UNCHARTED TERRITORY

Puerto Rico filed what could be the mother of all municipal bond bankruptcies

Puerto Rico, which is saddled with $74 billion in debt, filed for what could be the biggest local government bankruptcy by far in US history.

The island said in a May 3 court filing that it is restructuring its debt as its economic and financial crisis reaches “a breaking point.”

Puerto Rico’s economy has been struggling for years, unable to recover from disappearing tax breaks that buoyed its manufacturing sector and its government’s lavish spending habits. Its debt ballooned as it tried to set its economy back on track. It had until Monday to strike a deal with creditors before they could sue, but missed the deadline after negotiations reached an impasse.

The filing sets off an unprecedented process. Because Puerto Rico is an unincorporated territory, it’s not eligible for Chapter 9 bankruptcy protection like other US jurisdictions. Last year, the US Congress gave Puerto Rico an ability to file for bankruptcy under a law called the Puerto Rico Oversight, Management and Economic Stability Act or PROMESA—which means promise in Spanish.

Under it, Puerto Rico has the option to negotiate with creditors outside the court system, or through it in a process equivalent to Chapter 9. A spokesman for the Puerto Rican government said that the full $74 billion could be restructured under Title III, as the Chapter 9 equivalent is known, if agreements are not reached with creditors.

If that’s the case, Puerto Rico’s bankruptcy would be nearly five times bigger than Detroit’s, which set a record in 2013.

For now, island officials have said they are committed to “good-faith dialogue and negotiations.” But they also underscored the island’s dismal financial situation, so creditors shouldn’t get their hopes up.

“The government’s liquidity and insolvency problems are enormous,” said José Carrión, the chairman of the board that’s overseeing the territory’s debt restructuring. “Title III is now necessary to protect the people of Puerto Rico and avoid an even bigger negative economic impact due to a lawsuit avalanche.”

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