After careful consideration, the Caribbean island of Puerto Rico officially filed for the equivalent of bankruptcy May 3, 2017. According to USA Today, this decision will likely spark a “fierce legal battle” as it may put Puerto Rico’s citizens, creditors and workers in jeopardy.
Restructuring to eliminate debt
After years of talking with bondholders and insurers, Puerto Rico is making this move in an effort to eliminate nearly $70 billion in debt. According to Bloomberg Markets, this will be the biggest debt restructuring process ever undertaken by a U.S. governmental entity.
“We reached this decision because it protects the best interests of the people of Puerto Rico,” Governor Richard Rossello said in a statement.
While the mayor believes this is the best move for Puerto Rico to make, Brad Setser, senior fellow at the Council on Foreign Relations, addressed that it may cause an uproar.
“An orderly process for working out Puerto Rico’s debt trouble provides the best hope for Puerto Rico and also the best chance for most creditors to emerge better off,” he told Bloomberg in a telephone interview. “But clearly there’s going to be fights between different groups of creditors.”
Because Puerto Rico is a U.S. territory, it is restricted from using traditional bankruptcy. According to Fox News, the case was instead filed under Title III of the PROMESA law. This process utilizes a debt restructuring plan that is similar to that of bankruptcy protection. With this process, a creditor cannot seize any of Puerto Rico’s assets without confirmed authorization provided by the control board. Additionally, this process gives Puerto Rico the ability to force discounts on credit recoveries. This could work in its favor, but it can also scare potential investors away, ultimately prolonging the suffering.
“The governor needed to show that his primary allegiance lies with the citizens of Puerto Rico, and that was the justification for the filing,” David Tawil, president of Maglan Capital told Fox News. “I’m not sure whether bondholders are going to get any better treatment or recovery under this course of action.”
What’s next for Puerto Rico?
Unlike most bankruptcy cases, this process will not be controlled by a bankruptcy judge. On Friday May 5, Chief Justice John Roberts of the United States Supreme Court appointed District Court Judge Laura Taylor Swain of the Southern District of New York to handle the Puerto Rico restructuring. She is a judge with significant experience in overseeing bankruptcy and financial crime cases.
Currently, the citizens of Puerto Rico are leaving the island and heading to the States at an alarming rate. According to CNN Money, the island’s total population has dropped by 350,000 since 2007, and this trend of decline is likely to keep up.
When it comes to the unsecured bondholders of Puerto Rico, they may “suffer significant cuts,” according to USA Today. The major investors are upset because they’re claiming that they made the investments before the island was even eligible for bankruptcy. This may cause conflict, and some believe that lawsuits are bound to surface.
However, Ted Hampton, vice president of Moody’s Investor Service, stated that the governor’s decision to file for bankruptcy was a step in the right direction. He believes that requesting bankruptcy protection will streamline the process for creditors, instead of creating a chaotic period that enables parties to form lawsuits.
Is there a chance that Puerto Rico could sell off some of its assets to pay off the debt? Yes, but it’s not likely. For example, USA Today brought up Detroit’s $18 billion debt, and how the city negotiated a deal and collected money from the state of Michigan and other private donors for relief.
Unfortunately, Puerto Rico is under much larger-scaled debt and scrutiny. This could make it difficult for the island to make a similar deal. Additionally, it’s not clear how long the court proceeding would last. It seems as though having the court oversee the island’s debt restructuring is its only choice.