Puerto Rico Gov. Ricardo Rossello announced Wednesday that the U.S. territory will restructure part of its $70 billion debt load in court, a move similar to declaring bankruptcy under the Bankruptcy Code.
Puerto Rico made the move to pursue a Title III proceeding under the Puerto Rico Oversight, Management and Economic Stability Act, or Promesa, after a court-ordered stay on litigation against the territory related to its debts expired Tuesday, resulting in multiple lawsuits from creditors. The restructuring process through the court system will once again protect Puerto Rico from lawsuits.
The Financial Oversight and Management Board for Puerto Rico subsequently filed the Title III petition with the U.S. District Court for the District of Puerto Rico in San Juan. A judge has yet to be assigned to the proceeding.
Martin J. Bienenstock of Proskauer Rose and Hermann D. Bauer Alvarez of O'Neill & Borges represent the oversight board in the case and, by extension, Puerto Rico.
In a statement filed Wednesday with the district court, the oversight board said Congress recognized a crisis in Puerto Rico with passage of Promesa, pointing to "lack of financial transparency, excessive borrowing, management inefficiencies and a severe economic decline" as causes.
"The fiscal distress Congress declared is about to worsen exponentially due to the elimination of approximately $850 million in Affordable Care Act funds in fiscal year 2018 and increasing substantially year-over-year and the exhaustion of all public pension funding, the shortfall of which could cost the commonwealth approximately $1.5 billion per year," the board continued. "The commonwealth and its instrumentalities cannot satisfy their collective $74 billion debt burden and $49 billion pension burden and pay their operating expenses."
The board concluded, "The oversight board and the commonwealth intend to continue pursuing consensual negotiations under the protection of the Title III automatic stay and remain hopeful that continued negotiations (including through mediation) will lead to consensual resolutions such that Puerto Rico will once again be able to experience economic and social prosperity after this difficult process is resolved."
Creditors, of course, have expressed frustration over the lengthy restructuring process.
"Sovereignty confers great power, but it does not authorize lawlessness."
So begins a lawsuit bond insurer Ambac Assurance filed Tuesday against the Puerto Rico, its governor and other parties involved in restructuring the commonwealth's debt. Ambac filed several suits against Puerto Rico when the legal stay expired.
Hedge funds Monarch Alternative Capital and Aurelius Capital Management are also suing, according to a report from Bloomberg.
The civil suits were filed in the Puerto Rico district court.
Rossello has been an outspoken advocate of measures that would limit the hit taxpayers could take in a restructuring.
The alternatives Puerto Rico had before Wednesday were significantly different, according to local newspaper El Nuevo Dia.
The path charted by the administration ... advocated and hoped to resolve the Puerto Rico debt using Title VI of the Promesa federal law, although they opened the door to Title III a little over a week ago. Title VI allows for a negotiated agreement between the government and its creditors, whereas Title III requires the active participation of a court in a process similar to bankruptcy. According to the governor, Title III would prevent bondholders, in a legal suit, from freezing the accounts of the government of Puerto Rico.
After the spate of lawsuits, Rossello confirmed the move to seek Title III protection Wednesday.
Ambac's suit accused the commonwealth of engaging in unconstitutional acts to avoid meeting its debt obligations.
In its Article III petition, Puerto Rico said its largest unsecured creditors were Banco Popular de Puerto Rico (owed $12.1 billion), the U.S. Army Corps of Engineers ($212.3 million), Total Petroleum Puerto Rico ($11.51 million), Evertec (EVTC) - Get EVERTEC, Inc. Report ($10.17 million) and Microsoft (MSFT) - Get Microsoft Corporation Report ($8.12 million).
The filing dwarfs what had been the largest municipal bankruptcy in U.S. history, that of Detroit. The Motor City entered Chapter 9 protection -- the section of the Bankruptcy Code for municipalities -- on July 18, 2013, with $10.3 billion in assets and $10.7 billion in liabilities. Detroit wrapped up the proceeding on Dec. 10, 2014.