Puerto Rico’s Public Debts: Accumulation and Restructuring
Changes from May 10, 2021 to May 18, 2021
This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with red strikethrough and textual matter added in the later version is indicated with blue.
May May
Analyst in Economic Policy Management, and Economic Stability Act (P.L. 114-187;Management, and Economic Stability Act (P.L. 114-187;
restructuring could also become one of the most expensive ever, with professional fees restructuring could also become one of the most expensive ever, with professional fees
The restructuring of Puerto Rico’s public debts could inform future federal responses to fiscal strains faced by The restructuring of Puerto Rico’s public debts could inform future federal responses to fiscal strains faced by
some state and local governments. some state and local governments.
PROMESA created two paths for debt restructuring and established a Financial Oversight and Management Board PROMESA created two paths for debt restructuring and established a Financial Oversight and Management Board
(FOMB; Oversight Board). Title III established a debt restructuring process that draws on the Bankruptcy Code. (FOMB; Oversight Board). Title III established a debt restructuring process that draws on the Bankruptcy Code.
Title VI set up a debt restructuring process similar to some sovereign debt procedures. U.S. District Court Judge Title VI set up a debt restructuring process similar to some sovereign debt procedures. U.S. District Court Judge
Laura Taylor Swain was chosen to preside over Title III cases. PROMESA conditioned the Oversight Board’s Laura Taylor Swain was chosen to preside over Title III cases. PROMESA conditioned the Oversight Board’s
termination on Puerto Rico’s ability to access termination on Puerto Rico’s ability to access “short-term and long-term credit markets at reasonable interest “short-term and long-term credit markets at reasonable interest
due to Hurricanes Irma and María in September 2017, led due to Hurricanes Irma and María in September 2017, led efforts to restructure the island’s public debts through efforts to restructure the island’s public debts through
Puerto Rico’s public debts Puerto Rico’s public debts
the main Treasury accounts of the Commonwealth of Puerto Rico (CPR); salesthe main Treasury accounts of the Commonwealth of Puerto Rico (CPR); sales -tax-backed debt known by its -tax-backed debt known by its
Electric Power Authority (PREPA); and debt issued by local county-like governments (Electric Power Authority (PREPA); and debt issued by local county-like governments (municipios) and other ) and other
Bonds with a par value of $17.6 Bonds with a par value of $17.6
postponements in proceedings to restructure debts of the island’s central government, in early February 2021 the postponements in proceedings to restructure debts of the island’s central government, in early February 2021 the
Board filedBoard filed
This report outlines the accumulation of the island’s public debts and how they are being restructured. Puerto This report outlines the accumulation of the island’s public debts and how they are being restructured. Puerto
Rico has faced a series of fiscal Rico has faced a series of fiscal
to a means to restructure its debts led to PROMESA’s enactment. This report focuses on the largest parts of the to a means to restructure its debts led to PROMESA’s enactment. This report focuses on the largest parts of the
island’s public debt. For brevity’s sake, it discusses restructuring of debts issued by PREPA, the Highways and island’s public debt. For brevity’s sake, it discusses restructuring of debts issued by PREPA, the Highways and
Transportation Authority (HTA), and Transportation Authority (HTA), and
Sewer Authority’s (PRASA’s) relatively stronger finances have kept it from Sewer Authority’s (PRASA’s) relatively stronger finances have kept it from having to restructure its bonds. On May 11, 2021, the Oversight Board affirmed its support for a restructuring plan for PREPA, which had been delayed because of the COVID-19 pandemic, among other disruptions
Hedge funds, which Hedge funds, which
roles in roles in Puerto Rico’s debt restructuring. As default risks on Puerto Rican public debt became evident, many Puerto Rico’s debt restructuring. As default risks on Puerto Rican public debt became evident, many
mutual funds reduced their holdings, mutual funds reduced their holdings,
hedge funds of trading on private information obtained through confidential Title III negotiations. In June 2020, hedge funds of trading on private information obtained through confidential Title III negotiations. In June 2020,
Judge Swain required parties to disclose more about their holdings. Once those disclosures were made, some Judge Swain required parties to disclose more about their holdings. Once those disclosures were made, some
was introduced during the 116th Congress (e.g., H.R. 6975, H.R. 683, S. 1675) to amend PROMESA in ways that was introduced during the 116th Congress (e.g., H.R. 6975, H.R. 683, S. 1675) to amend PROMESA in ways that
could affect debt restructuring processes. On February 24, 2021, the House passed H.R. 1192, which would could affect debt restructuring processes. On February 24, 2021, the House passed H.R. 1192, which would
mandate certain disclosures by professionals working on the island’s debt restructuring. A companion mandate certain disclosures by professionals working on the island’s debt restructuring. A companion
was introduced in the Senate. This report’s Appendices include a more detailed listing of Puerto was introduced in the Senate. This report’s Appendices include a more detailed listing of Puerto Rico’s pre-
process, a chronology of selected events, and a glossary of abbreviations in English and Spanish. process, a chronology of selected events, and a glossary of abbreviations in English and Spanish.
Congressional Research Service Congressional Research Service
link to page link to page
Contents
Introduction ................................................................................................................... 1
The Long Build-Up to Puerto Rico’s Debt Crisis ................................................................. 3
Postwar Development Strategy Made Puerto Rico a Model .............................................. 3
The 2006 Budgetary Crisis.......................................................................................... 3
Tax-Backed COFINA Bonds Provided Stop-Gap Financing ........................................ 4
Experiences with Pension Obligation Bonds ............................................................. 5
2013-2015: Fiscal Pressures Intensify ........................................................................... 7
Last GO Bonds Sold Directly to Hedge Funds in March 2014 ..................................... 8
Federal Courts Strike Down Local Bankruptcy Law .................................................. 9
Governor García Padil a Calls Debt “Unpayable,” Declares Fiscal Emergency ............ 10
Predefault Structure of Puerto Rico’s Public Debts ............................................................. 10
Government Development Bank as Fiscal Agent and Financial Advisor ........................... 11
Categories of Public Debt ......................................................................................... 11
Public Debt and the Puerto Rico Constitution............................................................... 13
PROMESA Enacted in 2016 to Address the Crisis.............................................................. 14
Oversight Board Appointments and Organization ......................................................... 15
PROMESA Established Two Paths to Restructure Debt ................................................. 15
Restructuring COFINA and GO Bonds ............................................................................. 17
New Governor Inaugurated in January 2017 ................................................................ 18
Oversight Board Files PROMESA Title III Petitions in May 2017 ................................... 19
Hurricanes Irma and María Hit Puerto Rico in September 2017 ...................................... 20
Settling the COFINA/GO Dispute .............................................................................. 20
Oversight Board, Title III Court Move to Wrap Up COFINA Restructuring ................. 23
Court Approves Restructuring and Bond Exchange in February 2019 ......................... 24
Concerns over COFINA Settlement and Ethical Conflicts .............................................. 24
Board Pivots GO Restructuring in 2019 ............................................................................ 25
2020: Oversight Board, Hedge Funds Negotiate Over GO Bonds .................................... 26
Accusations of Insider Trading in the GO Restructuring Process ..................................... 27
Calls for Investigations of Al eged Insider Trading .................................................. 27
Restructuring on Hold in 2020 ................................................................................... 28
Oversight Board Announces Revised GO PSA in February 2021..................................... 29
Market Perspectives on Debt Restructuring ....................................................................... 31
What Can Puerto Rico Afford to Pay? .............................................................................. 33
Puerto Rico’s Economy Expected to Shrink ................................................................. 34
Revenue Growth and Tax Policy ................................................................................
Comparison with Heavily Indebted States ...................................................................
Issues for Congress .......................................................................................................
Federalism and Municipal Debt Markets ..................................................................... 38
Federal Policies and Municipal Debt Structures............................................................ 40
Ultra-Long-Term and Exotic Debt .............................................................................. 41
Bankruptcy Procedures, Disclosure, and Potential Conflicts of Interest ....................... 42
An Audit of Puerto Rico’s Public Debt........................................................................
Constitutional Restraints May Be an Ineffective Substitute for Prudent Budgeting ............. 45
Congressional Research Service Congressional Research Service
link to page link to page
Figures
Figure 1. Puerto Rico’s Public Debt, 1960-2017 .................................................................. 4
Figure 2. Puerto Rico’s Public Debt as of July 31, 2016, in $Billions .................................... 12
Figure 3. COFINA Holdings of Senior COFINA Bondholders Coalition
Figure 4. Price Trends for Selected Puerto Rico Bonds........................................................ 32
Figure 5. Projected Puerto Rican and U.S. Economic Growth Rates, 2020-2025 .....................
Figure B-1. Trading Volumes for COFINA Bonds, 2016-2019.............................................. 49
Figure B-2. Price Trends and Trading Volumes for Selected GO Bonds, 2018-2021 ................. 51
Figure B-3. Selected Puerto Rico Building Authority Bond Price Trends and Trading
Volumes, 2018-2020 ................................................................................................... 52
Tables
Table 1. Comparison of February 2021 PSA and October 2020 Board Proposal ...................... 30
Table A-1. Puerto Rico’s Public Debt As of July 31, 2016, in $ Millions ................................
Table B-1. No-Trade Periods According to Sculptor Capital................................................. 50
Table C-1. Selected Chronology of Puerto Rico’s Debt Restructuring.................................... 53
Table D-1. Puerto Rico Table of Common Acronyms .......................................................... 56
Appendixes
Appendix A. Details of Puerto Rico’s Public Debt.............................................................. 46
Appendix B. Price Trends and Trading Volumes for Selected Bonds ..................................... 48
Appendix C. Chronology of Selected Events ..................................................................... 53
Appendix D. Table of Common Acronyms ........................................................................ 56
Contacts
Author Information ....................................................................................................... 57
Congressional Research Service Congressional Research Service
link to page link to page
Introduction
Puerto Rico’s public debts, which totaled just over $70 bil ion when the Puerto Rico Oversight, Puerto Rico’s public debts, which totaled just over $70 bil ion when the Puerto Rico Oversight,
Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30, Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30,
Puerto Rico’s fiscal troubles fel under national scrutiny during summer 2013, after the City of Puerto Rico’s fiscal troubles fel under national scrutiny during summer 2013, after the City of
Detroit’s bankruptcy filing reminded investors that municipal bonds are not risk free, and after Detroit’s bankruptcy filing reminded investors that municipal bonds are not risk free, and after
the financial press noted the precarious state of Puerto Rico’s public finances.1 Beyond the the financial press noted the precarious state of Puerto Rico’s public finances.1 Beyond the
consequences for the island, likely to last decades, the restructuring of Puerto Rico’s public debts consequences for the island, likely to last decades, the restructuring of Puerto Rico’s public debts
could inform future federal responses to fiscal strains faced by some state and local could inform future federal responses to fiscal strains faced by some state and local
governments.2 governments.2
PROMESA, among other provisions, created two paths for debt restructuring: one that draws on PROMESA, among other provisions, created two paths for debt restructuring: one that draws on
established a Financial Oversight and Management Board (FOMB; Oversight Board) and established a Financial Oversight and Management Board (FOMB; Oversight Board) and
empowered it to represent the Puerto Rican government in those debt restructuring processes. empowered it to represent the Puerto Rican government in those debt restructuring processes.
Those processes have included extensive litigation and negotiations with the Puerto Rican Those processes have included extensive litigation and negotiations with the Puerto Rican
government, hedge funds, bond insurers, and other creditors. Destruction caused by Hurricanes government, hedge funds, bond insurers, and other creditors. Destruction caused by Hurricanes
Irma and María in September 2017, gubernatorial turnover, and the complexity of litigation have Irma and María in September 2017, gubernatorial turnover, and the complexity of litigation have
delayed debt restructuring. delayed debt restructuring.
PROMESA conditions the Oversight Board’s termination on Puerto Rico’s ability to access PROMESA conditions the Oversight Board’s termination on Puerto Rico’s ability to access
restructuring the island’s debts into a fiscal y sustainable form is a likely prerequisite to that restructuring the island’s debts into a fiscal y sustainable form is a likely prerequisite to that
access. access.
The City of Detroit, by way of comparison, had about $18 bil ion in debt when it entered The City of Detroit, by way of comparison, had about $18 bil ion in debt when it entered
bankruptcy in 2013.4 Puerto Rico’s public debts, which totaled over $70 bil ion before including bankruptcy in 2013.4 Puerto Rico’s public debts, which totaled over $70 bil ion before including
unfunded pension liabilities, are about four times larger than that sum. Puerto Rico could also unfunded pension liabilities, are about four times larger than that sum. Puerto Rico could also
become one of the most expensive restructurings ever, with professional fees that might exceed become one of the most expensive restructurings ever, with professional fees that might exceed
$1.4 bil ion.5 $1.4 bil ion.5
Disputes over the relative priority of general obligation (GO) debt claims and claims of sales-and- Disputes over the relative priority of general obligation (GO) debt claims and claims of sales-and-
use-tax-backed debt were a central point of contention in the debt restructuring process. The use-tax-backed debt were a central point of contention in the debt restructuring process. The
Oversight Board decided to first restructure the sales tax-backed bonds—known as COFINA Oversight Board decided to first restructure the sales tax-backed bonds—known as COFINA
COFINA bondholders on a split of sales tax revenues between COFINA debt service and Puerto 1 Andrew Bary, “T roubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,” 1 Andrew Bary, “T roubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”
Barron’s, August 26, 2013. , August 26, 2013.
2 For instance, one bankruptcy lawyer stated that Puerto Rico’s debt restructuring process would “ almost certainly 2 For instance, one bankruptcy lawyer stated that Puerto Rico’s debt restructuring process would “ almost certainly
shape future municipal restructurings.” David R. Doyle, “ T he Puerto Rico ‘Bankruptcy’: a Cheat Sheet,” American shape future municipal restructurings.” David R. Doyle, “ T he Puerto Rico ‘Bankruptcy’: a Cheat Sheet,” American
Bankruptcy Institute, https://www.abi.org/feed-item/the-puerto-rico-%E2%80%9Cbankruptcy%E2%80%9D-a-cheat-Bankruptcy Institute, https://www.abi.org/feed-item/the-puerto-rico-%E2%80%9Cbankruptcy%E2%80%9D-a-cheat-
sheet . sheet .
