Puerto Rico Takes First Steps Toward Bankruptcy-ish Filing

After what has been the slowest of slow-motion train wrecks, Puerto Rico’s federal overseers have finally taken the inevitable first step toward considering the use of bankruptcy-ish proceedings, known as Title III, to allow the island to escape it's $70 billion debt burden. 

Last year Puerto Rico was granted a 1-year temporary stay, courtesy of the so-called Promesa Act passed by Congress, that allowed protection from creditor proceedings in order to allow the debt-burdened island to negotiate a consensual agreement with bondholders.  That said, the stay expires on Monday and the government has struggled to make headway in negotiations with creditors.

With $70 billion of debt outstanding, Puerto Rico’s debt restructuring will be the largest ever for the $3.8 trillion municipal-bond market and is also expected to be among the most complicated as well with the commonwealth’s debt issued by more than a dozen agencies and backed by sometimes competing repayment pledges. 

As Bloomberg notes, the board also took steps to wind down the island's government development bank which was used to finance multiple public projects but also defaulted on debt obligations.

Separately, the board approved winding down Puerto Rico’s government development bank, which financed public works on the island until it defaulted during the crisis, and increasing water rates as part of a plan to steady the Puerto Rico Aqueduct and Sewer Authority. Details of those fiscal proposals haven’t yet been released.


“This will provide a viable path for an orderly process for the Government Development Bank with the least impact for stakeholders involved,” said Elias Sanchez, Governor Ricardo Rossello’s representative on the federal board.

Of course, the shear size of bondholder losses are sure to make the restructuring process quite contentious.  The following $3.5 billion in 8% general obligation notes of 2035 were issued in March 2014 and have pretty much traded in one direction ever since. 



And while GO bonds currently trade hands in the mid-60s, Desmond Lachman of the American Enterprise Institute sees the ultimate recovery for bondholders being much more bleak courtesy of an economy that has been contracting since 2006 and shows few signs of picking up anytime in the near future.

It is difficult to overstate how desperate the present state of the Puerto Rican economy is. In each of the past 10 years, its economy has been contracting, and it is now more than 10-percent smaller than it was in 2006. Over the same period, more than 10 percent of its population has left the island for the mainland and its unemployment rate has risen to over 12 percent of its workforce.


Even before the slew of costly and disruptive creditor lawsuits that will almost surely follow the expiry of the U.S. Congress’ temporary stay on such suits next week, the island’s economic outlook was nothing short of grim. According to the Puerto Rican government’s own 10-year budget plan, which was approved by its Oversight Board, the island’s economy is projected to decline by more than 3 percent a year in 2018 and 2019 and by around 10 percent over the next five years.


In this context, it is striking that in Puerto Rico’s recent 10-year budget plan, which had the approval of its Oversight Board, the island would only make around one quarter of the debt service payments falling due over the next 10 years.

But at least a bunch of lawyers and investment bankers will make out pretty well.