STUMP » Articles » Here We Go: Puerto Rico Tries for Legal Federal Bankruptcy » 3 May 2017, 13:01

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Here We Go: Puerto Rico Tries for Legal Federal Bankruptcy  


3 May 2017, 13:01

Well, some kind of bankruptcy, that is, a legal process whereby they get to “restructure” (aka write down) some of their debt.

They were obviously already de facto bankrupt, and have been for years. This is just to start a legal process.

Puerto Rico Declares a Form of Bankruptcy:

The governor of Puerto Rico, Ricardo Rosselló, said he would move the island’s debt crisis into federal bankruptcy court, making it the largest government to seek refuge from its creditors in United States history.

Puerto Rico has roughly $73 billion of bond debt, and nearly $50 billion of unfunded pension obligations to restructure.

The case will not be formally called bankruptcy, since Puerto Rico is barred from using Chapter 9, the usual chapter used by insolvent local governments. It will instead petition for relief under a new federal law for insolvent territorial governments, called Promesa.

Puerto Rico requests bankruptcy protection for public debt

Puerto Rico’s financial oversight board on Wednesday filed for a form of bankruptcy protection under last year’s federal rescue law known as PROMESA, touching off the biggest bankruptcy in the history of the U.S. municipal debt market.

The move comes a day after several major creditors sued the U.S. territory and its Governor Ricardo Rossello over defaults on the island’s $70 billion in bonds.

The request came under Title III of the PROMESA law is an in-court debt restructuring process akin to U.S. bankruptcy protection, as Puerto Rico is barred from traditional bankruptcy because it is a U.S. territory. The case was filed in U.S. District Court in Puerto Rico.

The process will give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook investors and prolong the island’s lack of access to debt markets.


Rossello’s fiscal plan for the island, approved by the oversight board in March, forecasts Puerto Rico having only $800 million a year to pay debt, less than a quarter of what it owes. The low figure alienated creditors, and negotiations toward a restructuring deal have foundered.

Of course, Cate Long has been tweeting (and re-tweeting) this up:

Note some of those links are to primary documents.


Lawsuits Start Flying in Puerto Rico as Litigation Stay Ends

That didn’t take long.

The day after a provision of Promesa that protected Puerto Rico from lawsuits expired, bondholders have launched suits. Senior Cofina bondholders filed suit Tueday and Ambac Financial Group (AMBC) did as well.

Next step? Puerto Rico is likely to file for bankruptcy-like protection known as Title 3, says John Miller, who manages the municipal bond group at Nuveen Investments. He describes the bondholders and financial control board as “far apart” in agreeing to any kind of debt renegotiation.

The financial control board and Puerto Rico’s government agreed to a financial plan that could allow for recovery of an average of just 24 cents per dollar of debt — although actual recovery rates will depend on the terms of the individual bonds. The general obligation and Cofina bonds should be among the highest priority. They still trade above 70 cents per dollar of par value. They rose Monday as the Commonwealth got Medicaid funding from Congress.

I guess that was an easy prediction.

More: Hedge Funds That Flocked to Puerto Rico Bonds Face Long Road Out

Debt restructuring likely to wind up in court, analysts say
Bonds trade below recovery rates suggested by Moody’s ratings

Hedge funds first starting buying Puerto Rico debt in the summer of 2013 because they liked what they saw: A government that was paying high, tax-free yields that couldn’t go bankrupt.

Nearly four years later, the Caribbean island has defaulted on most of its bonds and Governor Ricardo Rossello, who took office in January, says it can pay less than a quarter of what’s owed over the next decade, assuming he can slash the budget and increase the island’s revenue. Some of the securities are trading near record lows. And, thanks to the U.S. Congress, Puerto Rico and its federal overseers can use bankruptcy-like proceedings to have some of its $70 billion debt written off in court, something investors once assumed it couldn’t ever do.

“It’s been a really long trade,” said David Tawil, president and co-founder of Maglan Capital LP, who bought Puerto Rico bonds in 2013 but has since sold them. “I don’t think when they first got into this they bargained for this type of length of trade. There’s been a lot more twists and turns and not to any substantial progress point between then and now.”