3 PROMESA §209 also requires implementation of modified accrual accounting standards and balanced budgets. 3 PROMESA §209 also requires implementation of modified accrual accounting standards and balanced budgets.
4 Roni A. Elias, “A Lesson From Detroit: Ways to Make Municipal Bankruptcy More Rare and Less Painful,” 4 Roni A. Elias, “A Lesson From Detroit: Ways to Make Municipal Bankruptcy More Rare and Less Painful,” Federal
Lawyer, May 2017, p. 70, https://www.fedbar.org/wp-content/uploads/2017/05/bankruptcy_elias-pdf-1.pdf. , May 2017, p. 70, https://www.fedbar.org/wp-content/uploads/2017/05/bankruptcy_elias-pdf-1.pdf.
5 Christian Ramos Segarra and Rosario Fajardol, “$832 Million in Attorney Fees for Puerto Rico Bankruptcy Process,” 5 Christian Ramos Segarra and Rosario Fajardol, “$832 Million in Attorney Fees for Puerto Rico Bankruptcy Process,”
Weekly Journal/El Vocero, January 27, 2021, https://www.theweeklyjournal.com/business/832-million-in-attorney-, January 27, 2021, https://www.theweeklyjournal.com/business/832-million-in-attorney-
fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-11eb-af4c-e796e78d7a4c.html. fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-11eb-af4c-e796e78d7a4c.html.
6 COFINA is the Corporación del Fondo de Interés Apremiante de Puerto Rico 6 COFINA is the Corporación del Fondo de Interés Apremiante de Puerto Rico. Appendix D lists commonly used lists commonly used
abbreviations and acronyms. abbreviations and acronyms.
Congressional Research Service Congressional Research Service
1 1
Puerto Rico’s Public Debts: Accumulation and Restructuring
Rico’s central government, the Commonwealth of Puerto Rico (CPR). That agreement became a Rico’s central government, the Commonwealth of Puerto Rico (CPR). That agreement became a
plan that a federal district court judge confirmed on February 4, 2019, clearing the way to a plan that a federal district court judge confirmed on February 4, 2019, clearing the way to a
restructuring of Puerto Rico’s COFINA debt, which, at that time, represented nearly one-quarter restructuring of Puerto Rico’s COFINA debt, which, at that time, represented nearly one-quarter
of the island’s outstanding public debt.7 Bonds with a par value of $17.6 bil ion were then of the island’s outstanding public debt.7 Bonds with a par value of $17.6 bil ion were then
exchanged for $12 bil ion in new bonds.8 exchanged for $12 bil ion in new bonds.8
On February 23, 2021, On February 23, 2021,
bondholders” to restructure the island’s GO bonds and certain other central government debts.9 bondholders” to restructure the island’s GO bonds and certain other central government debts.9
by less than a plan put forth in October 2020. The Board filed a disclosure statement describing by less than a plan put forth in October 2020. The Board filed a disclosure statement describing
the amended plan with the Title III court the amended plan with the Title III court on March 8, 2021.10 On May 4, 2021, the Title III court scheduled a hearing for July 13, 2021, on the adequacy of disclosures describing the plan.11
This report outlines the accumulation of Puerto Rico’s debt and the restructuring of the island’s This report outlines the accumulation of Puerto Rico’s debt and the restructuring of the island’s
public debt through processes established by PROMESA. Puerto Rico’s postwar economic public debt through processes established by PROMESA. Puerto Rico’s postwar economic
development strategy of industrialization, as noted below, faltered after the 1973 energy crisis. development strategy of industrialization, as noted below, faltered after the 1973 energy crisis.
Acute fiscal crises in 2006-2007 and 2013-2016 resulted in debt levels that could neither be Acute fiscal crises in 2006-2007 and 2013-2016 resulted in debt levels that could neither be
sustained nor addressed through the Bankruptcy Code, which led to PROMESA’s enactment. sustained nor addressed through the Bankruptcy Code, which led to PROMESA’s enactment.
This report focuses on the largest portions of the island’s public debt. For brevity’s sake, it omits This report focuses on the largest portions of the island’s public debt. For brevity’s sake, it omits
discussion of pensions and the restructuring of public corporations, such as the Puerto Rico discussion of pensions and the restructuring of public corporations, such as the Puerto Rico
smal er entities. Also, the Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) somewhat smal er entities. Also, the Puerto Rico Aqueduct and Sewer Authority’s (PRASA’s) somewhat
stronger financial position has enabled it to avoid the need to seek a restructuring of its bonds. stronger financial position has enabled it to avoid the need to seek a restructuring of its bonds.
The report’s Appendices include a summary of the structure of Puerto Rico’s pre-restructuring The report’s Appendices include a summary of the structure of Puerto Rico’s pre-restructuring
public debts, an analysis of the evolution of prices and trading volumes of selected bonds during public debts, an analysis of the evolution of prices and trading volumes of selected bonds during
the restructuring process, a chronology of selected events, and a glossary of abbreviations in the restructuring process, a chronology of selected events, and a glossary of abbreviations in
English and Spanish. English and Spanish.
7 Laura T aylor Swain, U.S. District Judge, “Memorandum of Opinion and Order Approving Settlement Between 7 Laura T aylor Swain, U.S. District Judge, “Memorandum of Opinion and Order Approving Settlement Between
Commonwealth of Puerto Rico and Puerto Rico Sales T ax Financing Corporation,” February 4, 2019, at Commonwealth of Puerto Rico and Puerto Rico Sales T ax Financing Corporation,” February 4, 2019, at
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMDUx&id2=0. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMDUx&id2=0.
8 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” 8 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” Bond Buyer, February 12, 2019. , February 12, 2019.
9 Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of 9 Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of
General Obligation and Public Building Authority Bonds Committed; Mediation Continues to Gain Support Across General Obligation and Public Building Authority Bonds Committed; Mediation Continues to Gain Support Across
Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/
149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, “ New Debt Agreement Opens Path to 149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, “ New Debt Agreement Opens Path to
Exit From Bankruptcy,” press release, February 23, 2021, https://drive.google.com/file/d/Exit From Bankruptcy,” press release, February 23, 2021, https://drive.google.com/file/d/
1go1HKPzYdtGFVFSfEotCgGDW7T Hhtn0j/view. 1go1HKPzYdtGFVFSfEotCgGDW7T Hhtn0j/view.
10 In re: CPR, Oversight Board, 10 In re: CPR, Oversight Board, Second Amended Title III Joint Plan Of Adjustment of the Commonwealth of Puerto
Rico, et al., March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. , March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view.
11 11 Laura T aylor Swain, U.S. District Judge, “Order Scheduling a Hearing on the Adequacy of Information Contained in the Disclosure Statement,” May 4, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MT AxMjI3OA==&id2=0. 12 On May 11, 2021, the Oversight Board affirmed its support for a restruct uring plan for PREPA, which had been delayed because of the COVID-19 pandemic, among other disruptions. Oversight Board, Status Report, May 11, 2021, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MT AxMzMxNg==&id2=0. 13 T he federal government agreed to reduce debt service on Clean Water State Revolving Fund Programs, the Drinking T he federal government agreed to reduce debt service on Clean Water State Revolving Fund Programs, the Drinking
Water State Revolving Fund Programs, and the U.S. Department of Agriculture’s Rural Development (RD) Program. Water State Revolving Fund Programs, and the U.S. Department of Agriculture’s Rural Development (RD) Program.
See PRASA, See PRASA, 2020 Fiscal Plan, June 29, 2020, pp. 3-60, 3-61, https://www.aafaf.pr.gov/wp-content/uploads/2020-, June 29, 2020, pp. 3-60, 3-61, https://www.aafaf.pr.gov/wp-content/uploads/2020-
Fiscal-Plan-for-PRASA-as-Certified-by-FOMB-on-June-29-2020.pdf. Fiscal-Plan-for-PRASA-as-Certified-by-FOMB-on-June-29-2020.pdf.
Congressional Research Service Congressional Research Service
2 2
link to page link to page
The Long Build-Up to Puerto Rico’s Debt Crisis
Over the past few decades, Puerto Rico’s government has struggled to collect sufficient revenues Over the past few decades, Puerto Rico’s government has struggled to collect sufficient revenues
to cover outlays, which led to rising public debt levels and growing unfunded pension liabilities. to cover outlays, which led to rising public debt levels and growing unfunded pension liabilities.
Postwar Development Strategy Made Puerto Rico a Model
From the onset of World War II in 1939 until the 1973 energy crisis, Puerto Rico had been put From the onset of World War II in 1939 until the 1973 energy crisis, Puerto Rico had been put
forth as a model for economic development through industrialization supported by generous tax forth as a model for economic development through industrialization supported by generous tax
incentives.incentives.
heightened trade competition from middle-income countries, brought Puerto Rico’s postwar era heightened trade competition from middle-income countries, brought Puerto Rico’s postwar era
of rapid economic progress to an end. of rapid economic progress to an end.
During the 20th century, Puerto Rico closed much of the gap with the mainland in per capita During the 20th century, Puerto Rico closed much of the gap with the mainland in per capita
income, literacy, and health status. income, literacy, and health status.
terms of median household income, than the poorest mainland state. Since then, that income gap terms of median household income, than the poorest mainland state. Since then, that income gap
has narrowed more slowly.has narrowed more slowly.
remained nearly steady before increasing in the mid-1980s, as shown iremained nearly steady before increasing in the mid-1980s, as shown in Figure 1. By 2014, the . By 2014, the
island’s public debt reached a level roughly equivalent to its gross national product (GNP). island’s public debt reached a level roughly equivalent to its gross national product (GNP).
Public corporations, which provide electricity, water, transportation, and other publicly provided Public corporations, which provide electricity, water, transportation, and other publicly provided
services, accounted for much of that accumulation of debt. Puerto Rico’s central government, services, accounted for much of that accumulation of debt. Puerto Rico’s central government,
whose budgets were considered separate from its public corporations, kept revenues and outlays whose budgets were considered separate from its public corporations, kept revenues and outlays
roughly in balance until 2000, when outlays began to consistently outpace revenues. roughly in balance until 2000, when outlays began to consistently outpace revenues.
The 2006 Budgetary Crisis
In 2006, the Puerto Rican legislature and then-Governor Aníbal Acevedo Vilá reached an impasse In 2006, the Puerto Rican legislature and then-Governor Aníbal Acevedo Vilá reached an impasse
on a budget and how to address looming fiscal chal enges. By late 2006, after credit rating on a budget and how to address looming fiscal chal enges. By late 2006, after credit rating
agencies downgraded the island’s GO bonds nearly to junk status, island officials and their agencies downgraded the island’s GO bonds nearly to junk status, island officials and their
no. 4 (December 1980), pp. 52-75, http://www.jstor.org/stable/27861908. According to one recent analysis, “ real [gross no. 4 (December 1980), pp. 52-75, http://www.jstor.org/stable/27861908. According to one recent analysis, “ real [gross
domestic product] GDP per capita increased at a rate of 5.3 percent between 1950 and 1974.” John Devereux, domestic product] GDP per capita increased at a rate of 5.3 percent between 1950 and 1974.” John Devereux,
“Arrested Development? Puerto Rico in an American Century,” “Arrested Development? Puerto Rico in an American Century,” Journal of Economic History, vol. 79, no. 3 , vol. 79, no. 3
(September 2019), pp. 708-735. (September 2019), pp. 708-735.
request a longer memorandum version. request a longer memorandum version.
& Hum an Biology, vol. 38, August 2020. , vol. 38, August 2020.
estimate. T he 2014-2018 American Community Survey found Puerto Rico’s median householdestimate. T he 2014-2018 American Community Survey found Puerto Rico’s median household
Mississippi’s and 33% of the U.S. estimate. Mississippi’s and 33% of the U.S. estimate.
http://www.gdb-pur.com/documents/CommonwealthQuarterlyReport71714.pdf; and Commonwealth of Puerto Rico, http://www.gdb-pur.com/documents/CommonwealthQuarterlyReport71714.pdf; and Commonwealth of Puerto Rico,
Consolidated Annual Financial Report for FY2013 , note 22, pp. 230-231, http://www.hacienda.gobierno.pr/downloads/, note 22, pp. 230-231, http://www.hacienda.gobierno.pr/downloads/
pdf/cafr/FINANCIAL_REPORT _2013.pdf. GNP, which measures the island’s total income, is typically used to pdf/cafr/FINANCIAL_REPORT _2013.pdf. GNP, which measures the island’s total income, is typically used to
measure the Puerto Rican economy because gross domestic product (GDP) is distorted by the tax measure the Puerto Rican economy because gross domestic product (GDP) is distorted by the tax
of multinational corporations with Puerto Rican subsidiaries. of multinational corporations with Puerto Rican subsidiaries.
Jurídica Universidad de Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832, esp. T able 2. , vol. 85, no. 3 (2016), pp. 819-832, esp. T able 2.
Congressional Research Service Congressional Research Service
3 3
Puerto Rico’s Public Debts: Accumulation and Restructuring
financial advisors soon came to view bonds backed by sales tax revenues as one way to manage financial advisors soon came to view bonds backed by sales tax revenues as one way to manage
fiscal chal enges. fiscal chal enges.
Tax-Backed COFINA Bonds Provided Stop-Gap Financing
Seeking to pay off old debts incurred without a clear means of repayment, the island’s legislature Seeking to pay off old debts incurred without a clear means of repayment, the island’s legislature
and governor enacted measures in the second half of 2006 that set up a securitization of a new and governor enacted measures in the second half of 2006 that set up a securitization of a new
5.5% sales and use tax, which replaced an excise tax. 5.5% sales and use tax, which replaced an excise tax.
a high credit rating, and thus could be issued with a lower yield, reducing debt service costs to the a high credit rating, and thus could be issued with a lower yield, reducing debt service costs to the
Puerto Rican government. Puerto Rican government.
Figure 1. Puerto Rico’s Public Debt, 1960-2017
In bil ions of constant (FY2017) dol ars In bil ions of constant (FY2017) dol ars
Source: Statistical Appendix (Apéndice Estadístico), various years; available at https://web.archive.org/web/ various years; available at https://web.archive.org/web/
20160831062749/http://www.jp.gobierno.pr/Portal_JP/Default.aspx?tabid=184. 20160831062749/http://www.jp.gobierno.pr/Portal_JP/Default.aspx?tabid=184.
