Puerto Rico Declares “Bankruptcy” Due to $123 Billion in Debts
The island owes $74 billion in bond debts and $49 billion in pension payments.
Earlier this week, Puerto Rico, an American territory, sought “bankruptcy” protection after years of economic downfalls and facing $123 billion in bond and pension debts. So why did it take over two years for the island to address these problems?
First off, it’s not exactly bankruptcy since Puerto Rico is only a territory and the island cannot receive the same Chapter 9 protections like the states. Second, it was not until last year that Congress passed the Puerto Rico Debt Relief Bill:
The legislation would create a federal oversight board, appointed by Washington, with power to restructure Puerto Rico’s unmanageable debt load.
The bill provides for a stay, or halt, to any litigation brought against the Puerto Rican government and its debt issuing agencies that is retroactive to December. This provides breathing room for the board to start the process of restructuring and oversee a sustainable budget process.
The Puerto Rico Financial Oversight and Management Board
This committee invoked that law passed by D.C. in June of last year. This means that the island’s “standoff with creditors” will now go “before a federal judge in San Juan in a restructuring process known as Title III.” Supreme Court Justice John Roberts will select a judge to hear the case. He may choose any federal judge he wishes.
The Wall Street Journal explained how this will work out:
Chapter 9, which the city of Detroit used to obtain $7 billion in debt relief, relies on elected officials to negotiate with creditors and design repayment schemes. Under Title III, the federal board overseeing Puerto Rico’s finances is responsible for restructuring negotiations. The board, comprised of appointed technocrats, was designed to take local politics out of the equation. “Unlike chapter 9, a Title III case is not led by elected officials,” said Susheel Kirpalani, a lawyer for sales-tax bondholders. “That is a critical point to depoliticize the government’s restructuring and hopefully will lead to fairer outcomes for creditors.”
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Settlement talks haven’t produced an agreement so far, but the board said it still wants to strike deals. If it can’t find takers, however, it can ask a judge to approve a plan over the objections of creditors, as in chapter 9. The board is required to “respect” creditor liens and priorities, but no one knows if that gives creditors real ammunition to resist forcible write-downs.
The court filing listed these problems. From NPR:
Puerto Rico’s labor participation rate is only about two-thirds that of the U.S. mainland.
The territory’s population has dropped by 10 percent since 2007.
Nearly half of Puerto Rico’s residents live below the federal poverty level.
How Did Puerto Rico Get In This Mess?
This did not happen overnight. In fact, it started decades ago. As of right now, Puerto Rico has “$74 billion in bond debt and $49 billion in unfunded pension obligations.”
The island has struggled to create jobs since Congress ended the federal tax credits it enjoyed. The local leaders tried to “cut spending and boost tax collections,” but they decided to take the borrowing route:
For over a decade, Puerto Rico’s government and its municipal corporations borrowed more to buy time to stave off deeper economic overhauls. With government payrolls down over the past decade, pension funds have fewer workers contributing and the plans are now underfunded by an estimated $45 billion.
The investors decided to ignore the financial problems:
For years, investors overlooked these fiscal and demographic problems because Puerto Rico’s bonds offered high yields and because they believed the island’s economy would eventually recover. Puerto Rico can issue debt exempt from federal, state and local taxes, unlike U.S. states, which made these bonds attractive to many mutual-fund investors and more recently, hedge funds.
But Puerto Rico began to lose access to the credit markets three years ago, when its ratings were downgraded. The door closed for good in 2015 when the island’s governor declared the debts unpayable.
Investors
Reality? The investors will probably not receive as much money as they want. USA Today points out that if the investors “hold secured bonds, they might get paid in full.” Without secured bonds, they “could suffer significant cuts, depending on which types of debt the judge determines to be vulnerable.” The main fight comes from two bondholders: Confina bonds and GO bondholders. From NASDAQ:
The Cofina camp argues that its claims on tax revenue are protected by the bond indentures and should not be used to pay holders of the island’s general obligation bonds.
The GO bondholders meanwhile have seen Puerto Rico default on their payments while staying current on the Cofina debt, because the taxes have already been remitted to the trustee.
Before Puerto Rico declared bankruptcy, these bondholders tried to work out “a deal with the government that would have valued their debt at 70 cents on the dollar.” But now the bonds have started to trade “around 66 cents on the dollar.”
Honestly, no one knows for sure what will happen next because this has never happened before. But these bondholders believe their should receive money first.
Pensions
The creditors believe they deserve money first, but what about those who have retired and need to receive pensions? The law Congress passed last year demanded that Puerto Rico “provide adequate funding for public pension systems.”
When Detroit sought protection, the retirees accepted “cuts after a judge ruled that their pensions could be cut in municipal bankruptcy.” Yet, under bankruptcy, the protections given to pensioners could collapse.
However, as Municipal Market Analytics analyst Matt Fabian said, the pensioners could “still fare better than investors” since they “are more politically empathetic than Wall Street creditors and bond insurers.”
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Comments
Remember the Democrat Party evil be strong there……..
A judge with any serious commitment to the Constitution would declare the special law passed last year unconstitutional, appoint a Receiver to take over the running of the government, and declare the payment of debt to be the Receiever’s principal obligation second only to payment for current essential services. And by essential, I mean only essential.
Quite ironic since Puerto Rico means ‘rich port.’
