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The Final Countdown To Puerto Rico’s May 1 Deadline

April 21, 2017 Blog

Puerto Rico is facing a May 1 deadline to restructure its $70 billion debt. At that time, a freeze on lawsuits against Puerto Rico will expire.

The clock is ticking on Puerto Rico. Last year, the U.S. Congress passed a Puerto Rico rescue law called “PROMESA,” which halted creditor lawsuits against the island commonwealth. It gave Puerto Rico time for a federally appointed oversight board and creditors to negotiate an out-of-court settlement on what would be the biggest debt restructuring in U.S. history, according to a recent Reuters article.

No such settlement happened. And in 2017, there does not seem to be much flexibility in negotiating positions between the new government, creditors and the independent oversight board. A process akin to a bankruptcy is looming and various creditors will most likely take a huge haircut.

Indeed, Puerto Rico’s debt crisis is turning into a true-life version of The Hunger Games, a series of novels aimed at teenagers about a dystopian future in which children fight to the death on television, according to Anthony T. Caso, a law professor.

“Creditors are now battling each other over the scraps,” according to an article by Caso published this month.  “There is no money, and given the chance, Puerto Rico’s government has no intention of ever paying back the people who financed the regime for the past several years.”

“The political leaders who spent money that the commonwealth did not have and mismanaged its affairs continue to live in the lap of luxury, suffering no consequences for their betrayal of the public trust,” according to Caso. “In the meantime, the people of Puerto Rico suffer, as do the creditors.”

Everyday people, Mom and Pop investors who own Puerto Rico bonds, are in the cross hairs of this fight, Caso writes.

“When we speak of the creditors, do not think of megabanks. Instead, envision the people who will be the real losers here. The retirees counting on repayment in order to finance their pensions. That is especially the case for the creditors of the Puerto Rico Sales Tax Financing Corporation, or “COFINA,” a special set of bonds guaranteed by a portion of the sales tax revenues.”

And the fight is getting more intense.

“Several years after retirement funds stepped forward to invest in these bonds, helping the commonwealth, the holders of the “general obligation” (GO) bonds are seeking a court ruling finding the COFINA bonds illegal and thus worthless. Just like in The Hunger Games, the victims of the regime are fighting each other for the slim chance to live another day — to get some of their funds repaid. The GO bondholders reject cooperation and would rather destroy the other victims of Puerto Rico’s mismanagement.”

“In pursuit of its Hunger Games -inspired strategy, the GO bondholders are not attacking the politicians and bureaucrats that have driven Puerto Rico into the ditch. Instead, they are trying to kill off the competition for whatever scraps will be left over when – and if – creditors finally get paid.”

Lost in the shuffle amongst the large institutional holders of bonds, pension funds and hedge funds, are the Mom and Pop investors who were sold Puerto Rico bonds by UBS, Popular, Santander and Merrill Lynch.

Many of these retail investors have brought investment fraud claims against the banks, however, income from the bonds that they need to pay their own monthly expenses is being cut and the values of the bond portfolios are dwindling by the day.

It looks like the Puerto Rico Hunger Games is turning Mom and Pop investors into victims of a terrible struggle over billions of dollars of bonds. Let’s hope investors aren’t flattened entirely.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.