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Hedge funds first starting buying Puerto Rico debt in the summer of 2013 because they liked what they saw: A government that was paying high, tax-free yields that couldn’t go bankrupt. Nearly four years later, the Caribbean island has defaulted on most of its bonds and Governor Ricardo Rossello, who took office in January, says it can pay less than a quarter of what’s owed over the next decade, assuming he can slash the budget and increase the island’s revenue, Bloomberg News reported. Some of the securities are trading near record lows. And, thanks to the U.S. Congress, Puerto Rico and its federal overseers can use bankruptcy-like proceedings to have some of its $70 billion debt written off in court, something investors once assumed it couldn’t ever do. Read more.

In related news, the Financial Oversight and Management Board for Puerto Rico responded to an inquiry to Sens. Thom Tillis and Tom Cotton. Click here to read the letter. 

Lawyers for Puerto Rico's government are drafting a forbearance agreement that could allow the U.S. territory to avoid invoking bankruptcy protections in the short-term, Reuters reported on Friday. Puerto Rico and its creditors wrapped up roughly a week's worth of mediated talks in New York, aimed at striking a deal to restructure much of the $70 billion in debt the island cannot pay. It remains unclear if creditors would support such an offer to extend talks past a May 1 deadline to reach an agreement. After that date, Puerto Rico could face lawsuits from creditors or seek a court-sanctioned restructuring process akin to U.S. bankruptcy, a provision of the 2016 rescue law known as PROMESA. Read more.

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

The trading prices of Puerto Rico bonds largely account for the losses investors will take when the island restructures its $70 billion debt, said Art Steinmetz, the chairman and chief executive officer of OppenheimerFunds Inc., a major holder of the island’s securities, Bloomberg News reported yesterday. Puerto Rico’s bonds tumbled last month after its federal overseers approved a fiscal recovery plan that will cover only a fraction of the debt payments that are due. That plan is being used to determine how deeply the island needs to cut its debt, which can be done in a bankruptcy-like proceeding if no agreement can be reached with bondholders. One of the island’s most active securities traded yesterday at about 62.9 cents on the dollar. "They’re already priced well below par, so we think a lot of these bonds are close to what they’re going to be worth in a post-restructuring scenario, whatever that happens to be," Steinmetz said yesterday. "The biggest volatility actually happened back in 2013 when the fiscal problems first started surfacing to a wider audience."

A Puerto Rico labor union yesterday sued Governor Ricardo Rossello and the U.S. territory's financial oversight board, saying that pension cuts being proposed as part of the island's fiscal turnaround were unconstitutional, Reuters reported. The lawsuit, filed in federal court in San Juan by the Servidores Publicos Unidos, seeks a declaration the plan violates the federal Puerto Rico rescue law dubbed PROMESA, as well as an injunction blocking its implementation. Puerto Rico's current and future retirees would suffer "grievous harm" from the turnaround plan, the complaint said. The U.S. territory is trying to exit a crisis marked by $70 billion in debt, a 45 percent poverty rate, unemployment more than twice the U.S. average, and rampant emigration. Its federally appointed oversight board last month approved the turnaround plan that pushes draconian cuts to debt repayment and major austerity measures. The plan orders Rossello to cut pension spending by 10 percent a year — some $200 million — by 2020. It was unclear yesterday whether the government or the board planned to ask the court to freeze the lawsuit under PROMESA, which stays certain types of litigation over Puerto Rican debt until May 1. Read more. 

In related news, a holder of sales tax-backed Puerto Rican debt, known as COFINA debt, yesterday sued Bank of New York Mellon Corp. alleging that the bank breached its duty as trustee for COFINA debt to protect senior bondholders. Whitebox Advisers sued the bank in a New York state court, saying it should have either accelerated or frozen payouts on COFINA debt after technical defaults by the Puerto Rican government, which is facing an economic crisis marked by $70 billion in debt and a 45 percent poverty rate. Whitebox alleges that several events since 2015 constitute technical defaults, including plans by the government to restructure its debt and potentially cut recoveries to senior COFINA holders. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Bankruptcy for Puerto Rico is looking ever more likely as the clock ticks down toward a May 1 deadline to restructure $70 billion in debt, ramping up uncertainty for anyone betting on returns from the island's widely held U.S. municipal bonds, Reuters reported today. When U.S. Congress last year passed the Puerto Rico rescue law dubbed PROMESA, it froze creditor lawsuits against the island so its federally appointed oversight board and creditors could negotiate out of court on the biggest debt restructuring in U.S. municipal history. The freeze expires on May 1, however, and an extension by Congress is "not going to happen," said a Republican aide to the House Committee on Natural Resources, which is in charge of territory matters. A round of mediated talks is scheduled to begin on Thursday. But absent an agreement soon, a growing number of analysts say that Puerto Rico will seek protection from creditors under PROMESA's court-sanctioned restructuring process, akin to U.S. bankruptcy. Read more.

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Thom Tillis (R-N.C.) and Tom Cotton (R- Ark.) sent a letter on Friday to José B. Carrión III, chairman of the Financial Oversight and Management Board for Puerto Rico, expressing concern that Puerto Rico’s fiscal plan fails to comply with the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). “Multiple creditor groups have asserted that the Commonwealth and the Oversight Board have not attempted to negotiate with bondholders under Title VI of PROMESA, and in fact have failed to respond to creditors attempts to initiate negotiations,” Tillis and Cotton wrote. “This is a violation of both the spirit and letter of PROMISE, which plainly intends for the Commonwealth and the Oversight Board to make every effort to reach a negotiated settlement with bondholders under Title VI and reserves Title III restructuring as a last resort.” In expressing their concerns, Tillis and Cotton requested more information about the certification of the Fiscal Plan. Click here to read the full letter.

Puerto Rican power utility PREPA and its creditors have reached a new deal to restructure $8.9 billion in debt through new bonds with longer maturities, the U.S. territory's government announced yesterday, Reuters reported. The agreement, which must be approved by Puerto Rico's federally appointed oversight board, could save $2.2 billion in debt servicing costs over five years, Governor Ricardo Rossello's administration said in a statement. That is $1.5 billion more than a prior pending deal between the parties would have saved, the government said. The sides agreed to extend until April 13 the deadline to implement the deal. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Moody's Investors Service yesterday lowered ratings on $13 billion of Puerto Rican bonds, including debt from the U.S. territory's now-defunct former fiscal agent, the Government Development Bank (GDB), Reuters reported. Moody's said that it downgraded bonds from six Puerto Rican issuers, but affirmed ratings on the island's largest classes of debt — general obligation bonds guaranteed by its constitution, and so-called COFINA debt, backed by sales tax revenue. It downgraded to C from Ca the GDB's senior notes, as well as bonds issued by the Puerto Rico Infrastructure Financing Authority, backed by rum taxes; bonds issued by its convention center authority, backed by hotel occupancy taxes; debt of the island's largest retirement system, backed by government pension contributions; and the 1998 Resolution bonds of the island's highway authority.