Skip to Content

Puerto Rico Bond Restructuring Is Up In The Air

March 6, 2019 Blog

Puerto Rico’s efforts to restructure its $120 billion debt load rested largely in the hands of a federal board that was empowered in 2016 under the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA.

PROMESA’s board, known in Puerto Rico as “La Junta” or fiscal control board, has been making significant progress in the bankruptcy court. There was even a glimmer of hope that Puerto Rico could get back on solid financial footing.

Then, in February, the bond restructuring was knocked off its rails. A hedge fund with a big financial stake in the bankruptcy had been challenging the authority of the PROMESA board in court, hoping to get a better shake with a new group.

Last month, a federal appeals court agreed with the hedge fund. They decided that the board was not constitutionally appointed and that a new group must either be confirmed by the U.S. Senate or replaced in accordance with the law within the next 90 days.

Despite finding that the oversight board was put together in a way that violates the Constitution, the court rule that it would not invalidate what the board has done since it was formed in 2016 to address Puerto Rico’s $120 billion debt and pension crisis. The court observed  that  the board members should be seen as “de facto” officers who have thus far “acted in good faith to carry out their duties.”

One thing is clear. When the Senate considers the composition of the new board, it needs to root out all conflicts of interests by its members.

For example, a report issued in 2016 and titled “Pirates of the Caribbean” argued that control board members José Ramon Gonzalez and Carlos Garcia should be held accountable for their part in plunging the island into debt, according to the HuffPost. The paper came from two progressive coalitions, Hedge Clippers and the Committee for Better Banks, which both seek to combat the political power of financial institutions.

Before they were appointed to the control board, Gonzalez and Garcia moved between top positions in Puerto Rico’s Government Development Bank, which issues the island’s government bonds, and Banco Santander, the Spanish-owned mega-bank that was buying and structuring the vast majority of those same obligations.

The report alleged that Garcia, Gonzalez and other executives at Santander presided over an explosion of lucrative underwritings that allowed the financially strapped island to continue borrowing huge sums, but on increasingly risky terms, according to the HuffPost. The structure of those loans, the report suggested, was more favorable to Santander and other financial institutions than to the government ― and thus the taxpayers.

Santander participated in the underwriting of $61.2 billion of the island’s $70 billion in debt, according to the analysis. The report estimates that more than $1 billion went toward management fees for Santander and other banks

Where does this leave the thousands of Mom and Pop Puerto Rico bond investors who have lost their retirement savings by holding the Island Commonwealth’s bonds? Will a new board look out for their interests?

While the actions of PROMESA’s new board are uncertain, investors can potentially recover their losses through FINRA investment fraud arbitration cases against  UBS, Santander and other firms who sold them the bonds.

But investors’ time to file claims is fast running out. FINRA has a six-year eligibility period, and the clock on Puerto Rico’s bond debacle may have started ticking at the time of the historic bond market crash in 2013.

Indeed, time may be running out for Puerto Rico’s bond restructuring and bond holders.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.