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After shunning the U.S. territory for much of the past six years, municipal-bond mutual funds are again buying the Puerto Rico’s debt as it recovers from the 2017 hurricane and inches closer to winning a potential court approval to restructure more than $17 billion of sales-tax-backed debt, a major step in its record-setting bankruptcy, Bloomberg News reported. Pacific Investment Management Co. held about $506 million of commonwealth securities as of Sept. 30, nearly 10 times the $52 million held the month before Hurricane Maria, according to data compiled by Bloomberg. AllianceBernstein LP increased its exposure to $347 million, as of Nov. 30, up from $53 million in August 2017. Capital Group and Massachusetts Financial Services Co. increased their exposure by nearly 50 percent. The increase comes after the price of Puerto Rico bonds rallied on expectations that a stream of federal disaster aid and private insurance cash will give a jolt to Puerto Rico’s economy, which has shrunk in the past decade. Its bankruptcy may also speed up this year if a court signs off on the restructuring plan for its sales-tax bonds that would address about a fourth of the island’s $74 billion of debt, freeing Puerto Rico to strike similar deals with other creditors.

Bondholders that own nearly $3 billion of debt issued by a Puerto Rico retirement system have a claim on the pension fund’s assets, a U.S. appellate court said yesterday, Reuters reported. The reversal of a district court ruling could complicate efforts by Puerto Rico’s federally created oversight board to restructure about $120 billion of the U.S. commonwealth’s debt and pension liabilities through a form of municipal bankruptcy. The board in July 2017 challenged bondholders’ security interest in debt sold by Puerto Rico’s largest pension fund, the Employees Retirement System. In August, U.S. District Judge Laura Taylor Swain, who is hearing the bankruptcy case filed in May 2017, ruled that the bondholders “do not possess a perfected security interest” over property pledged by the bankrupt public entity to pay its debt. Her opinion also said that their claim over the pension system’s revenue was “invalidated and unenforceable.” The 1st U.S. Circuit Court of Appeals determined, however, that “the bondholders met the requirements for perfection beginning on December 17, 2015, and so reverse the district court.” Puerto Rico’s pension system liquidated all of its cash assets, facing a nearly 100 percent funding shortfall that is thought to be the largest ever for comparably-sized U.S. public pensions.

Puerto Rico’s federal supervisors are making a final push to write down $18 billion in sales-tax bonds under a settlement that would mark their largest renegotiation yet of the U.S. territory’s crushing debts, the Wall Street Journal reported. The restructuring proposal covers the revenue bonds known as Cofina s, which make up roughly 40 percent of Puerto Rico’s core government debt. First issued in 2007, the Cofina bonds are backed by sales taxes that provided investors a secure source of repayment and lowered Puerto Rico’s borrowing costs. Sales-tax revenue has never fallen short of paying off the Cofina bonds. But a decade of economic contraction has pushed Puerto Rico’s authorities to seek concessions from those bondholders to avoid further cutbacks in public services. The settlement pending before U.S. District Judge Laura Taylor Swain would eliminate $6 billion in Cofina debt and release to Puerto Rico roughly half of the future sales-tax revenue currently earmarked for bondholders. Read more. (Subscription required.) 

In related news, Puerto Rico took an important step toward privatizing its bankrupt public power monopoly and bringing in new investment to help modernize the utility and reverse the island’s economic decline, the Wall Street Journal reported. The government announced on Thursday the selection of four bidders seeking to take over Puerto Rico Electric Power Authority’s transmission and distribution system: Duke Energy Corp., Exelon Corp., PSEG Services Corp. and a consortium of ATCO Ltd., IEM Inc. and Quanta Services Inc. “Under a public-private partnership, we will be developing a system that responds to the real needs of our people, providing stability, reliability and efficiency to our island’s energy system,” said Omar Marrero, executive director of the Puerto Rico Public-Private Partnerships Authority. The government will now solicit proposals from the companies and expects to name a winner in the third quarter of this year. Read more. (Subscription required.) 

Puerto Rico’s plan to slash its sales-tax-backed debt relies on a tax-free exchange of old bonds for new ones. But the partial U.S. government shutdown has thrown a wrinkle in the proceedings, bondholders said in court yesterday: the Internal Revenue Service hasn’t been able to vet it in advance because of the closure, Bloomberg News reported. That led Peter Hein, a bondholder fighting the debt-adjustment plan, to ask U.S. District Court Judge Laura Taylor Swain to reject it, saying that creditors need to know how the IRS will treat the exchange for tax purposes before it takes place. Hein also claimed that the proposal, which is designed to lower the islands’ crippling government debt, is unfair because it pays Puerto Rico residents more than mainland creditors. 

Puerto Rico general obligation bond prices tumbled yesterday after the island’s federally appointed oversight board put the squeeze on bondholders late on Monday by announcing a plan to invalidate about half of the U.S. commonwealth’s full faith and credit-backed debt, Reuters reported. The board, along with an unsecured creditors committee, asked the U.S. District Court overseeing Puerto Rico’s bankruptcy case to wipe out more than $6 billion of GO bonds sold by the island in 2012 and 2014 that were already in default. The news pushed prices on bonds due in 2035 with an 8 percent coupon down into the 48 to 49 cents on the dollar range from 53.5 cents on Monday. With one debt restructuring completed and others in the works, the board is taking aim at the island’s roughly $13 billion of GO bonds and nearly $50 billion in unfunded pension liabilities. As a prelude to mediation, the board and creditors committee are seeking to declare some of the GO bonds null and void because their issuance exceeded a debt limit and violated a balanced budget requirement in Puerto Rico’s constitution.

Puerto Rico’s federally appointed fiscal oversight board announced yesterday that it will seek to invalidate in federal court more than $6 billion of general obligation (GO) bonds, Reuters reported. The action is aimed at three GO debt issues sold by the U.S. territory in 2012 and 2014 that were already in default. The board said in a statement that the debt had been issued “in clear violation of the Puerto Rico Constitution and should be declared null and void.” The oversight board and Puerto Rico’s unsecured creditors committee jointly asked U.S. Judge Laura Taylor Swain, who oversees the island’s bankruptcy cases, to wipe out more than $6 billion of GO debt by disallowing any claims filed to date by owners of these bonds. With roughly $120 billion in debt and pension liabilities, Puerto Rico and four of its public corporations commenced bankruptcy proceedings in U.S. court in May 2017, under Title III of the PROMESA Act. A 600-page report commissioned by the oversight board released last August pointed to potential causes of actions over Puerto Rico’s debt crisis, including potential violations of the island’s constitutional debt limit.