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Puerto Rico will face investors for the first time in a bankruptcy court, as it kicks off the biggest and most divisive debt restructuring in U.S. public finance history, Reuters reported today. While today’s hearing, in federal court in San Juan, is only the start of a process that could take months or years, it is also a culmination of more than two years of bitter debate among Puerto Rico's government, its creditors and federal lawmakers over how the island should rework its debt load of $70 billion. The bankruptcy process will cover about half of Puerto Rico's debt, though other local public agencies are restructuring out of court, and some could enter bankruptcy later. The bankruptcies will also address $50 billion in underfunded pension liabilities, as Puerto Rico battles a historic crisis marked by a 45 percent poverty rate and near-insolvent public health and retirement systems. The hearing will open with a discussion on the expected timetable for a debt-cutting plan, as well as settlement talks and possible mediation, according to an agenda filed on Tuesday. That may give insight into the style and pacing of U.S. District Judge Laura Taylor Swain. The rest of the agenda, though procedural, could shed light on how aggressive Puerto Rico's creditors will be in pursuing a scorched-earth strategy to thwart debt-cutting efforts.

 

Puerto Rico reached a restructuring agreement with bondholders invested in the commonwealth's Government Development Bank, officials announced yesterday in San Juan, Pensions&Investments reported yesterday. Parties to the agreement include the ad hoc group of bondholders, whose members are funds managed or advised by Avenue Capital Management II, Brigade Capital Management, Fir Tree Partners and Solus Alternative Asset Management. The group's financial adviser, Bradley Meyer of Ducera Partners in New York, said in a statement that the agreement “is fair to all parties.” Puerto Rico's Federal Affairs Administration said in that statement that GDB creditors “have agreed to substantial discounts to the principal,” but did not provide further details on the agreement, which calls for bondholders to exchange claims for one of three tranches of bonds issued by a new municipal entity. The new bonds will have varying principal amounts, interest rates, collateral priority, and other payment terms. It is the second agreement reached with bondholders and Gov. Ricardo Rosello, following one announced April 6 with holders of bonds issued by the Puerto Rico Electric Power Authority. The PREPA agreement restructures $9 billion in debt by offering them 85 cents on the dollar, and giving PREPA more time to begin making payments.

 

The losses from soured investments in Puerto Rico bonds are coming into focus for some of the world’s biggest mutual funds, and it is a brutal reckoning, the Wall Street Journal reported yesterday. The total red ink for mutual funds that invested in debt issued by the troubled island commonwealth is as much as $5.4 billion over the past five years, according to a Wall Street Journal analysis of mutual-fund holdings and municipal-bond trades. Those losses, which are both actual and unrealized, were tucked inside a wide range of funds managed by Franklin Resources Inc., OppenheimerFunds Inc., Vanguard Group, Goldman Sachs Asset Management, Western Asset Management Co., Lord, Abbett & Co., AllianceBernstein Holding and Dreyfus Corp., which is part of BNY Mellon Investment Management. The damage done to mutual-fund bets is one reason why a court-supervised restructuring of Puerto Rico’s debt that starts this week with a hearing in San Juan is expected to become such a lengthy battle. Many mutual-fund firms have greater incentive to agitate for maximum recovery — and have greater potential for losses — because they purchased debt closer to par values. Mutual funds as a group still hold about $14.6 billion of Puerto Rico’s $73 billion in outstanding bonds after selling off more than $9 billion over the past five years, according to research firm Morningstar Inc.

 

Puerto Rico’s creditors are preparing for a lengthy fight to maximize their recoveries after its slide into bankruptcy, but other Wall Street investors are rooting for the U.S. territory to succeed in driving down its $73 billion debt load, The Wall Street Journal reported yesterday. Creditors holding Puerto Rico’s municipal bonds argue that the territory won’t regain access to the high-yield credit markets if a court writes down the value of its bonds too deeply, according to court filings and congressional testimony. Puerto Rico was cut off from the credit markets in 2015, and restoring market access is a must for the federal oversight board handling its financial restructuring. But investors who don’t have bonds at risk in the court-supervised process are advocating an aggressive debt-restructuring to free up taxpayer resources for other purposes, such as infrastructure investments, and pave the way for its bonds to begin performing again. The more Puerto Rico is able to shrink its debt burden, the more money presumably will be available to pay back its restructured bonds, improving those securities’ performance in the market. Current creditors, on the other hand, say Puerto Rico should repay as much of its $73 billion in debt as it can to placate investors, reaffirm its willingness to pay and entice them to lend again. Yesterday, officials in Puerto Rico announced that its bankruptcy proceedings will begin on May 17 in San Juan with a series of requests for managing the case as the Commonwealth starts the process of restructuring its $70 billion in debt under Title III of PROMESA. The bankruptcy will be overseen by U.S. District Judge Laura Taylor Swain of the Southern District of New York.

