As John Paulson Goes, So Goes His Island Paradise

Puerto Rico's going kind of bankrupt.
Author:
Updated:
Original:
Awaiting the arrival of the S.S. Paul Singer. By AlbertHerring (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Awaiting the arrival of the S.S. Paul Singer. By AlbertHerring (Own work) [CC BY-SA 3.0], via Wikimedia Commons

A few years ago, high-flying hedge fund manager John Paulson was thinking: Now that I’ve put my losing days behind me forever, perhaps I should do something about all of these taxes I’m paying. Something like move to a tropical paradise where he wouldn’t have to pay any of them. As luck would have it, he found such a place: Puerto Rico, which was doing so well its financial plans amounted to bribing gringo billionaires into spending six months of the year sunning themselves on its insolvent, tax-efficient beaches.

In the end, Paulson decided against San Juan, but things went south for him all the same, in spite of those lucrative PuertoRican investments (which at least solved the tax problems). And the island he spurned? Well…

With its creditors at its heels and its coffers depleted, Puerto Rico sought what is essentially bankruptcy relief in federal court on Wednesday, the first time in history that an American state or territory had taken the extraordinary measure.

The island is about $75 billion in debt and has another $50 million or so in unfunded pension liabilities to boot, and the creditors holding that debt—hedge funds and mutual funds, mostly—weren’t particularly interested in the argument that Puerto Rico couldn’t ever hope to pay them. And so, this week, when a litigation freeze expired, they rushed to the courthouse, to be quickly followed by Puerto Rico’s colonial financial administrators.

The Puerto Rico Financial Oversight and Management Board, installed last year by Congress, on Wednesday invoked a law that puts the standoff with creditors before a federal judge in San Juan in a restructuring process known as Title III that doesn’t involve the U.S. bankruptcy court system….

The Trump administration has largely embraced the oversight-board framework established by the Obama administration. Following a meeting with Gov. Ricardo Rosselló in February, Treasury Secretary Steven Mnuchin said Puerto Rico should continue to work with the oversight board, and a Treasury spokeswoman on Wednesday said the department supported the board’s decision to invoke its Title III authority.

But, the hedge funds and bond insurers say, those Congressionally-mandated overseers were supposed to be our Joes, looking out for us and not trying to impose a 75% haircut on us. Back to the courthouse!

“The Commonwealth’s proposal is not a credible starting point for negotiations,” Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison, an adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders, said in a statement. He said that moving the proceedings to bankruptcy court would put the situation in “free-fall.”

Assured Guaranty Ltd. Thursday sued Puerto Rico’s federal oversight board, which one day earlier placed the ailing U.S. territory in what amounts to the largest ever U.S. municipal bankruptcy….

The insurer says the board overstepped when it ordered the payment of no more than $787 million annually in debt service over the next decade. That sum, less than a quarter of the $3.5 billion creditors are owed on average each year, is at the heart of a board-approved fiscal plan that forms the basis for restructuring negotiations.

Perhaps suing on Monday wasn’t the best option, after all.

Puerto Rico Declares a Form of Bankruptcy [DealBook]
Puerto Rico Skids Into Bankruptcy After Years of Economic Distress [WSJ]
Puerto Rico Faces Hedge Fund Lawsuits as U.S. Reprieve Ends [Bloomberg]
Puerto Rico Bond Insurer Becomes First to Challenge Restructuring Plan [WSJ]

Related