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.