Regulatory Authority) asking for a total of more than $900 million in damages. The bond funds had already landed UBS Puerto Rico in trouble before in 2012.


northern vigor's picture

Awww come on Tyler, if you are going to do Puerto Rician stories, use the picture of the three Puerto Rician women wearing bikinis in a parade. I haven't seen that picture for years.

skinwalker's picture

In my experience, Latina women look great from 14-24 and after that get nastier than hot dogs boiled in bear piss.

Looney Baloney's picture

Women look great from 14-24 and after that get nastier than hot dogs boiled in bear piss.


northern vigor's picture

is that an euphemism for rough sex?

Arrow4Truth's picture

They get that way after they eat their young.

Winston Churchill's picture

Where did they hide their flickknifes ?

Callz d Ballz's picture

Anyone utilizing Act 22 down there currently on this thread?

Countrybunkererd's picture

Not yet for me but i think i am about to.  i will be going there within the next month or three to discuss in detail what i need to do/ NOT do.

Car 54 Where Are U's picture

Backed out in Dec 2015.  Act 22 & 20 both kept changing and tightening the  requirements.  Even at that time there was significant degredation in the general economy, education system, and healthcare.  Infrastructure was a clusterf**k.  Brownouts and not enough reiable bandwith to do trading.   Rents as high or higher than NYC or Miami (at least in San Juan). The clincher for me was when you had to purchase a property rather than rent to qualify.  I could take the 180 days per year on Island.  Better solution for me has been USVI.  Similar program however considerably more flexible.  Now the strikes on general government services will pile up the trash etc very fast.  Running a business can be challenging enough without all the additional regulations imposed in PR.  For me the trade-offs just didn't make sense, even with the 4% corp tax rate.  Very happy on St. Croix!

IndyPat's picture

Puerto Pobre more like it.

DownWithYogaPants's picture

Piada muy buenos.  Tres beans!

headhunt's picture

...and the unions and the leftists they put in office continue to destroy the economies of the world.

A. Boaty's picture

Meredith Whitney's call forced municipalities to kick the can down the road. Can hits wall.

youngman's picture

Yes the first one out gets the best deal...when your the 49th state filing...not so much...

Chupacabra-322's picture

Boricuas are gonna start stabb'n Nigga's pretty soon.

Seasmoke's picture

Just double everyone's property taxes. Forward !!!!

redc1c4's picture

the biggest losers *ought* to be anyone stupid enough to have loaned Puerto Rico money...

instead it will likely be US tax payers... same as always.

Arrow4Truth's picture

That's part of the reason why I quit being a U$ taxpayer.

Muppet's picture

Paul Ryan already led and passed taxpayer backing for PR.  Ryan did say however, default would never actually occur and imperil the US.   Good call. 

peippe's picture

this is so sad-

I'll add them (P.R. Bond "buyers") to my prayer list, 

right along with the pedos & drone operators.

vote_libertarian_party's picture

Losers?  What are those?  I thought all financial markets were now the equivalent of university safe zones where everybody is a winner no matter how many stupid things they do.

Solio's picture

Bank; a paper creation (corporation) made for the extraction of value.

abets54's picture

Where are PR bonds trading now vs pre-announcement?

A. Boaty's picture

Puerto Rico = Rich Port. Looks like not so rich.

PontifexMaximus's picture

puerto rico is as greece: who the hell cares about them?