The Puerto Rican government has filed for a form of
bankruptcy protection after a new wave of litigation from
bondholders seeking payment on defaulted loans.
The island, which has suffered from a decade-long recession,
has accumulated more than $70 billion in outstanding debt
after financing its fiscal deficits by issuing loans that it is
now unable to pay back.
Although U.S. territories like Puerto Rico are barred from
traditional bankruptcy proceedings, the Puerto Rico Oversight,
Management, and Economic Stability Act, enacted last year and
known as PROMESA, made it possible for the island to pursue a
similar in-court debt restructuring process under a section
called Title III. Puerto Ricos financial oversight board
filed Wednesday to begin these proceedings after
a federal stay on litigation ended Monday, unleashing new
lawsuits on the island.
According to the filing, a lack of financial
transparency, excessive borrowing, management inefficiencies,
and a severe economic decline has made it impossible for
the Puerto Rican government to satisfy its $74 billion debt
burden and $49 billion in pension liabilities, causing the
territory to reach a breaking point.
Puerto Rican debt was popular with fund managers, particularly
mutual funds and hedge funds, and bond insurers because it
offered high yields and because they had confidence the debt
would be repaid. Speaking at the Delivering Alpha conference in
2015, Perry Capital founder Richard Perry argued that Puerto
Rico was the 51st state and said there were
constitutional guarantees ensuring that its debt would be
Some asset managers observe that the situation has been
deteriorating for some time and that bondholders have had time
to shed their holdings. "Puerto Rico has been a long slow
burn," says Karen McQuiston, head of institutional
advisory and solutions at PGIM, the investment management
business of Prudential Financial. "Its a theme that
applies to political risks in general. Weve seen the
fiscal situation. Weve seen the external debt, but there
has been time to get out."
Marina Gross, executive vice president of the
portfolio research and consulting group at Natixis Global Asset
Management, adds that the municipal bond market priced in a
bankruptcy for Puerto Rico 24 months ago. "The market has dealt
with it a while back," she says.
Ellen Ellison, CIO of the University of Illinois Foundation,
adds, "My hedge funds have done the analytical work on Puerto
Rico. But distressed investors loves a fast train wreck, this
has been a slow train wreck."
Some $10 billion of Puerto Rico's debt is held by mutual
funds, with two fund firms, OppenheimerFunds and Franklin
Templeton Investments, holding the bulk of that amount,
according to a Wall Street Journal report, citing
Morningstar figures. OppenheimerFunds could not be reached by
press time. Franklin Templeton declined to comment.
Litigants who sued Tuesday include bondholder and hedge
fund Aurelius Capital Management, as well as
Ambac Financial Group, an insurer of debt issued by Puerto