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Puerto Rico Filed for Bankruptcy. What Now?

June 16, 2017 Blog

Puerto Rico filed for bankruptcy on May 3, 2017, setting in motion an uncertain chain of events that will not only have drastic consequences for the territory’s bondholders, but which could also provide guidance for other United States territories – such as the U.S. Virgin Islands which is currently carrying a $2 billion debt load – seeking to restructure their debts in the future.

Of course, the move to file for bankruptcy does not come as a surprise. Puerto Rico was facing a May 1 deadline to negotiate an out-of-court settlement on its $70 billion debt; and having already defaulted on numerous payments and treaded water under a freeze on creditor lawsuits under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), the island territory was simply out of options when the freeze expired on May 1.

Puerto Rico’s Title III Filing Under PROMESA

Many media outlets are referring to Puerto Rico’s filing as a “Title III bankruptcy.” However, unlike Detroit’s historic Chapter 9 bankruptcy, Puerto Rico’s filing does not rely directly on the U.S. Bankruptcy Code.

This is because, until Congress enacted PROMESA in 2016, territories such as Puerto Rico were ineligible to seek protection in the way that Detroit did in 2013 – and in the way that Illinois may seek debt relief soon. PROMESA created a new remedy specifically designed to allow Puerto Rico and other territories to restructure their debts, using a unique procedure that combines elements of traditional Chapter 9 and Chapter 11 bankruptcies with some aspects that are unique to PROMESA.

For example, PROMESA also provided for the establishment of an Oversight Board with seven members selected by President Obama in 2016. The Oversight Board’s role is to develop a debt restructuring plan that puts Puerto Rico on the long road to fiscal responsibility and financial stability, even if that means making decisions that are not immediately the most-beneficial to the territory’s finances. As the members of the Oversight Board negotiate with creditors to restructure Puerto Rico’s debts, they have the flexibility to negotiate deals (and to overrule Puerto Rican officials, if necessary) in order to begin rebuilding the trust that led to Puerto Rico’s municipal bonds becoming some of the most attractive investment opportunities on the market.

What Puerto Rico’s Filing Means for Investors

However, bond holders in Puerto Rico and on the U.S. mainland are still facing substantial losses. With the Title III filing, Puerto Rico’s financial shortfall means that both individual and institutional investors can expect unprecedented losses where they once enjoyed returns and stability that exceeded what virtually all other bonds had to offer. How much will investors get paid, and when? While many investors are pursuing fraud-based claims against their brokerage firms, others may just have to wait and see.

Securities Arbitration Lawyers for Puerto Rico Municipal Bond Holders

At Zamansky LLC, we have been successful in helping individual Puerto Rico bond holders recover their losses through securities arbitration against their brokerage firms. If you invested in Puerto Rico’s municipal bonds through UBS, another broker or your employer-sponsored plan, we encourage you to call (212) 742-1414 or contact us online for a free consultation.