Puerto Rico announces historic debt restructuring in court

The island's economic crisis has been looming with it seeking refuge from $73 billion in bond debt and almost $50 billion of unfunded pension obligations to restructure. The island's previous government declared the debt unpayable and the territory began a series of multimillion-dollar defaults in August 2015, which prompted Congress to pass the restructuring law past year.

"The result is that Puerto Rico can no longer fully pay its debt and pay for government services". For the last two years, officials have been seeking assistance from Washington, testifying before stern congressional committees and even making fast-track oral arguments before the United States Supreme Court. Puerto Rico, the board decided last week, will raise water rates on consumers, liquidate its decades-old industrial development bank and seek concessions from creditors of additional government agencies. US cities, notably Detroit, have obtained favorable rulings in recent chapter 9 proceedings that helped them chop down obligations to Wall Street.

Puerto Rico's situation is ugly.

The complaint, filed in federal court in San Juan, accuses Puerto Rico's leadership of impairing contractual rights of so-called COFINA bondholders, whose debt is backed by sales tax revenue, and trying to take their property in what they say are violations of the due process clause of the U.S. Constitution.

The legal proceeding does not mean negotiations toward a compromise must stop, Governor Rossello said in a statement on Wednesday. As Jeff Mazzella, the group's president, sees it, the oversight board's action "will allow Puerto Rico to rob millions of American retirees and savers who invested in Puerto Rico bonds".

Some of those creditors are furious. The latest proposal would have provided as much as 90 cents on the dollar to general-obligation bondholders.

"This debt can not be paid from the pocket of the workers", community leader Juan Camacho said. Many prominent Wall Street firms own Puerto Rico's bonds.

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Instead, Puerto Rico will petition a judge for relief under a new federal law for insolvent territorial governments, called Promesa. That's a mere 20% of what the island had been paying creditors in the past.

During that time, economists and analysts warn, many changes could occur.

The island territory, 1,500 miles from Washington, 's saw its population plummet to 3.4 million from more than 5 million. However, the judge will first need approval from the federal control board that was authorized by Congress previous year to oversee the island's finances.

"It's going to be uncomfortable for some", Barbarosh said.

Title III of that law - a hybrid between Chapter 9 and Chapter 11 bankruptcy protection, designed for local governments (although Puerto Rico is excluded) and corporations, respectively, - provides a stay on all creditor litigation and would leave decisions on debt repayment in the hands of a court.

Puerto Rico's situation is more dire than Detroit's because the city, in part, had a firm set of rules in bankruptcy court, an option that the USA territory doesn't have, said Greg Clark, head of municipal research at Debtwire.

In the midst of Puerto Rico's financial calamity, Rossello, a scientist and the son of a former governor of the island, has been advocating for Puerto Rico to gain statehood as a way to help it dig out from debt. States, like United States territories, now can not declare bankruptcy. Roughly $12 billion of the island's $73 billion was insured. Those creditors gave concessions that the governor pointed to Wednesday as a good example for other creditors to follow. Current retirees will continue to receive their traditional monthly pensions, but the amounts are to be reduced by about 10 percent on average.

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