 

Puerto Rico's benchmark general obligation (GO) debt price fell to a record low in light trading as the prospect of a drawn-out restructuring of the island's $70 billion debt load spurred selling, Reuters reported yesterday. A mixture of small odd-lot trades, combined with a few larger block trades, left the price on the defaulted benchmark 2035 GO bonds below a bid price of 60, its lowest price since the $3.5 billion issue was sold in March 2014. The bid price on the bonds, which were sold with an 8 percent coupon, fell as low as 58.45 points before settling around 59.41 late on Tuesday. The larger block trades, which mixed in between the odd-lot trades, briefly lifted bid prices into the 61.75/62 range before settling lower.

There has been an exodus of families from Puerto Rico in the face of its economic collapse, so Luis Santaella School has a big problem: Only 146 children are enrolled compared with about 250 in the past, The New York Times reported today. Like 178 other schools across the island, it is set to close after the last day of the school term this week, in part to help Puerto Rico battle a $123 billion debt. The school will join the many casualties of a fiscal crisis that forced Puerto Rico to declare a form of bankruptcy last week and caused hundreds of thousands of people to leave the island in the past decade. The school will join the shuttered businesses and abandoned homes as yet another indicator of the emergency gripping Puerto Rico and the desperate efforts to stop the hemorrhaging. For some, the closings represent not just another chip at Puerto Rico’s national budget, but also an opportunity to transform a struggling education system in which some schools are infested with termites, enrollment has dropped by nearly a third since 2010, and just 10 percent of eighth graders passed the standardized math test. But for parents, the cuts feel both catastrophic and capricious. The oversight board has warned that the government must save up to $40 million a month, suggesting that about 300 schools close and that teachers be furloughed two days a month. The plan is less draconian than the one the fiscal board had suggested. The consolidation is not just about saving money, but improving student performance and empowering local officials to be accountable for what happens at their schools. If two $1 million schools merge, the new $2 million school can afford computer labs that twice as many students could use.

 

As Puerto Rico filed the largest municipal bond bankruptcy in U.S. history last week, many believe that all Congress needs to do is take a step back and let the process work itself out. Others are also under the false impression that merely allowing the Financial Control Board set up under the Puerto Rico Oversight, Management, and Economic Stability Act will provide the necessary independence and structural reforms for the economy to magically bounce back after more than a decade of negative growth. Unfortunately, nothing could be further from the truth, according to a commentary in The Hill yesterday. The reality is that unlike other major debt-restructuring cases in the U.S. and worldwide, Puerto Rico’s 10-year-plus economic depression is directly correlated to congressional policies that harmed the Commonwealth’s economy. It was Congress and the ruling political party in Puerto Rico at the time that decided to phase out Section 936 of the Internal Revenue Code, a decision that provoked the loss of 75,000 manufacturing jobs over the following decade. The inability to foster alternative economic strategies to mitigate the loss of federal tax incentives, and ill-advised spending decisions by the island’s politicians, aggravated the situation. Therefore, according to the commentary, reasonable and responsible remedies need to be put in place to correct this damage. Helping Puerto Rico now would save money to states and the federal government. Puerto Ricans, as U.S. citizens by birth, are moving at an accelerated pace to live in the states. If economic conditions do not improve soon, this trend is projected to increase even further, continuing to erode the tax base of the Commonwealth and leaving behind an aging population without the workforce it needs to grow.

 

Puerto Rico, deep in a fiscal hole it dug partially with its own shovels, is about to grab a rope and start pulling itself out, according to an editorial in today’s New York Daily News. All who care about the island Commonwealth, including the 3.5 million people who live there and 800,000 New Yorkers of Puerto Rican descent, should suck up the inevitable pain and hope to high heaven that this works. The day of reckoning is here for many reasons, but foremost because, over decades, Puerto Rico’s government spent way more than it took in. While American states have to balance their budgets, a task they often fudge through fiscal trickery, Puerto Rico didn’t even have that fig leaf. So the government issued more and more debt to fund its operations, up to $70 billion by 2014, and now north of $100 billion. Add to that more than $40 billion in unfunded pension liabilities. But Washington more than contributed to the calamity. In 1984, Congress shamefully and inexplicably stripped Puerto Rico of the ability to seek bankruptcy, a right open to all 50 states and every political subdivision therein. More than 30 years too late, Congress finally wised up last summer and gave Puerto Rico the bankruptcy option. As the plan begins to bite, there will no doubt be major dislocations, from public sector layoffs to reduced pensions to big losses for investors, as the island’s debt exceeding $100 billion is restructured. It’s not going to be fun. But pray that all who love this great place stay on board long enough to let its people crawl out of the hole and start walking.