Puerto Rico Bondholders Reject Island’s Restructuring Offer

GOs would receive as much as 77 cents on the dollar in plan
Sales-tax bonds would get as much as 58 cents on the dollar
Puerto Rico bondholders rejected Governor Ricardo Rossello’s debt-restructuring proposal days before a May 1 deadline to craft a deal or face a potential wave of creditor lawsuits.

The Caribbean island is offering holders of its general-obligation bonds as much as 77 cents on the dollar while proposing as much as 58 cents on the dollar for its sales-tax debt, according to the commonwealth’s latest creditor proposal, dated April 24 and posted at midnight Saturday on the Municipal Securities Rulemaking Board’s website, called EMMA.

The cash-strapped commonwealth is negotiating with its investors and has until Monday night to reach a restructuring accord, otherwise a legal stay that shields the island from creditor lawsuits expires. Absent a restructuring deal or an agreement to suspend legal claims, Puerto Rico may face potentially adverse rulings on cases already filed, as well as new legal challenges.

Puerto Rico is offering to repay general-obligation bondholders as much as $10.25 billion of the $13.2 billion it owes, according to the proposal. The island also would repay as much as $10.2 billion of $17.6 billion of sales tax bonds.

Investors would exchange their existing securities for two different types of debt: tax-exempt senior bonds with a constitutional priority maturing in 30 years, and cash-flow bonds that would be repaid after the senior securities, depending on the commonwealth’s liquidity.

That structure gives general-obligation bondholders a recovery range of as little as 52 percent — if Puerto Rico only repays the senior bonds — and as much as 77 percent if it repays both the senior debt and the cash-flow securities. The recovery range for sales-tax securities is 39 percent to 58 percent.

Perhaps they’ll find out what they’ll get under a bankruptcy.

Puerto Rico’s Broken Promise

A federal stay barring Puerto Rico’s creditors from taking legal action against the commonwealth and most of its entities for nonpayment of debt expires on Tuesday.

The stay was ordered under the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa, passed by Congress in June 2016. It was designed to give a cash-strapped Puerto Rico time to come up with a viable long-term fiscal plan, and to work with creditors toward a voluntary debt restructuring. But as we go to press both sides appear to be far apart.

The expiration of the stay could allow Puerto Rico’s newly elected Gov. Ricardo Rosselló to seek bankruptcy protection for much of that debt, as provided for under Promesa. Yet creditors won’t go down without a fight.
Bankruptcy was not an option for Puerto Rico or its municipal corporations when together they issued the $73 billion of debt that is now outstanding. A long history of willingness to pay back creditors had given Puerto Rico a high credit rating and, together with its triple-tax-exempt status, helped it attract capital at low rates.

It also made it too easy for the political class to pile up unproductive debt. In June 2015 then-governor Alejandro García Padilla announced that his government was running out of money and that he wanted Washington to step in and allow Puerto Rico to declare bankruptcy. Yet while the governor was crying poor, he was paying big money for “consultants.” For example, in 2015 Puerto Rico initiated an 18-month, $615,000 contract with the politically connected Podesta Group in Washington. Curious.

To paraphrase Bartleby the Scrivener, Mr. García Padilla seemed to “prefer not to” service Puerto Rico’s bond obligations. A scare campaign about a looming humanitarian crisis followed. Conveniently, it was a U.S. election year and that’s how Promesa was born.

Promesa was born to begin with so as to prevent an actual bankruptcy.

And yet… less than a year later… here we are.


A Year After PROMESA, Congress Isn’t Planning Much to Help Puerto Rico

Last June, members of Congress wrestled with politically sensitive legislation aimed at allowing Puerto Rico to restructure its debts.

Nearly a year later, the law — PROMESA, signed by then-President Barack Obama on June 30, 2016 — is still plodding its way through the labyrinth of implementation. And a new Commonwealth government is working with a fiscal oversight board to craft plans that would help the island emerge from its debt crisis.

The issues reached new urgency on Monday, when a stay on creditor litigation expires.

These issues are on Washington’s radar, mostly because Congress is interested in overseeing implementation of PROMESA.

House Natural Resources Committee Chairman Rob Bishop (R-Utah) told Morning Consult that his committee, which had jurisdiction over PROMESA, said the panel “will continue oversight” related to PROMESA implementation. The minutiae of San Juan’s fiscal situation should remain the oversight board’s responsibility, he said.