Notes: Data represent gross public debt of Puerto Rico as of June 30 of each year, provided by the Government Data represent gross public debt of Puerto Rico as of June 30 of each year, provided by the Government
Development Bank of Puerto Rico. Figures for 1989 and 2014 were preliminary estimates. HTA and the Development Bank of Puerto Rico. Figures for 1989 and 2014 were preliminary estimates. HTA and the
University of Puerto Rico are included in the Commonwealth Government subtotal. The U.S. GDP price index is University of Puerto Rico are included in the Commonwealth Government subtotal. The U.S. GDP price index is
used to adjust levels for inflation. Recent used to adjust levels for inflation. Recent Apéndices Estadístico omit debt data. omit debt data.
Congressional Research Service Congressional Research Service
4 4
Puerto Rico’s Public Debts: Accumulation and Restructuring
COFINA was established as a public corporation controlled by the Government Development COFINA was established as a public corporation controlled by the Government Development
Bank (GDB) to issue bonds backed by half of the proceeds of the new tax, which were divided Bank (GDB) to issue bonds backed by half of the proceeds of the new tax, which were divided
between senior bonds carrying stronger investor protections and junior (subordinate) bonds.between senior bonds carrying stronger investor protections and junior (subordinate) bonds.
COFINA provided funds to the Puerto Rican government and helped service its debts, but its COFINA provided funds to the Puerto Rican government and helped service its debts, but its
proceeds were not tied to infrastructure projects. Instead, funds covered past debts and continuing proceeds were not tied to infrastructure projects. Instead, funds covered past debts and continuing
operating budget deficits—a process termed “scoop and toss.”operating budget deficits—a process termed “scoop and toss.”
its relation to fiscal provisions in the Puerto Rican Constitution later became a central point of its relation to fiscal provisions in the Puerto Rican Constitution later became a central point of
contention in debt restructuring litigation and negotiations, as subsequent sections wil discuss. contention in debt restructuring litigation and negotiations, as subsequent sections wil discuss.
As the Great Recession of 2007-2009 strained Puerto Rico’s economy and public finances, more As the Great Recession of 2007-2009 strained Puerto Rico’s economy and public finances, more
COFINA bonds were issued. Those bonds were viewed as a more favorable financing option COFINA bonds were issued. Those bonds were viewed as a more favorable financing option
because they carried better credit ratings than CPR GO debt and thus could be issued with a lower because they carried better credit ratings than CPR GO debt and thus could be issued with a lower
yield. The last COFINA bonds were issued in 2011.yield. The last COFINA bonds were issued in 2011.
Board member Carlos García held senior posts in GDB, including serving as its president. From Board member Carlos García held senior posts in GDB, including serving as its president. From
2001 through 2006, García worked at Banco Santander, which helped place Puerto Rico’s 2001 through 2006, García worked at Banco Santander, which helped place Puerto Rico’s
pension bonds and which accumulated large holdings of COFINA bonds. pension bonds and which accumulated large holdings of COFINA bonds.
Experiences with Pension Obligation Bonds
The Great Recession and ongoing budgetary pressures also affected Puerto Rico’s three public The Great Recession and ongoing budgetary pressures also affected Puerto Rico’s three public
pension systems, which had been severely underfunded. Unfunded obligations of Puerto Rico’s pension systems, which had been severely underfunded. Unfunded obligations of Puerto Rico’s
public pension systems were estimated at over $40 bil ion in 2016. Many beneficiaries of Puerto public pension systems were estimated at over $40 bil ion in 2016. Many beneficiaries of Puerto
Rico’s public pensions were ineligible for the federal Social Security program, leaving them Rico’s public pensions were ineligible for the federal Social Security program, leaving them
dependent on systems with few remaining assets and uncertain financial prospects. dependent on systems with few remaining assets and uncertain financial prospects.
In 2006, Merril Lynch advisors suggested that the Puerto Rico Employee Retirement System In 2006, Merril Lynch advisors suggested that the Puerto Rico Employee Retirement System
(ERS) and Merril Lynch issue at least $7 bil ion in pension obligation bonds (POBs). Merril (ERS) and Merril Lynch issue at least $7 bil ion in pension obligation bonds (POBs). Merril
Lynch was unable to place those bonds with investors because the bonds were ineligible for a Lynch was unable to place those bonds with investors because the bonds were ineligible for a
federal tax exemption. federal tax exemption.
Other jurisdictions have issued POBs in the hope that returns on investments funded by bond Other jurisdictions have issued POBs in the hope that returns on investments funded by bond
proceeds would cover principal and interest payments plus the forgone investment earnings that proceeds would cover principal and interest payments plus the forgone investment earnings that
could have been made using contributions pledged to back the bonds—an approach known as an could have been made using contributions pledged to back the bonds—an approach known as an
arbitrage strategy.arbitrage strategy.
investment yields sufficiently high, if fees and other costs were low, and if bond proceeds were investment yields sufficiently high, if fees and other costs were low, and if bond proceeds were
not diverted to cover other liabilities. Low yields or losses would expand pension liabilities. not diverted to cover other liabilities. Low yields or losses would expand pension liabilities.
In 2008, UBS (Union Bank of Switzerland)—which had also advised island officials on the In 2008, UBS (Union Bank of Switzerland)—which had also advised island officials on the
structure of the bonds—underwrote three rounds of POBs. UBS’s own proprietary funds—largely structure of the bonds—underwrote three rounds of POBs. UBS’s own proprietary funds—largely
Corporation, was established by Act 91-2006, enacted May 13, 2006, http://www.lexjuris.com/lexlex/leyes2006/Corporation, was established by Act 91-2006, enacted May 13, 2006, http://www.lexjuris.com/lexlex/leyes2006/
lexl2006091.htm; Act 117-2006, enacted July 4, 2006 (established sales and use tax); Act 291-2006, enacted December lexl2006091.htm; Act 117-2006, enacted July 4, 2006 (established sales and use tax); Act 291-2006, enacted December
26, 2006. Kobre & Kim LLP, 26, 2006. Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-, August 20, 2018, https://drive.google.com/file/d/19-
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Part VI of that report presents an analysis of COFINA debt. GDB’s lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view. Part VI of that report presents an analysis of COFINA debt. GDB’s
board acted as COFINA’s board. Act 56-2007 (pp. 3-4) granted COFINA the same legal privileges as GDB. board acted as COFINA’s board. Act 56-2007 (pp. 3-4) granted COFINA the same legal privileges as GDB.
Existing Bonds,” Existing Bonds,” Wall Street Journal, December 2, 2013. , December 2, 2013.
http://periodismoinvestigativo.com/wp-content/uploads//2016/12/TE-1Q2016.pdf. http://periodismoinvestigativo.com/wp-content/uploads//2016/12/TE-1Q2016.pdf.
Congressional Research Service Congressional Research Service
5 5
Puerto Rico’s Public Debts: Accumulation and Restructuring
closed-end mutual funds marketed to Puerto Rico residents—bought 41% of the first POB issue, closed-end mutual funds marketed to Puerto Rico residents—bought 41% of the first POB issue,
89% of the second issue, and 38% of the third. Santander and Banco Popular, two of the largest 89% of the second issue, and 38% of the third. Santander and Banco Popular, two of the largest
banks in Puerto Rico, apparently bought nearly al of the remaining bonds in the second issue. banks in Puerto Rico, apparently bought nearly al of the remaining bonds in the second issue.
The Puerto Rico POBs incurred substantial losses and raised serious questions regarding the The Puerto Rico POBs incurred substantial losses and raised serious questions regarding the
judgement of ERS board members, the island government’s financial advisors, and investment judgement of ERS board members, the island government’s financial advisors, and investment
banks involved in implementing the bond sales. A 2010 analysis of the ERS POBs’ issuance by banks involved in implementing the bond sales. A 2010 analysis of the ERS POBs’ issuance by
financial analysis firm Conway MacKenzie was sharply critical of responsible officials.financial analysis firm Conway MacKenzie was sharply critical of responsible officials.
underlying bonds’ poor performance and the use of leverage resulted in substantial losses for underlying bonds’ poor performance and the use of leverage resulted in substantial losses for
retail investors who held those UBS mutual funds. retail investors who held those UBS mutual funds.
pay $34 mil ion to settle claims regarding marketing of its closed-end bond funds with the U.S. pay $34 mil ion to settle claims regarding marketing of its closed-end bond funds with the U.S.
Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority
(FINRA) in September 2015. One UBS financial advisor pleaded guilty to criminal fraud charges (FINRA) in September 2015. One UBS financial advisor pleaded guilty to criminal fraud charges
in November 2018. in November 2018.
Bonds and Municipal Finance
State and local governments borrow to finance schools, streets, sewers, and other public infrastructure projects, State and local governments borrow to finance schools, streets, sewers, and other public infrastructure projects,
or to support certain private projects, as wel as to close short-term gaps between public revenues and outlays. or to support certain private projects, as wel as to close short-term gaps between public revenues and outlays.
U.S. state and local borrowing totaled over $3 tril ion in mid-2020.U.S. state and local borrowing totaled over $3 tril ion in mid-2020.
are general y exempt from federal taxes. Most states exempt their own securities from tax, though fewer exempt are general y exempt from federal taxes. Most states exempt their own securities from tax, though fewer exempt
those of other states. Bonds issued by Puerto Rico, with some exceptions, offer a triple exemption from taxes—those of other states. Bonds issued by Puerto Rico, with some exceptions, offer a triple exemption from taxes—
that is, exempt from federal, state, and local taxes—that made them attractive to municipal mutual fund managers that is, exempt from federal, state, and local taxes—that made them attractive to municipal mutual fund managers
and to high-income households.and to high-income households.
Municipal securities offered on the U.S. mainland are subject to SEC regulation, though securities issued by Municipal securities offered on the U.S. mainland are subject to SEC regulation, though securities issued by
investment companies based in U.S. territories are not covered by the 1940 Investment Company Act (ICA; P.L. investment companies based in U.S. territories are not covered by the 1940 Investment Company Act (ICA; P.L.
76-768).76-768).
Retirement System Bonds into its Puerto Rican Municipal Bond Funds in 2008,” Securities Litigation & Consulting Retirement System Bonds into its Puerto Rican Municipal Bond Funds in 2008,” Securities Litigation & Consulting
Group blog, November 6, 2014, http://blog.slcg.com/2014/11/ubs-succumbed-to-conflicts-and.html. Group blog, November 6, 2014, http://blog.slcg.com/2014/11/ubs-succumbed-to-conflicts-and.html.
Em ployees Retirem ent System of the Governm ent of Puerto Rico , October 2010, , October 2010,
http://www.slcg.com/pdf/blog/13409.pdf. http://www.slcg.com/pdf/blog/13409.pdf.
System Bonds,” Securities Litigation & Consulting Group blog, May 16, 2017, http://blog.slcg.com/2017/05/ubs-and-System Bonds,” Securities Litigation & Consulting Group blog, May 16, 2017, http://blog.slcg.com/2017/05/ubs-and-
santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished Pensions,” santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished Pensions,”
Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also see David Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also see David
Evans, “How UBS Spread the Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg, September 22, 2015, Evans, “How UBS Spread the Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg, September 22, 2015,
https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients. https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients.
November 16, 2019, https://www.justice.gov/opa/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-November 16, 2019, https://www.justice.gov/opa/pr/former-registered-financial-advisor-pleads-guilty-bank-fraud-role-
scheme-fraudulently-obtain. Also see Kate McCormick, “ Former UBS Insider Says Banks Fueled Economic Crisis inscheme-fraudulently-obtain. Also see Kate McCormick, “ Former UBS Insider Says Banks Fueled Economic Crisis in
Puerto Rico,” May 1, 2018, Puerto Rico,” May 1, 2018, PBS Frontline, https://www.pbs.org/wgbh/frontline/article/former-ubs-insider-says-banks-, https://www.pbs.org/wgbh/frontline/article/former-ubs-insider-says-banks-
fueled-economic-crisis-in-puerto-rico/. fueled-economic-crisis-in-puerto-rico/.
Level [SLGSDODNS],” https://fred.stlouisfed.org/series/SLGSDODNS. Level [SLGSDODNS],” https://fred.stlouisfed.org/series/SLGSDODNS.
Retirement System (ERS) bonds, for example, did not qualify for certain mainland tax exemptions. See Kobre & Kim Retirement System (ERS) bonds, for example, did not qualify for certain mainland tax exemptions. See Kobre & Kim
LLP, LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-, August 20, 2018, https://drive.google.com/file/d/19-
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, p. 338. lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, p. 338.
extend for another three years. extend for another three years.
Congressional Research Service Congressional Research Service
6 6
Puerto Rico’s Public Debts: Accumulation and Restructuring
Municipal—or muni—securities mostly fal into two broad categories. General obligation (GO) bonds are typical y Municipal—or muni—securities mostly fal into two broad categories. General obligation (GO) bonds are typical y
backed by a government’s pledge of “ful faith and credit,” backed by the power to tax. Revenue bonds, often backed by a government’s pledge of “ful faith and credit,” backed by the power to tax. Revenue bonds, often
issued by public utilities, public corporations, or semi-independent authorities, can be backed by specific cash flows issued by public utilities, public corporations, or semi-independent authorities, can be backed by specific cash flows
from a project or source—such as sales of water or electric power, sewer charges,from a project or source—such as sales of water or electric power, sewer charges,
broadly applied tax. Revenue bonds, while tied to narrower income streams than GO debt, can qualify for certain broadly applied tax. Revenue bonds, while tied to narrower income streams than GO debt, can qualify for certain
investor protections.investor protections.
Default rates for muni securities historical y have been wel below rates for corporate debt, although municipal Default rates for muni securities historical y have been wel below rates for corporate debt, although municipal
default rates have risen in the past two decades. The credit rating agency Moody’s found thatdefault rates have risen in the past two decades. The credit rating agency Moody’s found that
period (2008-2017) almost 10% of corporate issuances defaulted, but less than 0.5% of municipal issuances did.period (2008-2017) almost 10% of corporate issuances defaulted, but less than 0.5% of municipal issuances did.
