In May 2017, Puerto Rico filed for bankruptcy protection from creditors in what is being described as the largest municipal bankruptcy filing in history. Court protection from litigation as part of the debt-relief law (Title III) passed by Congress in June expired on May 1, 2017. Title III was created to help the commonwealth emerge from their economic troubles and compounding debt that they have been struggling with. Since September 2013, when the steep decline in Puerto Rico bond values began, investors holding these bonds have suffered massive losses.
This filing came about after Governor Ricardo Rossello failed to persuade Puerto Rico’s creditors to settle for a reduced payment amount, the government faced new lawsuits pending from their defaults, and the proposed 10-year fiscal plan only (see our previous post here) that was approved in March 2017 covered a quarter of the debt payments necessary for the island. What this means for Puerto Rico is it has given up power over its economic restructuring.
An oversight board is expected to negotiate debts with creditors and propose a plan, which could lead to large debt cuts. Now there is less money to go toward lawsuit settlements, many of which have already been filed, with many more yet to be filed. Puerto Rico will ask a federal court to force creditors to take losses on its $74 billion debt, which was brought on through borrowing to finance budget deficits.
For bondholders with unsecured bonds, they will certainly take a hit as the commonwealth of Puerto Rico will say it’s unable to pay its debt in full. For bondholders with secured bonds, it is possible that they might still be paid in full in the future. Many bondholders, at the time of purchase of municipal bonds, were under the impression that the island could not legally declare bankruptcy, as is the case in the United States.
This filing will also involve hedge funds, such as Aurelius Capital Management, Monarch Alternative Capital and Whitebox Advisors, which together hold a third of the Puerto Rico’s debt.
The island’s pension liability is also close to $50 billion, and its public retirement systems are out of money or are expected to soon be later this year. Additionally since 2007, the island has lost about 20% of its jobs and 10% of its population, creating an economic crisis that is putting strain on the whole island. Today it is estimated that 60% of residents are unemployed. However because Puerto Rico residents are also U.S. citizens, they can, and many have already, move to the United States.
Just last month, Government Development Bank (GDB) for Puerto Rico liquidated and proposed a fiscal plan that calls for winding down its operations during the next 10 years. The bank can’t repay its $4.5 billion in obligations to bondholders (see our previous post on this here).
Erez Law has filed over 200 FINRA arbitration claims for investors that invested and lost money in Puerto Rico bonds. Erez Law represents investors both in Puerto Rico and in the mainland U.S. in claims against brokerage firms such as UBS, Merrill Lynch, Santander Securities, Oriental Financial Services, Popular Securities, and Morgan Stanley.
Financial advisors have an obligation to recommend only suitable securities and investment strategies. Stockbrokers also have an obligation to disclose all material risks related to their investments. If a financial advisor recommended Puerto Rico bonds or funds and it was not suitable or appropriate given the client’s risk tolerance or if the broker failed to disclose the risks related to the investment, the broker and the firm may be liable for the client’s losses.
If you have experienced investment losses as a result of Puerto Rico bonds, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.