What the Puerto Rico debt restructuring deal means for debtors

by | Feb 27, 2019 | Economy, Headlines | Comments

On February 4, 2019, a major debt restructuring plan for Puerto Rico was approved by a federal bankruptcy judge. It was the first such deal in Puerto Rico since the territory’s government declared that it could not pay its public debt nearly four years ago. This restructuring plan required Puerto Rico to pay $32 billion over 40 years. Although it looks like this requirement will put a high degree of economic pressure on the Puerto Rican government, officials said this restructuring deal will be a great move for the recovery of Puerto Rico’s economy because the territory would save approximately $456 million yearly in debt service, and lessen sales debt by 32%.

According to a report from US Government Accountability Office, “Puerto Rico has roughly $70 billion in outstanding debt, and since August 2015 has defaulted on over $1.5 billion in debt.” Due to these factors, including the Puerto Rico government’s inadequate financial management and oversight practices, policy decisions by Puerto Rico’s government, and prolonged economic contraction, the debt crisis on Puerto Rico has the potential to become increasingly gloomy.

There is little doubt that the approval of the restructuring deal has the ability to bring hope of a economic recovery for Puerto Rico. Governor Ricardo Rosselló said the new deal is an important step for the territory. The new plan will save Puerto Rico an average of more than $450 million a year. This money saved will be able to benefit public services like health, education, pension payments, and public safety.

However, there are some critical voices indicating that if hedge funds win, Puerto Ricans lose. Critics point out this plan grants predatory vulture funds a huge payoff, while consigning the territory’s citizens to 40 years of high sales taxes. The sales tax has increased to 11.5%, which is higher than in all 50 states. Additionally, critics think the structure of the deal is unhealthy. Senior bondholders who hold nearly $8 billion have priority to collect and recover 93% of these funds, but the junior bondholders only have the ability to recover 54% of funds. Most of these subordinated bondholders are individual Puerto Rican investors. Also, some critics’ echo concerns about Puerto Rico’s ability to make the payments, and the possibility of negative effects on public services.