Major defaults in recent decades include a mismanaged nuclear power project in Washington State, Orange Major defaults in recent decades include a mismanaged nuclear power project in Washington State, Orange
County in Southern California, and the City of Detroit.County in Southern California, and the City of Detroit.
and the Territory of Florida defaulted or repudiated debts in the 19th century.and the Territory of Florida defaulted or repudiated debts in the 19th century.
2013-2015: Fiscal Pressures Intensify
The island’s fiscal condition began to raise widespread concerns in financial markets and among The island’s fiscal condition began to raise widespread concerns in financial markets and among
policymakers in mid-2013, after Detroit filed for municipal bankruptcy and a business magazine policymakers in mid-2013, after Detroit filed for municipal bankruptcy and a business magazine
criticized Puerto Rico’s fiscal condition.criticized Puerto Rico’s fiscal condition.
inaugurated in January 2013, hired a team of debt restructuring advisors in early 2014. inaugurated in January 2013, hired a team of debt restructuring advisors in early 2014.
Ratings on the island’s public debt—which had reached a level roughly equivalent to the island’s Ratings on the island’s public debt—which had reached a level roughly equivalent to the island’s
gross national product (GNP)gross national product (GNP)
local bankruptcy law, another round of downgrades put several of the debt ratings for the island’s local bankruptcy law, another round of downgrades put several of the debt ratings for the island’s
public corporations below investment grade. Ratings for COFINA and GO bonds were also public corporations below investment grade. Ratings for COFINA and GO bonds were also
Revenues Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or Revenues Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or
Required?” Required?” Municipal Finance Journal, vol. 39(4), winter 2019, pp. 47-97. , vol. 39(4), winter 2019, pp. 47-97.
https://www.treasurer.ca.gov/cdiac/seminars/2019/20190212/day2/6.pdf. https://www.treasurer.ca.gov/cdiac/seminars/2019/20190212/day2/6.pdf.
https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/. https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/.
were Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, T ennessee, and were Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, T ennessee, and
Virginia. Also see William B. English, “Virginia. Also see William B. English, “
1840s,” 1840s,” American Economic Review, vol. 86, no. 1 (March 1996), pp. 259-275. , vol. 86, no. 1 (March 1996), pp. 259-275.
Barron’s, August 26, 2013. , August 26, 2013.
March 6, 2014, http://www.bloomberg.com/news/articles/2014-03-05/puerto-rico-gdb-hires-millstein-affiliate-as- March 6, 2014, http://www.bloomberg.com/news/articles/2014-03-05/puerto-rico-gdb-hires-millstein-affiliate-as-
financial-adviser. Also see Emily Glazer and Mike Cherney, “ Puerto Rico Finance Arm Hires Restructuring Lawyers: financial-adviser. Also see Emily Glazer and Mike Cherney, “ Puerto Rico Finance Arm Hires Restructuring Lawyers:
Government Development Bank for Puerto Rico Hires Cleary Government Development Bank for Puerto Rico Hires Cleary
7, 2014. 7, 2014.
CommonwealthQuarterlyReport71714.pdf. GNP, which measures the value of output created within a given CommonwealthQuarterlyReport71714.pdf. GNP, which measures the value of output created within a given
jurisdiction, is considered a more accurate indicator of Puerto Rico’s level of economic activity than gross jurisdiction, is considered a more accurate indicator of Puerto Rico’s level of economic activity than gross
product (GDP), which in Puerto Rico is strongly influenced by transactions of multinational corporations that often product (GDP), which in Puerto Rico is strongly influenced by transactions of multinational corporations that often
have a tenuous connection to the island’s economy. have a tenuous connection to the island’s economy.
http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT _2013.pdf. http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT _2013.pdf.
Congressional Research Service Congressional Research Service
7 7
Puerto Rico’s Public Debts: Accumulation and Restructuring
downgraded. downgraded.
access to capital markets. access to capital markets.
Last GO Bonds Sold Directly to Hedge Funds in March 2014
Lacking access to normal channels of municipal finance, the island’s government issued $3.5 Lacking access to normal channels of municipal finance, the island’s government issued $3.5
bil ion in GO bonds to a syndicate of hedge funds in March 2014—a month after the credit bil ion in GO bonds to a syndicate of hedge funds in March 2014—a month after the credit
ratings on the island’s GO bonds had been downgraded to junk status. ratings on the island’s GO bonds had been downgraded to junk status.
8.6% yield, wel above usual rates in the municipal finance market.8.6% yield, wel above usual rates in the municipal finance market.
issued with a provision that New York State law would govern disputes, then viewed as a issued with a provision that New York State law would govern disputes, then viewed as a
significant investor protection. Moreover, the Puerto Rico Constitution sets debt service as a top significant investor protection. Moreover, the Puerto Rico Constitution sets debt service as a top
priority, before other public outlays. priority, before other public outlays.
About $900 mil ion of the bond proceeds went to pay off bank loans, including to banks involved About $900 mil ion of the bond proceeds went to pay off bank loans, including to banks involved
in underwriting the issue.in underwriting the issue.
in the deal, including former GDB head Jorge Irizarry, who later led a coalitionin the deal, including former GDB head Jorge Irizarry, who later led a coalition
local junior COFINA bondholders. local junior COFINA bondholders.
funds Paulson & Company, Och-Ziff Capital,funds Paulson & Company, Och-Ziff Capital,
Capital reportedly each bought more than $100 mil ion of the issue. Capital reportedly each bought more than $100 mil ion of the issue.
(Ley 71 de 2014; Act 71-2014; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto (Ley 71 de 2014; Act 71-2014; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto
Rico). T he law is also called the “ Recovery Act” or the “ Local Bankruptcy Law” (“ Rico). T he law is also called the “ Recovery Act” or the “ Local Bankruptcy Law” (“ Ley de Quiebra Criolla”). ”).
and the Commonwealth,” July 3, 2013. Also see Kobre & Kim LLP, and the Commonwealth,” July 3, 2013. Also see Kobre & Kim LLP, Final Investigative Report, August 20, 2018, , August 20, 2018,
https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 189-190; and CRS Report https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 189-190; and CRS Report
R44095, R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin, , by D. Andrew Austin, Puerto Rico’s Current Fiscal Challenges, by , by
D. Andrew Austin. D. Andrew Austin.
02/11/fitch-cuts-puerto-ricos-debt-to-junk/. Downgrades were triggered by warnings that the Government Development 02/11/fitch-cuts-puerto-ricos-debt-to-junk/. Downgrades were triggered by warnings that the Government Development
Bank faced liquidity challenges. Bank faced liquidity challenges.
implying an initial yield of 8.6%. T he average yield for Bond Buyer 20-Bond GO Index for 2014 was 4.25%. See WM implying an initial yield of 8.6%. T he average yield for Bond Buyer 20-Bond GO Index for 2014 was 4.25%. See WM
Financial Strategies, “ Rates Over T ime,” November 2020, http://www.munibondadvisor.com/market.htm. T he bond’s Financial Strategies, “ Rates Over T ime,” November 2020, http://www.munibondadvisor.com/market.htm. T he bond’s
official statement warned the “ Commonwealth may be unable to honor its obligation to pay debt service on the Bonds,” official statement warned the “ Commonwealth may be unable to honor its obligation to pay debt service on the Bonds,”
GDB, 2014A GO Bond Official Statement, March 11, 2014, https://web.archive.org/web/20160317092340/http://GDB, 2014A GO Bond Official Statement, March 11, 2014, https://web.archive.org/web/20160317092340/http://
www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF. www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF.
https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-debt-created-a-perfect-storm-before-the-storm. https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-debt-created-a-perfect-storm-before-the-storm.
https://www.bloomberg.com/news/articles/2017-06-28/sec-probes-barclays-morgan-stanley-bankers-on-puerto-rico-https://www.bloomberg.com/news/articles/2017-06-28/sec-probes-barclays-morgan-stanley-bankers-on-puerto-rico-
bonds. Also see Robert Slavin, “ Morgan Stanley Hires Former GDB President to Attract Puerto Rico Business,” bonds. Also see Robert Slavin, “ Morgan Stanley Hires Former GDB President to Attract Puerto Rico Business,” Bond
Buyer, April 30, 2013. Irizarry later headed the , April 30, 2013. Irizarry later headed the Bonistas del Patio group, which played a role in the COFINA group, which played a role in the COFINA
restructuring. restructuring.
El Vocero, April 9, 2018, p. 5, https://issuu.com/vocero.com/docs/v04092018__1_/4. , April 9, 2018, p. 5, https://issuu.com/vocero.com/docs/v04092018__1_/4.
U.S. Department of Justice related to trade in conflict diamonds and minerals expired. See Sculptor Capital, “U.S. Department of Justice related to trade in conflict diamonds and minerals expired. See Sculptor Capital, “ Och -Ziff Och -Ziff
Capital Management Changes Name to Sculptor Capital Management,” press release, September 12, 2019, Capital Management Changes Name to Sculptor Capital Management,” press release, September 12, 2019,
https://www.globenewswire.com/news-release/2019/09/12/1914643/0/en/Och-Ziff-Capital-Management-Changes-https://www.globenewswire.com/news-release/2019/09/12/1914643/0/en/Och-Ziff-Capital-Management-Changes-
Name-to-Sculptor-Capital-Management.html. Also see U.S. v. Och-Ziff, Name-to-Sculptor-Capital-Management.html. Also see U.S. v. Och-Ziff, Deferred Prosecution Agreem ent, September , September
26, 2016, https://www.justice.gov/criminal-fraud/file/900261/download. 26, 2016, https://www.justice.gov/criminal-fraud/file/900261/download.
Congressional Research Service Congressional Research Service
8 8
Puerto Rico’s Public Debts: Accumulation and Restructuring
After the 2014 GO issuance, hedge funds expanded their involvement in Puerto Rico, both in After the 2014 GO issuance, hedge funds expanded their involvement in Puerto Rico, both in
purchases of bonds as wel as contact with officials and policymakers. The ratings agency Fitch, purchases of bonds as wel as contact with officials and policymakers. The ratings agency Fitch,
according to reports, found that some 60 hedge funds held about $16 bil ion of Puerto Rico’s according to reports, found that some 60 hedge funds held about $16 bil ion of Puerto Rico’s
public debt, about 22% of the total amount, by fal 2014.public debt, about 22% of the total amount, by fal 2014.
Goldman Sachs’s holdings of Puerto Rican debt increased to a reported $1.3 bil ion in 2014. Goldman Sachs’s holdings of Puerto Rican debt increased to a reported $1.3 bil ion in 2014.
Federal Courts Strike Down Local Bankruptcy Law
The Puerto Rican government lost access to Chapter 9 of the U.S. Bankruptcy Code, which The Puerto Rican government lost access to Chapter 9 of the U.S. Bankruptcy Code, which
governs the adjustment of municipal debts, in 1984.governs the adjustment of municipal debts, in 1984.
corporations facing severe liquidity chal enges, island policymakers sought to create a path to corporations facing severe liquidity chal enges, island policymakers sought to create a path to
restructuring debts through local laws. In particular, the deterioration of PREPA’s finances and restructuring debts through local laws. In particular, the deterioration of PREPA’s finances and
operations became evident in spring 2014.operations became evident in spring 2014.
signed a restructuring support agreement (RSA) with its creditors, which included appointment of signed a restructuring support agreement (RSA) with its creditors, which included appointment of
an outside chief restructuring officer. an outside chief restructuring officer.
In June 2014, Puerto Rico enacted a local bankruptcy law, which heightened concerns of default In June 2014, Puerto Rico enacted a local bankruptcy law, which heightened concerns of default
risks.risks.
Franklin mutual fund groups, chal enged the law.Franklin mutual fund groups, chal enged the law.
law, which would enhance CPR’s ability to pay GO debt by al owing cramdowns of public law, which would enhance CPR’s ability to pay GO debt by al owing cramdowns of public
2015, https://periodismoinvestigativo.com/2015/04/vulture-funds-have-puerto-rico-cornered/. 2015, https://periodismoinvestigativo.com/2015/04/vulture-funds-have-puerto-rico-cornered/.
https://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/. Also see Joel Cintrón https://dealbook.nytimes.com/2014/09/12/puerto-rico-finds-it-has-new-friends-in-hedge-funds/. Also see Joel Cintrón
Arbasetti and Carla Minet, “Out in the Open, Hedge Funds in Puerto Rico,” Center for Investigative Journalism, July Arbasetti and Carla Minet, “Out in the Open, Hedge Funds in Puerto Rico,” Center for Investigative Journalism, July
14, 2015, https://periodismoinvestigativo.com/2015/07/out-in-the-open-hedge-funds-in-puerto-rico/. 14, 2015, https://periodismoinvestigativo.com/2015/07/out-in-the-open-hedge-funds-in-puerto-rico/.
26, 2015. 26, 2015.
defining who may be a debtor under chapter 9,” which removed Puerto Rico’s access to Chapter 9. See Jon Greenberg, defining who may be a debtor under chapter 9,” which removed Puerto Rico’s access to Chapter 9. See Jon Greenberg,
“Mystery: Strom T hurmond, Puerto Rico and Bankruptcy Protection,” PolitiFact, April 27, 2016, “Mystery: Strom T hurmond, Puerto Rico and Bankruptcy Protection,” PolitiFact, April 27, 2016,
https://www.politifact.com/factchecks/2016/apr/27/john-oliver/mystery-strom-thurmond-puerto-rico-and-bankruptcy-/. https://www.politifact.com/factchecks/2016/apr/27/john-oliver/mystery-strom-thurmond-puerto-rico-and-bankruptcy-/.
