Puerto Rico hit with lawsuit after litigation freeze expires

Puerto Rico hit with lawsuit after litigation freeze expires

With multiple creditors on its heels with lawsuits, and its coffers depleted, Puerto Rico on Wednesday declared a form of bankruptcy permitted by the Promesa law, giving the island sweeping powers to forego a lot of its debt obligations, and perhaps eventually get a fresh start.

Hours after a deadline to negotiate a debt restructuring passed without a deal, Puerto Rico faced a smattering of lawsuits from financial stakeholders that could ultimately push it into bankruptcy.

It filed a fourth lawsuit in federal court in Washington, D.C., against the U.S. Treasury Department and Treasury Secretary Mnuchin, demanding a lien on Puerto Rican rum taxes collected by Treasury, which it says Puerto Rico has improperly diverted away from bondholders. As of September 30, Puerto Rico and its various bond issuing authorities had missed almost $1.5 billion in debt service payments.

Promesa, signed into law last June, includes an oversight board aimed at helping the island manage its public finances.

"Title III was especially compelled by the commonwealth's need to restructure $49 billion of pension liabilities", the oversight board said in Wednesday's filing. Title III was created to surmount that hurdle.

The largest municipal bankruptcy was roughly $18 billion owed by the city of Detroit in 2013.

Unlike a regular bankruptcy on the USA mainland, a judge can not unilaterally seize any of Puerto Rico's assets without prior authorization from the federal control board. "Yesterday, just as a deal was within reach, we understand that the Oversight Board intervened to block it, and the Governor acquiesced to the Board", Andrew Rosenberg, the legal advisor to the group, said in the written statement.

In the midst of Puerto Rico's financial calamity, Rossello, a scientist and the son of a former governor of the island, has been advocating for Puerto Rico to gain statehood as a way to help it dig out from debt.

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"The governor needed to show that his primary allegiance lies with the citizens of Puerto Rico, and that was the justification for the filing", said David Tawil, whose fund, Maglan Capital, held Puerto Rico GO debt but has since sold it.

Overall, Puerto Rico is facing $73 billion in debt.

Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court.

"When a line is crossed, the government has to act in favor of the people of Puerto Rico".

Puerto Rico has filed for bankruptcy.

"At least essential services would be guaranteed", he said.

But the oversight board also gave Puerto Rico a new option for handling its debt: If voluntary talks fail, the board has the ability to initiate a mandatory, court-supervised debt restructuring process. The plight may serve as a lesson and cautionary tale for bondholders, and complicates the USVI's situation, as Puerto Rico and the U.S. Virgin Islands are close in proximity, and have numerous same problems.

A fiscal plan sets aside $800 million a year for debt payments, a fraction of the $35 billion due in interest and payments over the next decade. Bloomberg reports that the proposal would have paid as much as 77 cents on the dollar to some creditors, and as little as 39 cents on the dollar.

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