Anyone who invested in Puerto Rican bonds in the last 10 years or so had to have done so with plan of having taxpayers bail them out one way or another. That assumption needs to be disproved.
Also, Puerto Rico has rejected statehood in plebiscites, and by local actions for generations. Their being a territory is a drain on the country with limited benefits to the country. They need to be given independence and get their often expressed wish of getting out from under the Yanqui Imperialists.
Exactly!
Agree! I lived in Puerto Rico for over 20 years and independence is what is best for them even if they don’t know it. Puerto Rico is culturally a Latin American country and most of them don’t see Americans as their fellow citizens. Even among those who say they are pro-statehood, they see it as a way to get more benefits. In fact, that was the main theme in the political ads by the pro-statehood party.
They spoke of the “statehood” bonus and never about the responsibility that comes with being a state. I only met a handful of people who expressed a desire for statehood because they were Americans and the USA was their country.
Yes! Set them off on their own. We do not need them to become a state and become a further burden on the US. Nor do we need their leftists politics and votes!
One of the reasons why it took this long was prior to the November 2016 election, the territory was controlled by a Democrat / Popular Democratic Party governor who both refused to recognize Statehood and sought taxes as an alternative to stave off bankruptcy. Red in Puerto Rico is Democrat while Blue is Republican. With Nevares, although he caucuses as a Democrat nationally, he’s head of the New Progressive Party as the governor, so he’s doing what’s necessary to reform the state and get it back into the black similar to what Wisconsin is doing even if that means using bankruptcy. The Puerto Rican are also voting in a referendum on June 11th to vote for Statehood or not. If Puerto Rico does become a state, it would become a purple state to fight for for both Democrats and Republicans in the next election. PR would have about 7 electoral college points which is significant. Also statehood gives them far more bankruptcy tools to renegotiate financial obligations. That’s why California isn’t too worried about being so far in the red because they have that capability to tell their debt holders to take a hike.
A side benefit of Puerto Rico becoming a state would put Puerto Rico on the map and raise awareness of the island and possibly boost tourism. Why go to Hawaii when Puerto Rico offers nearly the same amenities? Plus it also would stop the morons out there that thinks Puerto Ricans are illegal immigrants like Mexicans or other Latin nationalities.
No, Puerto Rico did not reject the last plebiscite, Governor Padilla just refused to act on it passing back in 2011 because he opposed statehood. This time it will likely pass and Governor Rosselló supports pushing for it.
What? What do you mean by “recognize statehood”? What are you talking about? You don’t “recognize statehood”; you hold a referendum and hopefully and overwhelming majority of the voting population endorses that option, the Puerto Rican government ask for statehood and then the other states decide if Puerto Rico is in or not.
And this disaster has been going on for a long time under both major political parties. The current governor is the son of another governor who was in power for 8 years. Both parties have been controlling the local government and spending like drunken sailors, selling “tax free” bonds.
States are not permitted to declare bankruptcy; municipalities, counties and apparently territories are able to enter into bankruptcy proceedings.
Wait until California goes belly up in a few years.
You are right about states not being able to declare bankruptcy. I believe Illinois is in worse shape financially than California (or Calizuela, as I like to refer to it), and it will be shortly facing the wrath of its numerous creditors. I believe Chicago (Chiraq) will be in bankruptcy court in the near future.
States certainly cannot use the Federal bankruptcy code. But as sovereign entities in their own right could they restructure debts outside of federal court?
Beyond that purely theoretical question, I’m betting PROMESA becomes a model for California, Illinois and New Jersey. Congress would have to make that happen but public employee unions are making it seem inevitable.
Incorrect, Puerto Rico has not been allowed to enter bankruptcy proceedings despite being a territory which is why a law had to be passed (PROMESA which was bipartisan) in order to give them some authority to RESTRUCTURE their debt. Chapter 9 of the United States Code limits that only to municipalities WITH the state’s permission to do so. Ergo it only allows municipalities of STATES to do so which Puerto Rico is not a state and not allowed to execute one under the US Bankruptcy code.
One of the biggest reason of the contribution towards Puerto Rico’s debt is the flight of Puerto Ricans from the island to the mainland due to the economy. There’s no restrictions on immigration so they can come and go as they please because they are US Citizens. There are more Puerto Ricans on the mainland than there are on the island which goes to show the state of the economy there.
They need to pay the US government everything they owe and then we should drop them rapido. They are a drain on us, what do they contribute?
Isn’t it time we set them free?
Oh how do you propose they pay everything they owe as a territory then? They don’t have the flexibility to manage their economy like other countries or states do and thus are subjected to how the Federal government makes the rules for them since it’s in the Constitution. Have you actually looked at Article IV closely? This essentially neuters their authority because they have to ask Congress to give them authority to make whatever changes necessary to their territory ie PROMESA. The June 11th plebiscite is more likely to pass this time just like the one 2012 which passed with 54%. The problem of the last plebiscite was it was a two question format and a governor that opposed statehood. This time, it’s straightforward and they have only two answers to choose on the first question. If you choose statehood, then that’s it. If you choose “Independence/Free Association” then you have to choose either answer. So if Statehood clearly passes, then the second question is disregarded. All of this is nonbinding anyways so if the second question doesn’t get a significant number compared to the Statehood votes, then it’ll likely be ignored all together since the governor will probably call to disregard it.