T he late Judge T orruella, an expert on U.S.-Puerto Rico relations, stated in a concurrence that “ there is no legislative T he late Judge T orruella, an expert on U.S.-Puerto Rico relations, stated in a concurrence that “ there is no legislative
record on which to rely for determining Congress’s reasons behind the 1984 Amendments. A tracing of its travels record on which to rely for determining Congress’s reasons behind the 1984 Amendments. A tracing of its travels
through the halls of Congress sheds less light than a piece of coal on a moonless night through the halls of Congress sheds less light than a piece of coal on a moonless night
enactment.” Franklin Cal. T ax-Free T r. v. Puerto Rico, 805 F.3d 322, 349 (1st Cir. 2015) (T orruella, J., concurring in enactment.” Franklin Cal. T ax-Free T r. v. Puerto Rico, 805 F.3d 322, 349 (1st Cir. 2015) (T orruella, J., concurring in
the judgment), the judgment), aff’d, Puerto Rico v. Franklin Cal. T ax-Free T r., 136 S. Ct. 1938 (2016). , Puerto Rico v. Franklin Cal. T ax-Free T r., 136 S. Ct. 1938 (2016).
red, with antiquated technology, high costs and declining sales.” See T estimony of Robert Donahue, MMA Managing red, with antiquated technology, high costs and declining sales.” See T estimony of Robert Donahue, MMA Managing
Director, in U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And Director, in U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And
Antitrust Law, Antitrust Law, H.R. 870, 114th Cong., 1st sess., February 26, 2015, p. 28, https://www.jonesday.com/files/upload/robert -, 114th Cong., 1st sess., February 26, 2015, p. 28, https://www.jonesday.com/files/upload/robert -
donahue-testimony.pdf. donahue-testimony.pdf.
(Ley 71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico). (Ley 71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico).
T he law was also called the “Recovery Act” or the “Local Bankruptcy Law” (“ T he law was also called the “Recovery Act” or the “Local Bankruptcy Law” (“ Ley de Quiebra Criolla”). See also ”). See also
Moody’s Investor’s Service, “ Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and Moody’s Investor’s Service, “ Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and
the Commonwealth,” July 3, 2013. the Commonwealth,” July 3, 2013.
17, 2015, https://news.law.fordham.edu/fulj/2015/03/17/puerto-ricos-municipal-debt-crisis-a-two-front-battle/. 17, 2015, https://news.law.fordham.edu/fulj/2015/03/17/puerto-ricos-municipal-debt-crisis-a-two-front-battle/.
Congressional Research Service Congressional Research Service
9 9
Puerto Rico’s Public Debts: Accumulation and Restructuring
corporations’ debt. corporations’ debt.
although the Bankruptcy Code prevents municipalities in Puerto Rico from seeking relief under although the Bankruptcy Code prevents municipalities in Puerto Rico from seeking relief under
Chapter 9, the code nonetheless preempted Puerto Rico’s Recovery Act, and thus barred the CPR Chapter 9, the code nonetheless preempted Puerto Rico’s Recovery Act, and thus barred the CPR
from enacting its own municipal bankruptcy scheme to restructure debt. from enacting its own municipal bankruptcy scheme to restructure debt.
Governor García Padilla Calls Debt “Unpayable,” Declares Fiscal Emergency
Then-Governor García Padil a cal ed Puerto Rico’s public debts “unpayable” at the end of June Then-Governor García Padil a cal ed Puerto Rico’s public debts “unpayable” at the end of June
2015.2015.
liquidity in the face of mounting fiscal pressures. At the beginning of August 2015, three smal liquidity in the face of mounting fiscal pressures. At the beginning of August 2015, three smal
public bond issues were in default.public bond issues were in default.
executive order authorizing a clawback of balances and revenues from transportation and executive order authorizing a clawback of balances and revenues from transportation and
infrastructure entities.infrastructure entities.
service moratorium could be invoked to preserve funding for essential public services. service moratorium could be invoked to preserve funding for essential public services.
Puerto Rico’s defaults widened, Congress considered measures to address the island’s fiscal Puerto Rico’s defaults widened, Congress considered measures to address the island’s fiscal
crisis, which culminated in PROMESA’s enactment. crisis, which culminated in PROMESA’s enactment.
On June 29, 2016—two days before a $780 mil ion GO debt service payment was due— On June 29, 2016—two days before a $780 mil ion GO debt service payment was due—
Governor Padil a suspended payments on GO and Commonwealth-guaranteed bonds, leading to Governor Padil a suspended payments on GO and Commonwealth-guaranteed bonds, leading to
the first defaults on CPR debt.the first defaults on CPR debt.
law by President Obama to address Puerto Rico’s debts and finances. Before describing law by President Obama to address Puerto Rico’s debts and finances. Before describing
provisions of PROMESA, the next section analyzes the structure of Puerto Rico’s debt stack. provisions of PROMESA, the next section analyzes the structure of Puerto Rico’s debt stack.
Predefault Structure of Puerto Rico’s Public Debts
Puerto Rico’s fiscal crisis and its accumulations of debt are intertwined with the structure of its Puerto Rico’s fiscal crisis and its accumulations of debt are intertwined with the structure of its
public sector. This section surveys Puerto Rico’s public debts and briefly discusses how they public sector. This section surveys Puerto Rico’s public debts and briefly discusses how they
were accumulated. The Puerto Rican government includes a central government—the were accumulated. The Puerto Rican government includes a central government—the
https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. A cramdown is a reduction or restructuring of debts https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. A cramdown is a reduction or restructuring of debts
through a legal procedure that supersedes prior contractual requirements. through a legal procedure that supersedes prior contractual requirements.
Bankruptcy Clause,” Bankruptcy Clause,” American Bankruptcy Law Journal, vol. 88, no. 4 (fall 2014), pp. 553-578 (at p. 573). , vol. 88, no. 4 (fall 2014), pp. 553-578 (at p. 573).
agency or instrumentality of a State.” Cf. 11 U.S.C. §101(40). T he Bankruptcy Code thus covers a wider set of public agency or instrumentality of a State.” Cf. 11 U.S.C. §101(40). T he Bankruptcy Code thus covers a wider set of public
entities than the term municipalities usually connotes. In Puerto Rico, municipalities (entities than the term municipalities usually connotes. In Puerto Rico, municipalities (m unicipios) resemble county ) resemble county
governments on the mainland. governments on the mainland.
García Padilla’s Message on the Fiscal García Padilla’s Message on the Fiscal
politica/nota/mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico -2066574/. politica/nota/mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico -2066574/.
RatingsDirect , August 3, 2015, http://www.gdb-pur.com/investors_resources/documents/SP-RatingsDirectNews-Aug-RatingsDirect , August 3, 2015, http://www.gdb-pur.com/investors_resources/documents/SP-RatingsDirectNews-Aug-
03-2015.pdf. How clawback funds were used is unclear. See Luis J. 03-2015.pdf. How clawback funds were used is unclear. See Luis J.
Funds,” Funds,” Caribbean Business, August 24, 2016, https://caribbeanbusiness.com/light-shed-on-clawed-back-funds/. , August 24, 2016, https://caribbeanbusiness.com/light-shed-on-clawed-back-funds/.
ejecutivas/. ejecutivas/.
Leyes2016/lexl2016021.htm. Leyes2016/lexl2016021.htm.
ejecutivas/. For the July 1, 2016, GO debt service payment, see Act 21ejecutivas/. For the July 1, 2016, GO debt service payment, see Act 21
amounts for that payment. amounts for that payment.
Congressional Research Service Congressional Research Service
10 10
link to page link to page
Commonwealth of Puerto Rico (CPR)—as wel as some 50 public corporations. Commonwealth of Puerto Rico (CPR)—as wel as some 50 public corporations.
corporations have a wide range of responsibilities, including providing electricity, water and corporations have a wide range of responsibilities, including providing electricity, water and
sewer service, social services, health care, and maintenance of ports and parks. The island’s sewer service, social services, health care, and maintenance of ports and parks. The island’s
public debt, issued by 18 distinct public entities, presents an unusual y complex debt structure. public debt, issued by 18 distinct public entities, presents an unusual y complex debt structure.
Transfers and cross-subsidies among different public agencies and corporations, often routed Transfers and cross-subsidies among different public agencies and corporations, often routed
through the former Government Development Bank, added to that complexity. through the former Government Development Bank, added to that complexity.
Government Development Bank as Fiscal Agent and Financial
Advisor
The GDB—the CPR’s former fiscal agent and financial advisor to each governor’s The GDB—the CPR’s former fiscal agent and financial advisor to each governor’s
administration—had a central role in Puerto Rico’s debt crisis. In postwar decades, it supported administration—had a central role in Puerto Rico’s debt crisis. In postwar decades, it supported
the island’s industrialization strategy and served a mix of public and private clients. A GDB head the island’s industrialization strategy and served a mix of public and private clients. A GDB head
in 2015 described its role as “real y a combination of things that the Treasury, the New York Fed in 2015 described its role as “real y a combination of things that the Treasury, the New York Fed
and a development bank like the Inter-American Development Bank do.” and a development bank like the Inter-American Development Bank do.”
controlled debt issuance and negotiated with investment banks. The GDB defaulted on bond controlled debt issuance and negotiated with investment banks. The GDB defaulted on bond
payments in May 2016. In 2017, the newly formed Fiscal Agency and Financial Advisory payments in May 2016. In 2017, the newly formed Fiscal Agency and Financial Advisory
Authority (FAFAA) assumed most of GDB’s functions.Authority (FAFAA) assumed most of GDB’s functions.
Categories of Public Debt
Restructuring Puerto Rico’s finances has involved complex disputes among bondholders invested Restructuring Puerto Rico’s finances has involved complex disputes among bondholders invested
in different types of Puerto Rico’s public debt. This section outlines the structure of the island’s in different types of Puerto Rico’s public debt. This section outlines the structure of the island’s
public debts. Since Puerto Rico lost access to credit markets in late 2014, its current debt structure public debts. Since Puerto Rico lost access to credit markets in late 2014, its current debt structure
has been largely unchanged, aside from the runoff of short-term notes, the 2018 wind-down of the has been largely unchanged, aside from the runoff of short-term notes, the 2018 wind-down of the
GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for
Financing Corporation) Financing Corporation). Figure 2 aand Table A-1 show debt levels as of the end of July 2016. show debt levels as of the end of July 2016.
(Organization Chart), March 2, 2017, http://ogp.pr.gov/SobreOGP/Pages/organigrama.aspx. T hat version depicted 128 (Organization Chart), March 2, 2017, http://ogp.pr.gov/SobreOGP/Pages/organigrama.aspx. T hat version depicted 128
government entities. Former Governor Ricardo Rosselló Nevares (2017-2019) consolidated some smaller public government entities. Former Governor Ricardo Rosselló Nevares (2017-2019) consolidated some smaller public
corporations into central government departments. corporations into central government departments.
financing in the past and may continue to provide financing to governmental entities that do not have sufficient financing in the past and may continue to provide financing to governmental entities that do not have sufficient
independent resources to cover their operating expenses, to the extent permitted by law.” CPR, 2014A GO Bond independent resources to cover their operating expenses, to the extent permitted by law.” CPR, 2014A GO Bond
Official Statem ent, March 14, 2020, https://emma.msrb.org/ER892398-ER588507-ER990528.pdf. , March 14, 2020, https://emma.msrb.org/ER892398-ER588507-ER990528.pdf.
New York Tim es, November 29, 2015; and Arturo C. Porzecanski, “ T he Government Development Bank: At the Heart , November 29, 2015; and Arturo C. Porzecanski, “ T he Government Development Bank: At the Heart
of Puerto Rico’s Financial Crisis,” American University working paper, September 18, 2014, of Puerto Rico’s Financial Crisis,” American University working paper, September 18, 2014,
http://auapps.american.edu/aporzeca/www/http://auapps.american.edu/aporzeca/www/
T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf . T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf .
https://www.aafaf.pr.gov/wp-content/uploads/a-002-2017-1.pdf. https://www.aafaf.pr.gov/wp-content/uploads/a-002-2017-1.pdf.
Congressional Research Service Congressional Research Service
11 11
Figure 2. Puerto Rico’s Public Debt as of July 31, 2016, in $Bil ions
Source: CRS calculations based on CRS calculations based on Commonwealth Statement, December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/, December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/
CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.
Notes: Some items may not sum to totals due to rounding. This figure excludes debt of the Government Development Bank to minimize double counting. See source Some items may not sum to totals due to rounding. This figure excludes debt of the Government Development Bank to minimize double counting. See source
document for other important notes and caveats. document for other important notes and caveats.
CRS-12 CRS-12
link to page link to page
Unfunded obligations of Puerto Rico’s pension systems, which were estimated at $49 bil ion as of Unfunded obligations of Puerto Rico’s pension systems, which were estimated at $49 bil ion as of
June 2015, are not included.June 2015, are not included.
counting, totaled $68.7 bil ion at the end of July 2016. counting, totaled $68.7 bil ion at the end of July 2016.
These debts can be divided by the source of funds used to repay them, These debts can be divided by the source of funds used to repay them,
1. the Commonwealth’s General Fund; 1. the Commonwealth’s General Fund;
2. the sales & use tax or other specific revenue sources; 2. the sales & use tax or other specific revenue sources;
3. public corporations’ revenues; 3. public corporations’ revenues;
4. other debts, including local governments ( 4. other debts, including local governments (municipios) and nonrecourse debt.) and nonrecourse debt.
By July 2016, the category of debt repaid through the General Fund included $12.7 bil ion in GO By July 2016, the category of debt repaid through the General Fund included $12.7 bil ion in GO
debt backed by the good faith, credit, and taxing power of the Commonwealth, as wel as debt backed by the good faith, credit, and taxing power of the Commonwealth, as wel as $4.2 $4.2
bil ion of Puerto Rico’s public sector debt was payable from selected tax receipts, including $17.3 bil ion of Puerto Rico’s public sector debt was payable from selected tax receipts, including $17.3
bil ion in COFINA bonds. An additional $11.5 bil ion was payable through Commonwealth bil ion in COFINA bonds. An additional $11.5 bil ion was payable through Commonwealth
appropriations. Outstanding bonds for the island’s largest public corporations, PREPA ($9.0 appropriations. Outstanding bonds for the island’s largest public corporations, PREPA ($9.0
bil ion) and PRASA ($4.6 bil ion), are mostly repaid through utility charges. bil ion) and PRASA ($4.6 bil ion), are mostly repaid through utility charges.
Public Debt and the Puerto Rico Constitution
The Puerto Rican Constitution’s provisions related to budgets and debt have played a central role The Puerto Rican Constitution’s provisions related to budgets and debt have played a central role
in the process of restructuring the island’s public debts. in the process of restructuring the island’s public debts.
as legal y separate from the island’s central government,as legal y separate from the island’s central government,
have controlled them indirectly via appointments of those corporations’ boards.have controlled them indirectly via appointments of those corporations’ boards.
public corporations were also considered as separate from debts of the central (CPR) government. public corporations were also considered as separate from debts of the central (CPR) government.
