Puerto Rico Governor Alejandro García Padilla announced this week that the U.S. territory would not be paying most of the $422 million in debt that was due on Monday. However, it did pay $23 million in interest. As the Puerto Rican government had swapped $33 million of debt for new debt that matured at a later date, the principal it missed on its Government Development Bank-issued bonds was $367 million.
This was a significant development in the stand-off between the Commonwealth and Washington DC, as well as investors in Puerto Rican debt. Moreover, there are much more significant sums due this summer and, if this week’s failure to pay is an indication, investors could be in trouble.
Puerto Rico currently owes more than $70 billion to bond holders. Over $2 billion in bond payments are due this summer, including $805 million in Puerto Rico general obligation bonds. In the wake of this latest default there is growing concern that there will be more defaults in the future.
One significant Puerto Rico bond issuer, the Puerto Rico Government Development Bank (“GDB”), says it has arrived at a tentative deal with a group of hedge funds holding $900 million of the bank’s debt in which the funds would agree to a possible reduction on the dollar of their original securities’ face value. This group of institutional investors, which is being called the “Ad Hoc Group of bondholders,” include Claren Road Asset Management, Avenue Capital Management, Fir Tree Partners, Brigade Capital Management, Solus Alternative Asset Management, and Fore Research Management. The GDB arrived at a similar deal with credit unions that are holding about $33 million in debt. Regardless, according to Bloomberg, analysts at Moody’s Investors Service said that even if creditors agree to a non-payment, it would still be a default.
Mutual funds, bond insurers, hedge funds, and individual investors are among those still holding the Commonwealth’s debt. Many of them got involved with Puerto Rico closed-end bond funds because of the high yields and tax benefits. When the securities plunged in value a few years ago, thousands of investors lost a significant portion of their savings. Retail investors, retirees, and small business owners were hit especially hard.
Puerto Rico has been looking to the U.S. Congress for help with debt restructuring. On Sunday, Governor García Padilla said that he had to order what has been the territory’s biggest debt default to date because Washington has yet to provide the help that the island needs. He also said that he decided to concentrate on keeping essential services on the island running instead of paying creditors.
It was in 1984 that the U.S. Congress barred Puerto Rico from being able to file for Chapter 9 bankruptcy to restructure debt. This is why if they are going to get Puerto Rico the help that it needs, lawmakers are going to have to come up with another framework for the territory to use or amend current bankruptcy laws. (And since Puerto Rico is not its own nation, it cannot look to aid from the International Monetary Fund, as other independent countries can do.) In a letter to his fellow lawmakers, Treasury Secretary Jacob Lew cautioned that a “taxpayer-funded bailout” could become the only viable legislative option if a restructuring bill is not passed.
While Puerto Rico and the Treasury Department would like a plan that allows for easier debt restructuring, creditors want one that does not allow for debts to be forcibly restructured or contracts to be voided. At the moment, the House Natural Resources Committee is working on legislation that would set up a federal oversight board to oversee debt restructurings for Puerto Rico, as well as provide feedback on spending plans. A new draft is expected to be submitted later this month. A vote on the measure was delayed in April in the wake of changes sought by the U.S. Treasury.
Puerto Rico Bond Fraud Cases
At Shepherd Smith Edwards and Kantas, our Puerto Rico bond fraud lawyers are working with investors on the island and the U.S. mainland to pursue their investment losses through FINRA arbitration and other avenues. Many investors purchased their bonds at the advice of UBS-Puerto Rico (UBS-PR), Banco Santander (SAN), Banco Popular and other brokerage firms. Some of these brokers knew that the Puerto Rico bonds and Puerto Rico bond funds were too risky for investors, yet they still encouraged their clients to invest.
To explore your legal options, contact our Puerto Rico municipal bond fund law firm today.
Puerto Rico Warns of More Defaults After Missing May Payment, Bloomberg, May 1, 2016
Puerto Rico’s Debt Crisis Deepens as Government Misses Payment, The Wall Street Journal, May 2, 2016