On Wednesday, the Financial Oversight and Management Board for Puerto Rico announced they had moved to place the USA territory into federal bankruptcy court, making it the largest entity of the United States government to seek refuge from creditors in the courts in history.
The request, coming just one day after major creditors sued the Caribbean island and its Governor Ricardo Rossello over defaults on its $70 billion bonds, is similar to US bankruptcy protection.
Some of the island's debts will go before a federal bankruptcy court, making it the largest US government entity to seek such protection from creditors. Puerto Rico is preparing to cut public employee benefits, increase tax revenue, hike water rates and privatize government operations, among other things. The step toward bankruptcy-like proceedings, under a federal judge, intensified complaints that Puerto Rico has lost all control of its own future.
The slide into bankruptcy would mark a new low in Wall Street's relations with Gov. Rosselló, a political newcomer who pledged as a candidate to repay the territory's debts, shrink the government and strengthen ties with the U.S.
The decision to resolve a portion of the debt in court is the largest effort ever made by a USA government to shield itself from creditors.
The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop though, the governor said. 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.
Puerto Rico's situation is ugly.
Perhaps the most unique element of Detroit's bankruptcy was the role played by its local art museum.
"I'm not going to allow that to happen", he said. The company said it also has been forced to pay more than $52 million in insurance claims as a result of ongoing defaults by Puerto Rico's government.
Puerto Rico's benchmark 2035 general obligation bond rose modestly on Tuesday in light volume, gaining 0.65 point in price to bid 64.75, according to Thomson Reuters data.
The Motor City had $18 billion of debt, including outstanding bonds and unfunded liabilities for its worker pensions and retiree healthcare, when it filed for Chapter 9 municipal bankruptcy in July 2013. The restructuring process through the court system will once again protect Puerto Rico from lawsuits. More than 45 percent of the 3.4 million USA residents on the island live below the poverty line, with the unemployment rate more than double the U.S. national average.
Instead, Puerto Rico will petition a judge for relief under a new federal law for insolvent territorial governments, called Promesa.
Puerto Rico's Governor Ricardo Rosselló has filed for bankruptcy in federal court.
Puerto Rico's fiscal plan, rejected by creditors, would have it pay $800 million a year in debt service, an 80% cut in what it would otherwise owe. This is a debt restructuring plan that is carried out under the auspices of the court.