Puerto Rico has officially requested to enter into a bankruptcy-like proceeding to restructure its massive debt load after talks with its creditors failed.
Puerto Rico’s governor, Ricardo Rossello, announced Wednesday that he had requested that the federally appointed oversight board trigger Title III of the Promesa Act, a court-supervised debt restructuring similar to bankruptcy, in order to guarantee the best interests of the Puerto Rican people.
The restructuring of Puerto Rico’s roughly $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market and will set the stage for a lengthy legal battle between the island and its creditors, which include multiple hedge funds and mutual funds, as they face off in court where a federally appointed judge could force creditors to accept unfavorable repayment terms.
In a written statement issued Wednesday, Rossello said that “after extensive discussions in good faith and the opening of the financial books of the Government of Puerto Rico to the creditors, there has not been sufficient progress in the negotiations.”
“While the Government remains willing to continue to pursue good-faith dialogue and negotiations with its creditors, the recent expiration of the PROMESA stay imposed against enforcement of creditor liability claims dictates that the best course of action is for the Government to enter into Title III.”
Rossello officially notified the oversight board of his decision in a letter dated May 2.
“The Government has made good-faith efforts to reach a consensual restructuring with its creditors,” the letter says. “Puerto Rico’s creditors have not demonstrated a sufficient willingness to fairly share in such sacrifice through a necessary reduction in their debt to a sustainable level.”
The governor noted his plans to continue to make payments to the island’s creditors of nearly $800 million per year — an 80 percent cut in the total debt service payments due annually — as the fiscal plan previously certified by the oversight board, details.
A range of $3.0 billion to $3.8 billion is due cumulatively every year over the next decade on the 11 issues included in the fiscal plan.
Holders of Puerto Rico’s general obligation bonds, one of the highest tier securities that is backed by the island’s constitution, are due the most over the decade — with about $10 billion coming due in the time period.
The announcement comes just a day after the island was hit with multiple creditor lawsuits after a stay on litigation expired. Title III will put that automatic stay back in place, protecting the U.S. territory from further lawsuits.
Moody’s Investors Service analyst Ted Hampton believes that overall the decision to invoke Title III is a positive step for bondholders.
Although he notes that “a court proceeding will take considerable time and likely involve losses for all Puerto Rico bondholders, it will be an orderly process that should be better for creditors in the aggregate than a chaotic and uncertain period involving proliferating lawsuits among holders of the commonwealth’s numerous debt types.”
Rossello closed his note to the oversight board with his hope that Title III will “accelerate the negotiation process, leading to as much creditor consensus where possible”