Five key fiscal policy clauses in the Puerto Rico Constitution are Five key fiscal policy clauses in the Puerto Rico Constitution are
a a balanced budget requirement that appropriations (that appropriations (asignaciones aprobadas) )
not exceed available resources ( not exceed available resources (los recursos disponibles) (Article VI, Section 8); ) (Article VI, Section 8);
bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.
2016, pp. 172-208. 2016, pp. 172-208.
Archived CRS Report RL30058, Archived CRS Report RL30058, Tobacco Master Settlem ent Agreem ent (1998): Overview, Im plem entation by States,
and Congressional Issues, by C. Stephen Redhead, is available to congressional clients upon request. , by C. Stephen Redhead, is available to congressional clients upon request.
http://www.oslpr.org/english/PDF/http://www.oslpr.org/english/PDF/
T he%20Constitution%20of%20the%20Commonwealth%20of%20Puerto%20Rico.pdf . T he%20Constitution%20of%20the%20Commonwealth%20of%20Puerto%20Rico.pdf .
obligations, contracts, bonds, notes, promissory notes, receipts, expenses, accounts, funds, companies and property of obligations, contracts, bonds, notes, promissory notes, receipts, expenses, accounts, funds, companies and property of
the Authority, its officers, agents or employees, should be understood to be of the said governmentally controlled the Authority, its officers, agents or employees, should be understood to be of the said governmentally controlled
corporation and not of the central government.” corporation and not of the central government.”
Administration, 1935-1955,” City University of New York (CUNY) dissertation, 2014, Administration, 1935-1955,” City University of New York (CUNY) dissertation, 2014,
https://academicworks.cuny.edu/gc_etds/315. https://academicworks.cuny.edu/gc_etds/315.
Congressional Research Service Congressional Research Service
13 13
link to page link to page
a a priority for payment of interest and principal for securities backed by the
“full faith and credit” of the Puerto Rico government in the case of a budgetary of the Puerto Rico government in the case of a budgetary
shortfal (Article VI, Section 8); shortfal (Article VI, Section 8);
a “ a “clawback” provision, mandating the reapplication of revenues to debt service ” provision, mandating the reapplication of revenues to debt service
of full faith and credit pledges (Article VI Section 2); of full faith and credit pledges (Article VI Section 2);
a a prohibition on issuance of new GO debt if average debt service costs over the if average debt service costs over the
two preceding fiscal years equaled or exceeded 15% of the average of total two preceding fiscal years equaled or exceeded 15% of the average of total
revenues for those two years (Article VI Section 2);revenues for those two years (Article VI Section 2);
a a 30-year limit on GO bond maturities, except for housing bonds, which were , except for housing bonds, which were
permitted maturities of up to 40 years (Article VI, Section 2). permitted maturities of up to 40 years (Article VI, Section 2).
The stringency of those provisions, however, was loosened in several ways. A 1974 Puerto Rico The stringency of those provisions, however, was loosened in several ways. A 1974 Puerto Rico
Attorney General’s opinion held that bond proceeds counted as “available resources,” thus Attorney General’s opinion held that bond proceeds counted as “available resources,” thus
relaxing the balanced budget requirement.relaxing the balanced budget requirement.
considered to apply only to central government GO debt, not to so-cal ed “extraconstitutional” considered to apply only to central government GO debt, not to so-cal ed “extraconstitutional”
debt of public corporations and COFINA. The GDB, by serving as a conduit for transferring debt of public corporations and COFINA. The GDB, by serving as a conduit for transferring
resources between the central government and other public entities, also weakened the effective resources between the central government and other public entities, also weakened the effective
distinction between “constitutional” and “extraconstitutional” debt.distinction between “constitutional” and “extraconstitutional” debt.
contested whether some post-2012 debt issues conformed to the 15% limit, as wel as the reach of contested whether some post-2012 debt issues conformed to the 15% limit, as wel as the reach of
clawback measures used to bolster resources for payment of GO debt. Interpretations of those clawback measures used to bolster resources for payment of GO debt. Interpretations of those
constitutional limits have shaped much of the island’s public finance policy as wel as PROMESA constitutional limits have shaped much of the island’s public finance policy as wel as PROMESA
Title III litigation, which later sections describe. Title III litigation, which later sections describe.
PROMESA Enacted in 2016 to Address the Crisis
PROMESA (P.L. 114-187), as noted above, established two debt adjustment processes and a PROMESA (P.L. 114-187), as noted above, established two debt adjustment processes and a
Financial Oversight and Management Board for Puerto Rico, among other provisions.Financial Oversight and Management Board for Puerto Rico, among other provisions.
PROMESA endowed the FOMB with wide authorities, while the governor and legislature of PROMESA endowed the FOMB with wide authorities, while the governor and legislature of
Puerto Rico retained substantial control over public priorities, within the constraints of Board-Puerto Rico retained substantial control over public priorities, within the constraints of Board-
certified fiscal plans and other PROMESA provisions. certified fiscal plans and other PROMESA provisions.
legislation and deposited into the treasury (… ‘internal revenues’) in the two fiscal years preceding the fiscal year of legislation and deposited into the treasury (… ‘internal revenues’) in the two fiscal years preceding the fiscal year of
such proposed issuance. Internal revenues consist principally of income taxes, sales and use taxes (other than those such proposed issuance. Internal revenues consist principally of income taxes, sales and use taxes (other than those
assigned to COFINA) and excise taxes.” GDB, assigned to COFINA) and excise taxes.” GDB, Commonwealth Statement, December 18, 2016, p. 177. , December 18, 2016, p. 177.
de Puerto Rico y Su Requisito de un Presupuesto Balanceado,” [Puerto Rico’s Constitution and its Balanced Budget de Puerto Rico y Su Requisito de un Presupuesto Balanceado,” [Puerto Rico’s Constitution and its Balanced Budget
Requirement], Requirement], Law Review of the University of Puerto Rico , vol. 85, no. 3 (2016), pp. 819-832; and Sergio M. , vol. 85, no. 3 (2016), pp. 819-832; and Sergio M.
Marxuach, “ T he Endgame: An Analysis of Puerto Rico’s Debt Structure and the Arguments in Favor of Chapter 9,” Marxuach, “ T he Endgame: An Analysis of Puerto Rico’s Debt Structure and the Arguments in Favor of Chapter 9,”
Center for a New Economy working paper, November 30, 2015, http://bit.ly/2aBM7X3. Center for a New Economy working paper, November 30, 2015, http://bit.ly/2aBM7X3.
American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/
T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf . T he%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf .
5278, S. 2328), coordinated by D. Andrew Austin. , coordinated by D. Andrew Austin.
Congressional Research Service Congressional Research Service
14 14
Puerto Rico’s Public Debts: Accumulation and Restructuring
Oversight Board Appointments and Organization
The Oversight Board plays a central role in the restructuring process. At the end of August 2016, The Oversight Board plays a central role in the restructuring process. At the end of August 2016,
President Obama appointed six members from nomination lists compiled by congressional President Obama appointed six members from nomination lists compiled by congressional
leaders and a seventh of his own choosing.leaders and a seventh of his own choosing.
appoint a nonvoting representative to the Board. The Board chose José B. Carrión, an island appoint a nonvoting representative to the Board. The Board chose José B. Carrión, an island
insurance broker, as chair. insurance broker, as chair.
Litigation questioning the Board’s compliance with the U.S. Constitution’s Appointments Clause Litigation questioning the Board’s compliance with the U.S. Constitution’s Appointments Clause
delayed the renomination or replacement of the original members, whose three-year terms delayed the renomination or replacement of the original members, whose three-year terms
expired in August 2019. The Supreme Court rejected those chal enges in June 2020, clearing the expired in August 2019. The Supreme Court rejected those chal enges in June 2020, clearing the
way for new nominations and appointments. way for new nominations and appointments.
The Oversight Board chooses which instrumentalities wil be “covered.” The Oversight Board chooses which instrumentalities wil be “covered.”
the CPR government and covered instrumentalities to submit fiscal plans and budgets, which are the CPR government and covered instrumentalities to submit fiscal plans and budgets, which are
subject to Board approval. In September 2016, the Oversight Board listed the CPR government as subject to Board approval. In September 2016, the Oversight Board listed the CPR government as
a covered territory and 62 public corporations and other entities as covered instrumentalities. a covered territory and 62 public corporations and other entities as covered instrumentalities.
The Board also represents covered entities in debt restructuring processes set up by PROMESA. The Board also represents covered entities in debt restructuring processes set up by PROMESA.
PROMESA Established Two Paths to Restructure Debt
PROMESA’s Title III establishes a debt restructuring process that draws on Chapters 9 and 11 of PROMESA’s Title III establishes a debt restructuring process that draws on Chapters 9 and 11 of
the U.S. Bankruptcy Code.the U.S. Bankruptcy Code.
collective action agreements, similar to procedures used in some sovereign debt negotiations. collective action agreements, similar to procedures used in some sovereign debt negotiations.
Chief Justice John Roberts selected U.S. District Court Judge Laura Taylor Swain to oversee Chief Justice John Roberts selected U.S. District Court Judge Laura Taylor Swain to oversee
PROMESA TitlePROMESA Title
Chapter 9 of the U.S. Bankruptcy
PROMESA Title III
Congress first enacted a municipal bankruptcy law during the Great Depression of the 1930s to al ow local Congress first enacted a municipal bankruptcy law during the Great Depression of the 1930s to al ow local
governments to reorganize their debts under the supervision of a federal court.governments to reorganize their debts under the supervision of a federal court.
Management Board for Puerto Rico,” press release, August 31, 2016, https://obamawhitehouse.archives.gov/the-press-Management Board for Puerto Rico,” press release, August 31, 2016, https://obamawhitehouse.archives.gov/the-press-
office/2016/08/31/president -obama-announces-appointment-seven-individuals-financial. office/2016/08/31/president -obama-announces-appointment-seven-individuals-financial.
A. Baralt, A. Baralt, Tradition into the Future: The First Century of the Banco Popular de Puerto Rico: 1893 -1993 (San Juan: (San Juan:
Banco Popular, 1993). José Carrión was brother-in-law of Pedro Pierluisi Urrutia, Resident Commissioner at the time. Banco Popular, 1993). José Carrión was brother-in-law of Pedro Pierluisi Urrutia, Resident Commissioner at the time.
https://www.supremecourt.gov/opinions/19pdf/18-1334_8m58.pdf. https://www.supremecourt.gov/opinions/19pdf/18-1334_8m58.pdf.
1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view. 1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view.
(PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin, for a listing of Bankruptcy Code provisions , coordinated by D. Andrew Austin, for a listing of Bankruptcy Code provisions
incorporated into T itle III. incorporated into T itle III.
When the City Goes Broke: Pensions, Retirees, and Municipal Bankruptcies, by Kevin M. Lewis. , by Kevin M. Lewis.
basics/chapter-9-bankruptcy-basics. Also see Michael W. McConnell and Randal C. Picker, “ When Cities Go Broke: a basics/chapter-9-bankruptcy-basics. Also see Michael W. McConnell and Randal C. Picker, “ When Cities Go Broke: a
Conceptual Introduction to Municipal Bankruptcy,” Conceptual Introduction to Municipal Bankruptcy,” University of Chicago Law Review, vol. 60(2), spring 1993, pp. , vol. 60(2), spring 1993, pp.
Congressional Research Service Congressional Research Service
15 15
Puerto Rico’s Public Debts: Accumulation and Restructuring
for bankruptcy, but may al ow—or bar—their municipalities to seek protection from creditors under provisions of for bankruptcy, but may al ow—or bar—their municipalities to seek protection from creditors under provisions of
Chapter 9 of the Bankruptcy Code. The code defines “municipality” as a “political subdivision or public agency or Chapter 9 of the Bankruptcy Code. The code defines “municipality” as a “political subdivision or public agency or
instrumentality of a State,” which includes not only towns and cities, but also school districts, utility districts, and instrumentality of a State,” which includes not only towns and cities, but also school districts, utility districts, and
public authorities responsible for roads, bridges, water, sewers, and other publicly provided services.public authorities responsible for roads, bridges, water, sewers, and other publicly provided services.
A municipality may only receive Chapter 9 protections if several conditions are met: its state government A municipality may only receive Chapter 9 protections if several conditions are met: its state government
approves; it is insolvent; it wishes to implement a “plan of adjustment”; and it negotiates with creditors in good approves; it is insolvent; it wishes to implement a “plan of adjustment”; and it negotiates with creditors in good
faith or demonstrates such negotiations are impracticable.faith or demonstrates such negotiations are impracticable.
action to col ect debts, within certain limits and subject to certain chal enges. A bankruptcy court, however, action to col ect debts, within certain limits and subject to certain chal enges. A bankruptcy court, however,
cannot control a municipality’s regular operations, with some narrow exceptions.cannot control a municipality’s regular operations, with some narrow exceptions.
adjustment, typical y the result of negotiations with creditor groups, is subject to a federal judge’s confirmation. adjustment, typical y the result of negotiations with creditor groups, is subject to a federal judge’s confirmation.
The PROMESA Title III process largely fol ows procedures of Chapter 9 of the Bankruptcy Code, although it adds The PROMESA Title III process largely fol ows procedures of Chapter 9 of the Bankruptcy Code, although it adds
some requirements and omits others.some requirements and omits others.
and “covered territorial instrumentalities” rather than “municipality.” Second, Title III, unlike Chapter 9, does not and “covered territorial instrumentalities” rather than “municipality.” Second, Title III, unlike Chapter 9, does not
require insolvency as a prerequisite to seeking protection from creditors. Other differences are that the Oversight require insolvency as a prerequisite to seeking protection from creditors. Other differences are that the Oversight
Board decides which public entities are Board decides which public entities are covered territorial instrumentalities, chooses whether they can seek debt , chooses whether they can seek debt
relief, and represents those entities through the Title III process.relief, and represents those entities through the Title III process.
certification of certification of Fiscal Plans for covered entities, for covered entities,
Filing a Title III relief petition triggers an initial stay of litigation, although creditors may chal enge the petition Filing a Title III relief petition triggers an initial stay of litigation, although creditors may chal enge the petition
afterward.afterward.
