SAN JUAN – Puerto Rico’s governor on Wednesday announced a historic restructuring of a portion of the U.S. territory’s $73 billion debt through courts after negotiations with bondholders failed. The announcement marks the biggest bankruptcy-type process ever for the U.S. municipal bond market.
Gov. 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 U.S. 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 $9 billion of debt, the Aqueducts and Sewer Authority has roughly $5 billion of debt and the Highways and Transportation Authority has around $7 billion of debt.
Overall, Puerto Rico is facing $73 billion in debt. By comparison, the U.S. city of Detroit had $9.3 billion of obligations when it filed for bankruptcy in 2013 in the biggest U.S. 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 $800 million a year for debt payments, a fraction of the $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.
Elías Sánchez Sifonte, the governor’s representative to the board, criticized 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 favor of the people of Puerto Rico.”
A group representing some of those holding the $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 José Carrión 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 U.S. 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 U.S. territory faces.
Sánchez Sifonte noted that unlike a regular bankruptcy in the U.S. 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.”
While Detroit’s case was resolved in a couple of years, it is unclear how long it will take for Puerto Rico.
“This is much bigger and much more complex than Detroit,” Sánchez Sifonte said, adding that he estimates the process could be completed within four years.
The announcement has sparked widespread uncertainty on the island, where Puerto Ricans are struggling with increases in taxes, higher utility rates and an unemployment rate that has hovered around 12 percent. The crisis has prompted nearly 450,000 Puerto Ricans to leave the island for the U.S. mainland in the past decade.
It is too early to say what kind of impact a debt restructuring in court will have on the 3.4 million people that remain on the island, economist Jose Joaquin Villamil told a news agency.
“(It) presents a very big risk for both parties,” he said, referring to the government and to bondholders. “We don’t know what a federal district court judge is going to decide.”
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. Sánchez Sifonte disputed that opinion, saying that a court-supervised restructuring would actually provide more comfort to investors.
Economist Gustavo Velez told the news agency that Rossello’s announcement is the best path for Puerto Rico at this point. The previous governor announced that the $70 billion debt load was unpayable and needed restructuring.
“It’s been three years of agony, uncertainty and negotiations that have cost the island millions in consultants that have produced no results,” he said. “We cannot keep stretching this chewing gum further.”