Puerto Rico's oversight board filed for a form of bankruptcy protection on Wednesday in a major move that could mark the biggest bankruptcy in the history of the U.S. municipal debt market.
The request, coming just one day after major creditors sued the Caribbean island and its Governor Ricardo Rossello over defaults on its $70 billion bonds, is similar to U.S. bankruptcy protection. As a U.S. territory, Puerto Rico is blocked from traditional bankruptcy. As such, the board’s appeal comes under Title III of the PROMESA law, which would give Puerto Rico the ability to legally impose discounts on creditor recoveries.
"The governor needed to show that his primary allegiance lies with the citizens of Puerto Rico, and that was the justification for the filing," David Tawil, whose fund, Maglan Capital, held Puerto Rico GO debt before selling it, said. "I’m not sure whether bondholders are going to get any better treatment or recovery under this course of action."
The governor did note, however, that negotiations for a consensual restructuring agreement wouldn’t come to a halt.
"It is my hope that the Government’s Title III proceedings will accelerate the negotiation process," Rossello said.
The move will likely spark an intense legal battle, with the people, many of whom already struggling with an unemployment rate of 11.5 percent, at stake.