Puerto Rico announces historic debt restructuring in court

Puerto Rico files for $70 billion municipal bankruptcy

SAN JUAN, Puerto Rico - Bondholders sued Puerto Rico on Tuesday in the first legal challenges to hit the US territory after the expiration of a freeze on litigation that protected it from lawsuits amid a deep economic crisis.

The move, announced by the governor and then followed by a filing in USA court 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.

Another lawsuit filed by Ambac Assurance Corp. accuses the government of illegally retaining $300 million owed to bondholders.

Puerto Rico's collapse also shows the pressure than can emerge when retirement systems run out of cash.

The next step for Puerto Rico in the bankruptcy filing is for the Supreme Court to designate a bankruptcy judge to handle the case. The judge will ultimately decide how and which Puerto Rico assets will be distributed to bondholders. The bonds are backed by the island's constitution. "Title III is now necessary to protect the people of Puerto Rico and avoid an even bigger negative economic impact due to a lawsuit avalanche".

But those debts are likely to be pulled into the bankruptcy, or included in separate bankruptcy proceedings in coming days, Elias Sanchez, an adviser to Governor Ricardo Rossello, told Reuters on Wednesday. While the USVI's overall tax-supported debt at $2 billion is much lower than Puerto Rico's $53 billion in tax-supported debt, per capita debt is about a third higher: $19,000 in the USVI compared with $12,000 for Puerto Rico. Make no mistake: "The Board has chosen to turn Puerto Rico into the next Argentina".

"At least essential services would be guaranteed", he said.

The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop, the governor said in a statement on Wednesday. It would 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 markets.

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Puerto Rico has reached one consensual settlement with creditors, a $9 billion deal covering its public electricity monopoly that Gov. Rosselló recently renegotiated to mitigate politically unpopular fee increases on residents.

Rep. Nydia Velázquez, D-N.Y., who was born and raised in Puerto Rico, said that thanks to the law, the territory has the tools it needs to climb out of its crisis.

The board members and others authorities could not be immediately reached for comment as the lawsuits landed before dawn.

Puerto Rico could announce a historic, court-supervised restructuring for a portion of its $70 billion debt.

The previous largest USA public bankruptcy, Detroit's in 2013, covered some US$18 billion in debt.

Puerto Rico, whose government owes more than $70 billion in bond debt, also has almost $50 billion in pension liabilities as a effect of a more than decade-long recession.

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

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