Puerto Rico Files for Title III Bankruptcy Protection

Puerto Rico, a U.S. territory, is now under bankruptcy protection. Since the island is not a municipality, it could not file for Chapter 9 bankruptcy protection as did the city of Detroit. It is, however, availing itself of a Title III process that resembles Chapter 9 bankruptcy.

The process will allow Puerto Rico to use the court to restructure part of the more than $70 Billion in debt the island owes. According to The Wall Street Journal (WSJ), mutual funds hold about $10 Billion of the territory’s outstanding bonds.

Title III, under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), includes bankruptcy provisions that will be applied for the first time ever and it deals with insolvent territorial governments. Puerto Governor Ricardo Rosselló sent his petition for Title III protection today and the federal board tasked with overseeing the island’s finances approved his request soon after. Now, Supreme Court Chief Justice John G. Roberts Jr. will have to appoint a bankruptcy judge to Puerto Rico’s case.

Under the petition, Puerto Rico named its biggest unsecured creditors (i.e., non-bondholders) and how much it owes them:

· Banco Popular de Puerto Rico: $12.1 Billion

· The U.S. Army Corps of Engineers: $213 Million

· Total Petroleum Puerto Rico: $11.51 Million

· Evertec: $10.17 Million

· Microsoft $8.12 Million

The decision to go for Title III protection came after the island and creditors failed to come up with their own agreement regarding the debt owed by May 1, 2017. The deadline had placed a stay on litigation against Puerto Rico over this debt. Hours after it expired, general obligation bondholders and COFINA bondholders sued the territory and its government.

Governor Rosselló said that filing for bankruptcy protection was necessary so the territory could keep on providing needed public services. With this court protection, bond insurers, mutual funds, and hedge funds are among those expected to be impacted in that they could be facing a long battle to get back the debt Puerto Rico owes them. This was not what many bondholders, including those who thought that the bonds they were buying were constitutionally guaranteed (not to mention that the territory is not allowed to seek Chapter 9 bankruptcy protection) expected.

However, not all creditors view this development as a negative. The WSJ reported that one senior bondholder saw bankruptcy protection as a “positive” because it has placed a halt on competing lawsuits brought by competing bondholder groups.

Puerto Rico filing for bankruptcy makes it the biggest government entity in this country to date to seek this type of court protection from creditors. According to The New York Times, the island has about $120 Billion of unfunded pension obligations and bond debt to restructure. The second largest bankruptcy by a government entity to date involved Detroit. The Michigan city had a debt and retirement obligations of about $18 Billion.

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Puerto Rico files for biggest US municipal bankruptcy, CNN, May 3, 2017

PROMESA (PDF)

Puerto Rico Files for Title III Bankruptcy Protection, The Street, May 3, 2017