Update on Puerto Rico bond mess

Puerto Rico recently attempted to reinstate a law that would allow certain agencies to file for Chapter 9 protection. The U.S. Court of Appeals resisted, instead agreeing with the San Juan judge who refused it in February.

The dispute is because the commonwealth is excluded from a part of the bankruptcy code used by municipal entities and cities, the code allows public agencies to seek protection from creditors.

Cesar Miranda Rodriguez, Puerto Rico’s attorney general, says Puerto Rico may ask the U.S. Supreme Court to consider the case. Stating that the decision of the U.S. Court of Appeals “is very disappointing” Rodriguez continued, “It’s arbitrary and inconceivable that Puerto Rico will be deprived of a tool that allows for an orderly negotiation of public debt.”

Puerto Rico’s non-voting member, Pedro Pierluisi, is also reportedly sponsoring a bill that will ask Congress to allow certain public agencies to file for Chapter 9 protection.

Having these measures turned down comes as a blow as the island falls deeper into a fiscal crisis. This decision means that agencies must continue negotiations with its creditors, and if a solution is not found, investors could sue the Puerto Rican agencies in an attempt to reclaim their investments.

Since Governor Alejandro Garcia Padilla announced that he planned to restructure the commonwealths debt, securities have dropped in price. They are at a record low, according to data compiled by Bloomberg.

Puerto Rico is considered a U.S. commonwealth, and not a state. Because of this, it lacks the legal benefits that allow state municipalities and agencies to seek bankruptcy protection.

The Puerto Rico power utility, which serves most of the island’s 3.6 million residents, is attempting to negotiate for payment relief. The authority made a $415 million bond payment due July 1 and has reached an agreement to continue out-of-court discussions to restructure its $9 billion of debt. This has been widely regarded as a smart move and some investors are working with the power utility to find a “sustainable path forward.”

Others believe the islands debt is not payable and do not think things will improve without changes being made to the terms.

These issues have been ongoing for years but it is only now becoming big news nationally.  The bigger problem for U.S. based investors is that a number of bond funds hold Puerto Rican debt because of the high yields they pay.  Those assets are not in jeopardy.

The White Law Group continues to investigate the liability that brokerage firms may have for recommending Puerto Rico bonds or bond funds that invest in Puerto Rico, like Oppenheimer Rochester Fund Municipals A, Oppenheimer Rochester LtdTerm NY MunisA, Double Tax-Free Income A, Oppenheimer Rochester MD Municipal A, Oppenheimer Rochester VA Municipal A.  Brokerage firms are required to make investment recommendations that are suitable for their clients in light of their clients’ age, investment experience, net worth, income, and investment objectives.  High risk junk bonds are not appropriate for all investors.