Puerto Rico’s governor, Ricardo Rosselló, said the federal Oversight Board (OB) agreed to use bankruptcy-like proceedings to slash the island’s $70 billion debt after failing to strike an agreement with bondholders, pushing the territory toward the biggest restructuring ever by a U.S. state or local government.
The process called Title III, created by a U.S. law enacted last year to help Puerto Rico emerge from its debt crisis, would allow the government to petition a court to cut debt amassed by more than a dozen agencies, sometimes with conflicting claims on the island’s cash.
The impending move, announced by the governor at a press conference in San Juan, came after he and his predecessor both failed to persuade the island’s major creditors to accept less than they’re owed and the government faced an onslaught of new lawsuits stemming from a series of defaults.
"We have reached this decision because it protects the best interests of the people of Puerto Rico," said Rosselló, who took office in January. “The OB has agreed to submit Title III protection immediately and they will submit it.”, he added.
The financial collapse promises to impose deep losses on bondholders who for years snapped up Puerto Rico’s securities, even as the government contended with a shrinking economy and chronic budget shortfalls. U.S. states can’t file for bankruptcy, and investors bought the bonds assured that it wasn’t a legal option for Puerto Rico either.
The scale of the restructuring is far larger than Detroit’s record-setting bankruptcy, and it’s unclear how long a court proceeding would last or how deep would be the cuts that are imposed on bondholders. The island’s financial recovery plan covers less than a quarter of the debt payments due over the next decade, assuming Puerto Rico’s budget can be steadied.
Rosselló’s latest offers to creditors last week show the Commonwealth believes general obligations should receive a better recovery than its sales-tax bonds, another major class of its debt. The latest proposal offered as much as 90 cents on the dollar to general-obligation bondholders. Such securities due in 2035, among the most actively traded, sold for an average of 66 cents on the dollar Wednesday, up from 64.7 on Tuesday.
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