Puerto Rico's financial oversight board on
Wednesday filed for a form of bankruptcy protection under last
year's federal rescue law known as PROMESA, touching off the
biggest bankruptcy in the history of the U.S. municipal debt
The move comes a day after several major creditors sued the
U.S. territory and its Governor Ricardo Rossello over defaults
on the island's $70 billion in bonds.
The request came under Title III of the PROMESA law is an
in-court debt restructuring process akin to U.S. bankruptcy
protection, as Puerto Rico is barred from traditional bankruptcy
because it is a U.S. territory. The case was filed in U.S.
District Court in Puerto Rico.
The process will give Puerto Rico the legal ability to
impose drastic discounts on creditor recoveries, but could also
spook investors and prolong the island's lack of access to debt
"The governor needed to show that his primary allegiance
lies with the citizens of Puerto Rico, and that was the
justification for the filing," said David Tawil, whose fund,
Maglan Capital, held Puerto Rico GO debt but has since sold it.
"I’m not sure whether bondholders are going to get any better
treatment or recovery under this course of action."
The legal proceeding does not mean negotiations toward a
consensual restructuring agreement must stop, the governor said
in a statement on Wednesday.
"It is my hope that the Government’s Title III proceedings
will accelerate the negotiation process," the governor said in
Rossello's fiscal plan for the island, approved by the
oversight board in March, forecasts Puerto Rico having only $800
million a year to pay debt, less than a quarter of what it owes.
The low figure alienated creditors, and negotiations toward a
restructuring deal have foundered.
In addition to its debt, Puerto Rico is facing a 45 percent
poverty rate, a shrinking population and unemployment more than
twice the U.S. average.
Puerto Rico and its general obligation bondholders, whose
$18 billion of debt is backed by the island's constitution, were
negotiating until the last minute.
GO holders offered to accept cuts of 10 cents on the dollar,
Elias Sanchez, Rossello's liaison to the oversight board, told
Reuters on Wednesday.
The government responded with an offer to repay 70 percent
of claims through new bonds, and another 20 cents through a
"growth" bond, payable only if Puerto Rico surpassed fiscal
The sides could not reach a deal, and GO creditors sued the
island on Tuesday.
(Additional reporting by Jonathan Stempel)