Puerto Rico announces historic debt restructuring in court

Puerto Rico files for $70 billion municipal bankruptcy

Unlike states, Puerto Rico is not allowed to restructure its debt under Chapter 9 bankruptcy.

The governor of Puerto Rico announced Wednesday that the United States territory would seek a form of bankruptcy protection to restructure its $70 billion debt, the largest municipal restructuring in U.S. history.

"The government's liquidity and insolvency problems are enormous", said José Carrión, the chairman of the board that's overseeing the territory's debt restructuring. The outcome of its case could help determine where and how the deep financial troubles of certain states, such as IL, are resolved, said NYT.

The move, announced by the governor and then followed by a filing in USA court in San Juan, came after he and his predecessor both failed to persuade the island's major creditors to accept less than they're owed and the government faced an onslaught of new lawsuits stemming from a series of defaults.

"They're going to need them again at some point", he said.

On paper, it does not include US$17 billion of sales tax-backed debt, known as COFINA debt, or debt from other agencies. The company said it also has been forced to pay more than $52 million in insurance claims as a result of ongoing defaults by Puerto Rico's government.

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

Puerto Rican officials triggered the bankruptcy-like process after declaring they could not agree to the massive cuts in spending and new taxes demanded by investors.

The mountain of debt has left Puerto Rico struggling and the island - a former Spanish colony of 3.5 million and a USA territory for more than a century - has several times failed to make payments. This is a debt restructuring plan that is carried out under the auspices of the court.

The newest suits come after the administration of Gov. Ricardo Rossello failed to negotiate any deal with bondholders after the May 1 deadline of the litigation freeze.

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Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court. "A long and drawn-out battle with creditors will be catastrophic for Puerto Rico and its people", he said.

Rossello sent a letter to the Financial Oversight and Management Board on Tuesday, saying he hopes the Title III proceedings will "accelerate the negotiation process, leading to as much creditor consensus where possible and achieving where necessary a prompt and efficient judicial resolution of any issues or disputes". The judge will ultimately decide how and which Puerto Rico assets will be distributed to bondholders.

The in-court debt restructuring process helps avoid a potentially messy legal battle with creditors.

Technically, the Title III procedure is not a bankruptcy, as Puerto Rico - because of its unique political status - is ineligible for protection under Chapter 9 of the U.S. Bankruptcy Code.

The events in Puerto Rico may have more immediate relevance to the U.S. Virgin Islands, its smaller Caribbean neighbor. Under the Jones-Shaforth Act of 1917, residents in the USA and other US territories can invest in most Puerto Rican bonds without paying interest on the income.

The phasing out in 2006 of Internal Revenue Service tax incentives offered to US companies operating on the island also hurt because firms moved elsewhere, resulting in job losses. "They just can not do that without the consent of the board". "It is time for the government and the creditors to move forward in restructuring the public debt", she said.

The island has been mired in recession for over 10 years, causing many Puerto Ricans to migrate to the 50 states. The crisis has prompted almost 450,000 Puerto Ricans to leave the island for the US mainland in the past decade. It would also make substantial cuts to public employee benefits and raise fees for services for the 3.4 million people living on the island.

Rossello's petition was approved quickly by a federal board and now moves to the Supreme Court to designate a bankruptcy judge to handle the case, explained NYT.

However, he warned that the process will further spook the type of investors that Puerto Rico's economy needs as it prepares to implement several austerity measures. "I will support all actions Congress can take to guarantee fair treatment for the people of Puerto Rico, and give them the tools to build a better future". This legislation was passed in Congress and signed into law by President Obama previous year. "We can not keep stretching this chewing gum further".

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