SAN JUAN, Puerto Rico (AP) Bondholders are taking action against Puerto Rico after a freeze on litigation that protected the US territory from lawsuits expired amid an economic crisis.
Puerto Rico owes more than $70 billion in bond debt and has almost $50 billion in pension liabilities as a effect of a more than decade-long recession. The group accused government officials of strong-arming it into what it called "unfair, unjust, and illegally punitive terms".
Puerto Rico's decision to seek protection from creditors did not surprise analysts, who said it was a necessary step toward solving the island's crippling financial woes. Ambac argued that Puerto Rico has illegally diverted rum tax revenue slated for bondholders. The New York Times reports that the filing includes $74 billion in debt and $49 billion in pension obligations. The administration has also adopted an aggressive tax collection agenda with the aim of collecting over $400 million the government says is owed to it. Even with a bailout, there's no guarantee that the government would implement reforms to get the island back on its feet. But the action - once inconceivable for a territory that didn't have authority to file for bankruptcy - sets a precedent that could resonate with struggling states in the decades ahead. The population of Puerto Rico had declined 300,000 from 2010 to 2015's 3.4 million, according to the U.S. Census Bureau. Many prominent Wall Street firms own Puerto Rico's bonds.
Puerto Rico Chief of Staff William Villafane told The Associated Press just hours before the freeze expired that the government preferred to reach a deal with bondholders. It's a legal mechanism created by Congress to restructure debts if negotiations fail.
The Governor explained that the island had to take shelter in bankruptcy court to save enough money to provide essential public services. But there was no agreement by Monday's deadline.
Islanders fear the situation could worsen under the court process, and federal control board chairman Jose Carrion noted that consensual negotiations with bondholders are preferable.
Unsecured creditors and junior bondholders have taken significant losses in past restructurings, such as in Detroit, and are probably more vulnerable to large losses in Puerto Rico.
The financial problems of the Caribbean island - which has been locked in recession for more than a decade - have shaken the large market for USA municipal bonds, especially after Detroit declared bankruptcy in 2013.
Under it, Puerto Rico has the option to negotiate with creditors outside the court system, or through it in a process equivalent to Chapter 9.
Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court. "Where that sweet spot is, nobody exactly knows".
Rosselló latest offers to creditors show the commonwealth believes general obligations should receive a better recovery than its sales-tax bonds, another major class of its debt.
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