Major Title III cases have involved multiple issuers of debt because those entities’ fiscal relations were entwined, Major Title III cases have involved multiple issuers of debt because those entities’ fiscal relations were entwined,
which has complicated negotiations with creditor representatives. The Oversight Board has, with the approval of which has complicated negotiations with creditor representatives. The Oversight Board has, with the approval of
the Title III court, used its authority to appoint agents to represent interests of bondholders and other creditors.the Title III court, used its authority to appoint agents to represent interests of bondholders and other creditors.
The court also appointed a mediation team headed by Judge Barbara Houser to oversee negotiations.The court also appointed a mediation team headed by Judge Barbara Houser to oversee negotiations.
support agreement (PSA) outlines terms of negotiations and may be modified as additional parties sign on or as support agreement (PSA) outlines terms of negotiations and may be modified as additional parties sign on or as
terms shift. terms shift.
The Oversight Board is charged with proposing aThe Oversight Board is charged with proposing a plan of adjustment to implement negotiated terms of the to implement negotiated terms of the
restructuring. That plan may involve proposals to modify Puerto Rican laws, regulations, and fiscal plans. The restructuring. That plan may involve proposals to modify Puerto Rican laws, regulations, and fiscal plans. The
Puerto Rican government and legislature retain broad powers to control public operations aside from other Puerto Rican government and legislature retain broad powers to control public operations aside from other
PROMESA strictures.PROMESA strictures.
prerequisite of court confirmation of the plan.prerequisite of court confirmation of the plan.
425-495. 425-495.
class, or if the municipality reasonably believes a creditor may try to obtain a preferential transfer. 11 U.S.C. class, or if the municipality reasonably believes a creditor may try to obtain a preferential transfer. 11 U.S.C.
§109(c)(5). §109(c)(5).
Oversight, Managem ent, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328) , coordinated by D. Andrew , coordinated by D. Andrew
Austin. Austin.
Commonwealth-COFINA Dispute, In re CPR, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/Commonwealth-COFINA Dispute, In re CPR, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0.
puertorico/Home-DownloadPDF?id1=NjU3Njgy&id2=0. T he team was appointed under terms of 11 U.S.C. §105. puertorico/Home-DownloadPDF?id1=NjU3Njgy&id2=0. T he team was appointed under terms of 11 U.S.C. §105.
Barbara Houser had been chief bankruptcy judge of the U.S. Bankruptcy Court for the Northern District of T exas. Barbara Houser had been chief bankruptcy judge of the U.S. Bankruptcy Court for the Northern District of T exas.
Congressional Research Service Congressional Research Service
16 16
Puerto Rico’s Public Debts: Accumulation and Restructuring
The Oversight Board, as agent of the debtor, must file The Oversight Board, as agent of the debtor, must file
creditors.creditors.
adjustment. Creditors holding the same or similar types of debt or claims are divided into classes, as specified in adjustment. Creditors holding the same or similar types of debt or claims are divided into classes, as specified in
the plan of adjustment. Creditors within classes whose claims would be impaired by the plan vote to approve or the plan of adjustment. Creditors within classes whose claims would be impaired by the plan vote to approve or
reject it. Approval of at least one class of impaired creditors is required. Other requirements for confirmationreject it. Approval of at least one class of impaired creditors is required. Other requirements for confirmation
the Title III court include that the plan was proposed in good faith, that it is feasible and in the best interests of the Title III court include that the plan was proposed in good faith, that it is feasible and in the best interests of
creditors, and that it conforms to a Board-certified fiscal plan.creditors, and that it conforms to a Board-certified fiscal plan.
according to the plan, in cash, in new bonds, or in other ways, equal to payment in ful , nothing, or some according to the plan, in cash, in new bonds, or in other ways, equal to payment in ful , nothing, or some
intermediate amount. intermediate amount.
Restructuring COFINA and GO Bonds
Disputes over the legal and constitutional foundation for tax-backed bonds and for certain other Disputes over the legal and constitutional foundation for tax-backed bonds and for certain other
bonds have played a central role in Puerto Rico’s debt restructuring, even before PROMESA’s bonds have played a central role in Puerto Rico’s debt restructuring, even before PROMESA’s
enactment. In particular, controversies over the relative priority of GO debt claims and claims of enactment. In particular, controversies over the relative priority of GO debt claims and claims of
sales-and-use-tax-backed COFINA debt split investor groups. sales-and-use-tax-backed COFINA debt split investor groups.
Some suspected that issuing COFINA bonds sidestepped a limitation on debt issuance in the Some suspected that issuing COFINA bonds sidestepped a limitation on debt issuance in the
Puerto Rico Constitution, an accusation denied by others.Puerto Rico Constitution, an accusation denied by others.
“extraconstitutional” debt, meaning that bond proceeds and tax revenues supporting debt service “extraconstitutional” debt, meaning that bond proceeds and tax revenues supporting debt service
were not to be considered as “available resources” to the CPR. Bond documents asserted that were not to be considered as “available resources” to the CPR. Bond documents asserted that
COFINA proceeds were therefore protected from “clawback,” that is, the invocation of a COFINA proceeds were therefore protected from “clawback,” that is, the invocation of a
provision of the Puerto Rican Constitution prioritizing payment of GO debt service.provision of the Puerto Rican Constitution prioritizing payment of GO debt service.
Puerto Rican government obtained opinions from mainland law firms and the Puerto Rican Puerto Rican government obtained opinions from mainland law firms and the Puerto Rican
Attorney General that COFINA funds would not be subject to clawback, at least one mainland Attorney General that COFINA funds would not be subject to clawback, at least one mainland
law firm partner expressed doubt that a court would bar clawback of COFINA funds—an opinion law firm partner expressed doubt that a court would bar clawback of COFINA funds—an opinion
not shared with investors. not shared with investors.
legal risks presented by COFINA’s structure. legal risks presented by COFINA’s structure.
Some major mutual funds, which had bought Puerto Rico securities at par when issued before the Some major mutual funds, which had bought Puerto Rico securities at par when issued before the
island’s fiscal chal enges became evident, sharply reduced their holdings of the island’s public island’s fiscal chal enges became evident, sharply reduced their holdings of the island’s public
debt in late 2013 and 2014, prompting sharp drops in bond prices.debt in late 2013 and 2014, prompting sharp drops in bond prices.
sales were to hedge funds with a stronger appetite for complex debt restructuring processes. sales were to hedge funds with a stronger appetite for complex debt restructuring processes.
Many GO bondholders believed that restructuring the island’s public corporations’ debts or Many GO bondholders believed that restructuring the island’s public corporations’ debts or
clawing back COFINA revenues could help the government meet GO bond obligations, clawing back COFINA revenues could help the government meet GO bond obligations,
https://www.americanbanker.com/opinion/banks-have-huge-stake-in-outcome-of-puerto-rico-crisis. T he 2018 Kobre & https://www.americanbanker.com/opinion/banks-have-huge-stake-in-outcome-of-puerto-rico-crisis. T he 2018 Kobre &
Kim report claimed the GDB sought to compute the 15% debt limitation appropriately. Kim report claimed the GDB sought to compute the 15% debt limitation appropriately.
23, 2007, https://emma.msrb.org/MS261958-MS237266-MD462937.pdf. 23, 2007, https://emma.msrb.org/MS261958-MS237266-MD462937.pdf.
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 160-161, 164-165, 174-175. lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 160-161, 164-165, 174-175.
Rico Built Speed in October,” Rico Built Speed in October,” Wall Street Journal, October 25, 2017, https://www.wsj.com/articles/bond-funds-dump-, October 25, 2017, https://www.wsj.com/articles/bond-funds-dump-
puerto-rico-1508929380. puerto-rico-1508929380.
Congressional Research Service Congressional Research Service
17 17
Puerto Rico’s Public Debts: Accumulation and Restructuring
prompting contention with COFINA bondholder groups. prompting contention with COFINA bondholder groups.
senior COFINA bondholders, which included several mainland financial institutions and hedge senior COFINA bondholders, which included several mainland financial institutions and hedge
funds, and junior COFINA bondholders, who tended to be individual residents of Puerto Rico. funds, and junior COFINA bondholders, who tended to be individual residents of Puerto Rico.
Much of the COFINA-GO litigation included coalitions of major bondholders, such as the Ad Much of the COFINA-GO litigation included coalitions of major bondholders, such as the Ad
Hoc Group of Puerto Rico GO Bondholders, the COFINA Senior Bondholders Coalition, and the Hoc Group of Puerto Rico GO Bondholders, the COFINA Senior Bondholders Coalition, and the
Bonistas del Patio, a group claiming to represent island-based junior COFINA bondholders., a group claiming to represent island-based junior COFINA bondholders.
Three bond insurers (Ambac, National Public Finance, and Assured Guaranty), also known as Three bond insurers (Ambac, National Public Finance, and Assured Guaranty), also known as
monolines, also participated actively in negotiations and litigation.monolines, also participated actively in negotiations and litigation.
in congressional deliberations that led to PROMESA’s enactment. in congressional deliberations that led to PROMESA’s enactment.
The constitutional fiscal provisions became more salient as the prospect of a default of Puerto The constitutional fiscal provisions became more salient as the prospect of a default of Puerto
Rico’s government loomed, triggering heightened tensions among bondholders. In July 2016, a Rico’s government loomed, triggering heightened tensions among bondholders. In July 2016, a
group of GO bondholders sued then-Governor García Padil a to demand a clawback of COFINA- group of GO bondholders sued then-Governor García Padil a to demand a clawback of COFINA-
pledged revenues. In April 2017, a federal appeals court held that PROMESA stay provisions pledged revenues. In April 2017, a federal appeals court held that PROMESA stay provisions
applied.applied.
COFINA dispute needed to be resolved through the PROMESA Title III process. COFINA dispute needed to be resolved through the PROMESA Title III process.
New Governor Inaugurated in January 2017
In January 2017, Governor Ricardo Rossel ó Nevares succeeded Governor García Padil a, who In January 2017, Governor Ricardo Rossel ó Nevares succeeded Governor García Padil a, who
did not seek reelection.did not seek reelection.
including setting up FAFAA, including setting up FAFAA,
Rothschild & Co. were brought in to replace previous restructuring advisors.Rothschild & Co. were brought in to replace previous restructuring advisors.
abandoned the PREPA RSA and revamped PREPA’s governance by letting the chief restructuring abandoned the PREPA RSA and revamped PREPA’s governance by letting the chief restructuring
officer’s contract lapse and replacing the PREPA board appointed in 2017 with his own officer’s contract lapse and replacing the PREPA board appointed in 2017 with his own
https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf. https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf.
https://www.elnuevodia.com/english/english/nota/cofinabondholdersheadtoboston-2301236/. https://www.elnuevodia.com/english/english/nota/cofinabondholdersheadtoboston-2301236/.
Debt,” Center for Investigative Journalism, October 24, 2017, http://periodismoinvestigativo.com/2017/10/old-Debt,” Center for Investigative Journalism, October 24, 2017, http://periodismoinvestigativo.com/2017/10/old-
colleagues-gather-in-a-group-that -requires-puerto-rico-to-pay-the-debt/. Joel Cintrón Arbasetti and Carla Minet, “ Map colleagues-gather-in-a-group-that -requires-puerto-rico-to-pay-the-debt/. Joel Cintrón Arbasetti and Carla Minet, “ Map
of the Players and their Positions in the Puerto Rico Debt Game,” Center for Investigative Journalism, July 23, 2015, of the Players and their Positions in the Puerto Rico Debt Game,” Center for Investigative Journalism, July 23, 2015,
http://periodismoinvestigativo.com/2015/07/map-of-the-players-and-their-positions-in-the-puerto-rico-debt-game/. http://periodismoinvestigativo.com/2015/07/map-of-the-players-and-their-positions-in-the-puerto-rico-debt-game/.
media.ca1.uscourts.gov/pdf.opinions/17-1241P-01A.pdf. media.ca1.uscourts.gov/pdf.opinions/17-1241P-01A.pdf.
DownloadPDF?id1=OT AxNzgz&id2=0. DownloadPDF?id1=OT AxNzgz&id2=0.
García Padilla supports maintaining Puerto Rico’s current status. Former Governor Rosselló Nevares and current García Padilla supports maintaining Puerto Rico’s current status. Former Governor Rosselló Nevares and current
Governor Pedro Pierluisi Urrutia advocate statehood for Puerto Rico. Divergent views on Puerto Rico’s political status Governor Pedro Pierluisi Urrutia advocate statehood for Puerto Rico. Divergent views on Puerto Rico’s political status
have traditionally distinguished the island’s political parties in the postwar era. have traditionally distinguished the island’s political parties in the postwar era.
https://drive.google.com/file/d/1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view. https://drive.google.com/file/d/1D37UiofV0T 5s1Q4J54vs3xX_ArGF9532/view.
https://www.ft.com/content/b00acb45-341b-3501-888a-4685fc9ee4e6. https://www.ft.com/content/b00acb45-341b-3501-888a-4685fc9ee4e6.
Congressional Research Service Congressional Research Service
18 18
link to page 48 link to page 48 Puerto Rico’s Public Debts: Accumulation and Restructuring
appointees. appointees.
the island’s public debts. the island’s public debts.
Oversight Board Files PROMESA Title III Petitions in May 2017
PROMESA required the Oversight Board to take several steps to restructure debts. In an initial PROMESA required the Oversight Board to take several steps to restructure debts. In an initial
step, as noted above, the Board listed the CPR and the bulk of the island’s public corporations as step, as noted above, the Board listed the CPR and the bulk of the island’s public corporations as
covered instrumentalities under terms of PROMESA.covered instrumentalities under terms of PROMESA.
draft fiscal plans for the CPR and covered instrumentalities, whether or not the instrumentalities’ draft fiscal plans for the CPR and covered instrumentalities, whether or not the instrumentalities’
debts were to be restructured. Fiscal plans and budgets are subject to certification by the Board, debts were to be restructured. Fiscal plans and budgets are subject to certification by the Board,
which can impose its own plan if the governor’s draft is deemed inadequate. which can impose its own plan if the governor’s draft is deemed inadequate.
