Puerto Rico’s Bankruptcy Plan Is Almost Done ...

...And bondholders are going to get screwed.

For the benefit of those w/o a subscription here is a summary of where things look to be heading.

* Pensioners are being treated as having first claim on the territory's resources, ahead of bond holders. This appears to contradict PR's constitution and laws.
* Under the current proposals, 61 percent of the retirees would keep receiving their full pensions and none will receive less than 91.5%.
* Bond holders will receive no more than 64 cents on the dollar. Many will receive less.
* The board intends to declare bonds sold in 2012 and 2014 unconstitutional and effectively null and void.
* Bonds issued before 2012 will be honored at 64 cents on the dollar.
* Those issued in 2012 would be offered only 45 cents on the dollar. And those issued in 2014 only 35 cents on the dollar in a take it, or leave it and get nothing settlement offer.
* Lawsuits are expected to challenge the basis for the settlement. But many bondholders are expected to take what they can, given that the recent Detroit bankruptcy essentially followed the same pattern of putting pensions ahead of bondholders.

Thoughts: If this goes through and survives the court challenges it's going to send a signal that municipal bonds are nowhere near as safe as hitherto believed. It will almost certainly encourage states in serious fiscal trouble like Illinois to try the same thing. And my guess is the bond market is going to have to recalibrate it's risk reward ratio for municipal bonds. All of which means that municipal bonds at all but the highest credit ratings, could take a hit in their market valuation. And that hit will also be felt by those seeking to borrow money who are suddenly going to find that their legal guarantees are being viewed with skepticism by potential lenders demanding higher yields for their paper.

Puerto Rico Seeks de-facto Bankruptcy Protection Under New Law

...Puerto Rico has roughly $120 billion of bond debt and unfunded pension obligations to restructure, which dwarfs the second-largest similar episode. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations.

The island’s case will not be formally called a bankruptcy, since Puerto Rico is barred from using Chapter 9, the bankruptcy route normally used by insolvent local governments. Instead, the governor of Puerto Rico, Ricardo Rosselló, petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa. It contains some bankruptcy provisions and has never been used before, so there is no road map to follow.

Read the rest here.

This is going to send shock waves through the bond market, and that may be a good thing. Too many people have been placing too much confidence in paper I.O.U's. The basic law of economics still applies. If a debtor doesn't have the money to pay you back, it doesn't matter how many legal papers you wave under their nose, you're still not getting your money back.

People buying bonds issued by Greece, New Jersey, Illinois, the city of Chicago and a few other entities take note.

The Latest From Puerto Rico

Officials in the Treasury Department are discussing a radical and aggressive response to the fiscal chaos engulfing Puerto Rico that could involve a broad debt exchange assisted by the federal government.

The proposal calls for the federal government to help Puerto Rico collect and account for local tax revenues from the island’s businesses and residents, according to people briefed on the matter who spoke on the condition of anonymity because they were not authorized to publicly discuss the proposal. An inability to collect all the taxes owed is widely seen as contributing to Puerto Rico’s debt crisis.

The tax proceeds would be placed in a “lockbox” overseen by the Treasury and eventually paid out by the Treasury to the holders of the new bonds that Puerto Rico would issue in the proposed exchange. Since the Treasury would effectively become the paying agent for the new bonds, they would be more attractive than the bonds that creditors now hold.

That would make it easier for Puerto Rico to exchange the new debt with creditors who hold bonds that have been devastated in value since the island warned this summer that it could not pay its debts.

Read the rest here.

Speaking of Greece

Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable'

In Convoluted Vote Puerto Rico Takes a Step Toward Statehood

Tuesday, for the first time in its history, more Puerto Ricans favored becoming a state than maintaining the island's status quo as a U.S. Commonwealth. But put away the needle and thread for now — it'll likely be at least 2015 before America sews a 51st state onto its flag.

Adding a state to the union is a fairly easy process, legally speaking. Article Four of the Constitution allows Congress to admit new states into the union with simple majority votes in both houses of Congress (and a Presidential signature). Puerto Rico is a United States territory without its own sovereignty, so technically Congress doesn't even need the island's approval.

Read the rest here.

It is worth noting that the referendum was very confusing. While a majority did vote to change the island's status fully a third of the voters did not bother to vote at all on the second part. So I am dubious about how strong the sentiment for statehood is. That said the purely partisan objections to admitting PR to the Union are offensive. If you want an taste of this see the commentary on this thread over at Free Republic. Warning FR is an extremist website and is emphatically NOT endorsed by A/O.

Born Again in Puerto Rico

This summer all Puerto Ricans will have the chance to be born again -- at least on paper.

The government of Puerto Rico is invalidating every birth certificate issued on the island before July 1, 2010, in an attempt to curb rampant fraud and identity theft that officials say has ruined lives, strained social service programs and compromised national security.

Each of Puerto Rico's 4 million residents and the estimated 1.2 million Puerto Rico-born Americans living in the 50 states will have to apply for new vital documents to legally prove that they exist and remain eligible for government benefits.

It's a radical solution to what many say has been a serious and growing crisis involving Puerto Rican birth certificates, which are used to apply for everything from U.S. passports to Medicaid.

Read the rest here.