Puerto Rico heads to court for historic debt restructuring
Puerto Rico's governor on Wednesday announced a historic restructuring of a portion of the United States territory's US$73 billion debt through the courts after negotiations with bondholders failed.
The announcement marks the biggest bankruptcy-type process ever for the US municipal bond market.
Governor Ricardo Rossello said that a federal control board overseeing the island's finances agreed with his request late Tuesday to put certain debts before a court.
"We're going to protect our people," he said hours after the US territory was hit with multiple lawsuits from creditors seeking to recuperate the millions of dollars they invested in bonds issued by Puerto Rico's government, which has declared several defaults amid a 10-year recession.
Rossello said one of the lawsuits sought to claim all revenues generated by the island's Treasury Department for bondholders.
"I'm not going to allow that to happen," he said.
Rossello said the debts of certain agencies will be restructured in court, while others will be resolved through ongoing negotiations with bondholders. He said he did not yet have details on the breakdown of those debts. The island's Electric Power Authority has some US$9 billion of debt, the Aqueducts and Sewer Authority has roughly US$5 billion of debt and the Highways and Transportation Authority has around US$7 billion of debt.
Overall, Puerto Rico is facing US$73 billion in debt. By comparison, the US city of Detroit had US$9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest US municipal bankruptcy ever.
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. A fiscal plan for Puerto Rico sets aside US$800 million a year for debt payments, a fraction of the US$35 billion due in interest and payments over the next decade.
A federal district court judge will now be in charge of the restructuring. Bondholders cannot challenge Rossello's decision until 120 days from now.
Elias Sanchez, the governor's representative to the board, criticised creditors for filing lawsuits even as the governor continued to hold what he called good-faith negotiations after a litigation freeze expired after May 1.
"When a line is crossed, the government has to act in favour of the people of Puerto Rico."
A group representing some of those holding the US$16-billion worth of general obligation bonds accused the board of sabotaging consensual negotiations and forcing Puerto Rico into bankruptcy.
"The economy of Puerto Rico will be put on hold for years," said Andrew Rosenberg, adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders. "Make no mistake: The board has chosen to turn Puerto Rico into the next Argentina."
Board Chairman Jose Carrion did not immediately address those comments, but said in an earlier statement that while the bankruptcy-like process is needed to offset lawsuits, consensual negotiations are still preferable and that the board will pursue those with willing creditors.
"The government's liquidity and solvency problems are massive and Title III has now become necessary to protect the people of Puerto Rico and avoid further negative impact on the economy from a flurry of litigation and continued uncertainty," he said, referring to the name of the bankruptcy-like process.
In the next couple of days, the chief justice of the US Supreme Court is expected to appoint a federal district court judge to oversee Puerto Rico's case, he said. Meanwhile, the government will continue to talk to creditors and seek a stay on the nearly two dozen lawsuits that the US territory faces.
Sanchez noted that unlike a regular bankruptcy in the US mainland, a judge cannot unilaterally seize any of Puerto Rico's assets and turn them over to bondholders.
"The courts cannot say, 'We're going to give you the Puerto Rico coliseum, or these properties from the Land Authority," he said. "They just cannot do that without the consent of the board."