“Getting involved in the weeds, in the details, is for the board to do,” Bishop said. “They are autonomous for that very purpose — so that no political entity can influence them on which direction they go. But we can have some kind of influence on the speed.”

Natural Resources already held a hearing this year about PREPA, Puerto Rico’s debt-strapped power utility. Bishop did not share any specific details about his plans on Puerto Rico oversight except to signal that he is currently prioritizing other committee agenda items that are unrelated to Puerto Rico.

Democrats are worried about the current situation. On Tuesday, according to a press release, Natural Resources Democrats will convene a forum that will discuss “the human cost of the financial crisis and address options for recovery that lift people out of poverty, protect and restore worker rights, and promote economic growth.”

The release noted concerns that funds with significant investments on the island will bring about “an avalanche of lawsuits could turn Puerto Rico’s recession into a depression” now that the stay has nearly expired.
Some investors are worried about that situation, too. Puerto Rico’s government still could move forward with a court filing under a legal process outlined in Title III of PROMESA.

That’s an approach that’s favored by some of Puerto Rico’s creditors. Matt Rodrigue, a managing director at the New York-based financial services firm Miller Buckfire who is advising a group of senior creditors of Puerto Rican COFINA bonds, told Morning Consult that initiating that process would help the government move along.

“Our view is that the best thing the government can do to protect itself is to use the tools that Congress provided — specifically a Title III filing — on May 2, so that they get the benefit of an ongoing stay on litigation and really can transition to the next phase of the restructuring process,” Rodrigue said in an interview. “We need to move forward.”

The benefit of a formal bankruptcy process is that you can definitively close out an ugly financial situation.

That’s the theory, at any rate.

I think the Detroit situation papered things over only temporarily, but that’s a separate issue from Puerto Rico. I do know that if they are expecting any explicit federal bailout, they’re likely to be sitting waiting for a long time.

This is the extent of help that the feds have held out recently: U.S. Congress to give Puerto Rico short-term Medicaid help

Ailing Puerto Rico would receive $295 million in Medicaid funding from the federal government as part of the U.S. Congress’ spending plan to avert a government shutdown, Governor Ricardo Rossello said on Monday.

Rossello said in a statement in Spanish that he was “grateful” for the addition in the spending bill reached late Sunday night.

The full House of Representatives and Senate must approve the bipartisan pact, though prompt passage was expected this week.

Puerto Rico’s public health system is nearly insolvent, a key driver of emigration that has decimated the U.S. territory’s population as it wrestles with $70 billion in debt, a 45 percent poverty rate and unemployment twice the U.S. average.


The island’s aggressive lobbying for federal healthcare funding in Washington is seen as a possible detractor to filing bankruptcy, which would not garner sympathy from Congressional Republicans who opposed the in-court restructuring provision in last year’s Puerto Rico rescue law, PROMESA.

The $295 million will help fund the island’s Medicaid budget for fiscal year 2018, which starts July 1, and enable Puerto Rico to contract with managed care health insurance companies that administer the Medicaid program.

Without the money, the island would have to run the Medicaid program on its own, a massive undertaking that Puerto Rico is not equipped to do, said island Health Secretary Dr. Rafael Rodríguez-Mercado.

But Puerto Rico will still need an additional $300 million to fund its entire Medicaid budget for fiscal year 2018, Rodríguez-Mercado told Reuters in an interview on Monday. He hopes that money will come from the Children’s Health Insurance Program (CHIP) in September.

Puerto Rico’s $2.76 billion Medicaid budget has been funded in part by a one-time pool of money provided to U.S. territories under the Affordable Care Act, commonly referred to as Obamacare.

That money is expected to run out by the end of 2017, triggering what island officials call the “Medicaid cliff” — the return to a federal funding cap of $321 million for Puerto Rico’s Medicaid program.

U.S. territories receive proportionately less federal Medicaid reimbursement than U.S. states. Prior to Obamacare, Puerto Rico partially funded its Medicaid budget through bonds, exacerbating the island’s debt crisis.

Funding operating costs like Medicaid via bonds is a dead giveaway of bad fiscal policy.

Just in case you didn’t already know that.

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