Where the Board viewed debt restructuring as necessary, the next step was to petition a federal Where the Board viewed debt restructuring as necessary, the next step was to petition a federal
district court to initiate PROMESA Title III proceedings. The subsequent steps that put the GO- district court to initiate PROMESA Title III proceedings. The subsequent steps that put the GO-
COFINA dispute into the Title III court followed in rapid succession in late April and early May COFINA dispute into the Title III court followed in rapid succession in late April and early May
2017. Puerto Rico enacted a measure to claw back COFINA funds to the general fund,2017. Puerto Rico enacted a measure to claw back COFINA funds to the general fund,
triggering a default declaration on COFINA bonds on May 4, 2017.triggering a default declaration on COFINA bonds on May 4, 2017.
2017, the FOMB filed a petition to restructure CPR’s obligations under Title III of PROMESA.2017, the FOMB filed a petition to restructure CPR’s obligations under Title III of PROMESA.
On May 5, 2017, the Board then filed a Title III petition for COFINA, On May 5, 2017, the Board then filed a Title III petition for COFINA,
filed a petition for HTA.filed a petition for HTA.
and thus rejected the previous RSA framework. and thus rejected the previous RSA framework.
The Board also used PROMESA Title VI, which sets out a different procedure, to settle debts and The Board also used PROMESA Title VI, which sets out a different procedure, to settle debts and
operations of the GDB. The Board approved the GDB’s restructuring petition in July 2017, and operations of the GDB. The Board approved the GDB’s restructuring petition in July 2017, and
the bank was dissolved in November 2018.the bank was dissolved in November 2018.
over by the FAFAA. over by the FAFAA.
from a list “of at least 10 candidates prepared by a recognized firm in the field of search for executive candidates, from a list “of at least 10 candidates prepared by a recognized firm in the field of search for executive candidates,
according to objective criteria thataccording to objective criteria that
Restructuring Support Agreement, November 2, 2015, p. 98, at http://www.gdb-pur.com/investors_resources/Restructuring Support Agreement, November 2, 2015, p. 98, at http://www.gdb-pur.com/investors_resources/
documents/PREPA-RSA-RestructuringSupportAgreement -FullyExecuted.pdf. Rosselló’s 2016 campaign treasurer was documents/PREPA-RSA-RestructuringSupportAgreement -FullyExecuted.pdf. Rosselló’s 2016 campaign treasurer was
appointed chair of the PREPA board. See Javier Balmaceda, “Puerto Rico ’s PREPA Privatization: A Sale T oo appointed chair of the PREPA board. See Javier Balmaceda, “Puerto Rico ’s PREPA Privatization: A Sale T oo
Forbes, April 3, 2018, https://www.forbes.com/sites/debtwire/2018/04/03/puerto-ricos-prepa-privatization-a-sale-too-, April 3, 2018, https://www.forbes.com/sites/debtwire/2018/04/03/puerto-ricos-prepa-privatization-a-sale-too-
private/?sh=4a5358a27490. private/?sh=4a5358a27490.
https://www.elnuevodia.com/noticias/politica/notas/rossello-elimina-la-comision-para-la-auditoria-de-la-deuda/. See https://www.elnuevodia.com/noticias/politica/notas/rossello-elimina-la-comision-para-la-auditoria-de-la-deuda/. See
further discussion in the sectionfurther discussion in the section “ An Audit of Puerto Rico’s Public Debt .”
May 10, 2017. Also see Bank of New York Mellon, letter to COFINA T rustees, May 4, 2017, May 10, 2017. Also see Bank of New York Mellon, letter to COFINA T rustees, May 4, 2017,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIwMzQ1&id2=0. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIwMzQ1&id2=0.
Rico, May 3, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3NjAy&id2=0. , May 3, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3NjAy&id2=0.
DownloadPDF?id1=NjE3ODQx&id2=0. DownloadPDF?id1=NjE3ODQx&id2=0.
DownloadPDF?id1=NjIzMjkw&id2=0. DownloadPDF?id1=NjIzMjkw&id2=0.
DownloadPDF?id1=NzA4NjU1&id2=0. DownloadPDF?id1=NzA4NjU1&id2=0.
Congressional Research Service Congressional Research Service
19 19
Puerto Rico’s Public Debts: Accumulation and Restructuring
Judge Swain then directed the Oversight Board to resolve disputes among GO and COFINA Judge Swain then directed the Oversight Board to resolve disputes among GO and COFINA
creditors through confidential mediation overseen by a senior bankruptcy judge. On August 10, creditors through confidential mediation overseen by a senior bankruptcy judge. On August 10,
2017, Judge Swain appointed the Unsecured Creditors Committee (UCC) to represent 2017, Judge Swain appointed the Unsecured Creditors Committee (UCC) to represent
Commonwealth interests and Bettina Whyte to represent COFINA interests.Commonwealth interests and Bettina Whyte to represent COFINA interests.
surrounded by a cascade of litigation by various interested parties. surrounded by a cascade of litigation by various interested parties.
Hurricanes Irma and María Hit Puerto Rico in September 2017
Two Category 5 hurricanes soon stal ed progress in those negotiations. In September 2017, Two Category 5 hurricanes soon stal ed progress in those negotiations. In September 2017,
Hurricane Irma skirted the northern edge of Puerto Rico, and two weeks later, Hurricane María Hurricane Irma skirted the northern edge of Puerto Rico, and two weeks later, Hurricane María
passed over the whole island, leaving major damage in its wake.passed over the whole island, leaving major damage in its wake.
debt restructuring process in several ways. First, the island’s electrical grid was disabled, which debt restructuring process in several ways. First, the island’s electrical grid was disabled, which
crippled many water and sewer facilities, as wel as most manufacturing facilities and crippled many water and sewer facilities, as wel as most manufacturing facilities and
transportation systems. Health, housing, and incomes also were affected. Second, the disaster transportation systems. Health, housing, and incomes also were affected. Second, the disaster
responses commanded the attention of public officials and others. The hurricanes’ damage to responses commanded the attention of public officials and others. The hurricanes’ damage to
public infrastructure, including the island’s electrical grid, and to private businesses, including public infrastructure, including the island’s electrical grid, and to private businesses, including
most manufacturing facilities, prompted the Oversight Board to revise the Commonwealth’s most manufacturing facilities, prompted the Oversight Board to revise the Commonwealth’s
fiscal plan to reflect reduced economic activity and tax revenues. The Board anticipated that fiscal plan to reflect reduced economic activity and tax revenues. The Board anticipated that
federal disaster recovery funding—which it estimated would total $82 bil ion—would enhance federal disaster recovery funding—which it estimated would total $82 bil ion—would enhance
the ability to repay creditors in future years.the ability to repay creditors in future years.
coming. coming.
Settling the COFINA/GO Dispute
The COFINA Senior Bondholders Coalition, a coalition of hedge funds and investment groups, The COFINA Senior Bondholders Coalition, a coalition of hedge funds and investment groups,
played a central role in negotiations that led to a settlement of the COFINA/GO dispute over played a central role in negotiations that led to a settlement of the COFINA/GO dispute over
payment priority. The coalition controlled about a third of outstanding senior COFINA debt and payment priority. The coalition controlled about a third of outstanding senior COFINA debt and
substantial amounts of COFINA subordinate (junior) bonds. In June 2015, the coalition retained substantial amounts of COFINA subordinate (junior) bonds. In June 2015, the coalition retained
the law firm Quinn Emanuel and lead counsel Susheel Kirpalani. the law firm Quinn Emanuel and lead counsel Susheel Kirpalani.
document/getdocumentbycode/?docId=3427095&projectCode=PR4&source=DM. document/getdocumentbycode/?docId=3427095&projectCode=PR4&source=DM.
Representative of Commonwealth of Puerto Rico, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/Representative of Commonwealth of Puerto Rico, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. Bettina Whyte was managing director and senior advisor at puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0. Bettina Whyte was managing director and senior advisor at
Alvarez & Marsal, a New York financial advisory firm. Alvarez & Marsal, a New York financial advisory firm.
indicator of the complexity of the case. indicator of the complexity of the case.
Hurricane Center, AL112017, June 30, 2018, https://www.nhc.noaa.gov/data/tcr/AL112017_Irma.pdf; and Richard J. Hurricane Center, AL112017, June 30, 2018, https://www.nhc.noaa.gov/data/tcr/AL112017_Irma.pdf; and Richard J.
Pasch, Andrew B. Penny, and Robbie Berg, “Pasch, Andrew B. Penny, and Robbie Berg, “ T ropical Cyclone Report: Hurricane Maria,” National Hurricane Center, T ropical Cyclone Report: Hurricane Maria,” National Hurricane Center,
February 14, 2019, AL152017, https://www.nhc.noaa.gov/data/tcr/AL152017_Maria.pdf. February 14, 2019, AL152017, https://www.nhc.noaa.gov/data/tcr/AL152017_Maria.pdf.
17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view. 17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view.
Irm a and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster. , coordinated by Elizabeth M. Webster.
of Bankruptcy Procedure 2019, case 17-03283-LTS, docket #1552, October 26, 2017. Also see Michelle Bocanegra, of Bankruptcy Procedure 2019, case 17-03283-LTS, docket #1552, October 26, 2017. Also see Michelle Bocanegra,
“MVP: Quinn Emanuel’s Susheel Kirpalani,” Law360, November 30, 2018, https://www.law360.com/articles/“MVP: Quinn Emanuel’s Susheel Kirpalani,” Law360, November 30, 2018, https://www.law360.com/articles/
1094205/mvp-quinn-emanuel-s-susheel-kirpalani. In that interview, UCC lead counsel Luc Despins is described as a 1094205/mvp-quinn-emanuel-s-susheel-kirpalani. In that interview, UCC lead counsel Luc Despins is described as a
mentor. mentor.
Congressional Research Service Congressional Research Service
20 20
link to page link to page
After sel ing off about half of their COFINA junior bonds after Hurricane María hit, the coalition After sel ing off about half of their COFINA junior bonds after Hurricane María hit, the coalition
increased its holdings of those bonds from $709 mil ion in October 2017 to $2.222 bil ion at the increased its holdings of those bonds from $709 mil ion in October 2017 to $2.222 bil ion at the
end of October 2018, as shown iend of October 2018, as shown in Figure 3..
2018—the price of COFINA senior bonds rose from about 35% to over 80% of par, and junior 2018—the price of COFINA senior bonds rose from about 35% to over 80% of par, and junior
bonds rose from about 10% of par to about 50% of par. bonds rose from about 10% of par to about 50% of par.
On May 14, 2018, the COFINA Senior Bondholders Coalition proposed a framework to settle the On May 14, 2018, the COFINA Senior Bondholders Coalition proposed a framework to settle the
GO/COFINA dispute,GO/COFINA dispute,
“meaningful debt relief.”“meaningful debt relief.”
June 5, 2018, that would al ocate 53.65% of the Pledged Sales Tax Base Amount—set at 5.5% of June 5, 2018, that would al ocate 53.65% of the Pledged Sales Tax Base Amount—set at 5.5% of
the 10.5% Sales & Use Tax—to COFINA.the 10.5% Sales & Use Tax—to COFINA.
the draft agreement favorably, as it could sidestep cal s to rule on the validity of COFINA’s legal the draft agreement favorably, as it could sidestep cal s to rule on the validity of COFINA’s legal
structure under the Puerto Rico Constitution. structure under the Puerto Rico Constitution.
Under the proposed framework, existing COFINA bonds would be exchanged for new securities Under the proposed framework, existing COFINA bonds would be exchanged for new securities
designed to reduce debt service obligations over the next decade, but carrying stronger investor designed to reduce debt service obligations over the next decade, but carrying stronger investor
protections. Certain COFINA creditors were to collect about $1.2 bil ion held in escrow.protections. Certain COFINA creditors were to collect about $1.2 bil ion held in escrow.
reduction in COFINA claims al owed the CPR government a greater share of sales and use tax reduction in COFINA claims al owed the CPR government a greater share of sales and use tax
revenues, which, in principle, would benefit GO bondholders. Island taxpayers also appear to revenues, which, in principle, would benefit GO bondholders. Island taxpayers also appear to
have benefited from a reduction of certain tax rates enacted in December 2018. have benefited from a reduction of certain tax rates enacted in December 2018.
DownloadPDF?id1=ODk5ODcw&id2=0. DownloadPDF?id1=ODk5ODcw&id2=0.
Discussions to Help Resolve Puerto Rico’s Debt Crisis,” May 14, 2018, https://www.businesswire.com/news/home/Discussions to Help Resolve Puerto Rico’s Debt Crisis,” May 14, 2018, https://www.businesswire.com/news/home/
20180514005558/en/. 20180514005558/en/.
https://caribbeanbusiness.com/go-cofina-bondholder-sides-head-for-shootout/. https://caribbeanbusiness.com/go-cofina-bondholder-sides-head-for-shootout/.
https://www.bloomberg.com/news/articles/2018-06-08/puerto-rico-cofina-investors-get-half-sales-tax-in-proposed-https://www.bloomberg.com/news/articles/2018-06-08/puerto-rico-cofina-investors-get-half-sales-tax-in-proposed-
deal. deal.
2018, http://www.aafaf.pr.gov/assets/cofina-fiscal-plan-090718.pdf. 2018, http://www.aafaf.pr.gov/assets/cofina-fiscal-plan-090718.pdf.
Amendments to its Income T ax Code,” January 2019, https://www.pwc.com/us/en/services/tax/library/insights/puerto-Amendments to its Income T ax Code,” January 2019, https://www.pwc.com/us/en/services/tax/library/insights/puerto-
rico-significant -amendments-to-income-tax-code.html. rico-significant -amendments-to-income-tax-code.html.
Congressional Research Service Congressional Research Service
21 21
Puerto Rico’s Public Debts: Accumulation and Restructuring
Figure 3. COFINA Holdings of Senior COFINA Bondholders Coalition
Source: CRS calculations using Rule 2019 filings on the COFINA docket. CRS calculations using Rule 2019 filings on the COFINA docket.
Notes: Baupost, headed by Seth Klarman, controls the investment vehicles named Decagon Holdings. See David Baupost, headed by Seth Klarman, controls the investment vehicles named Decagon Holdings. See David
Dayen, “We Can Final y Identify One of the Largest Holders of Puerto Rican Debt,” Intercept, October 3, 2017, Dayen, “We Can Final y Identify One of the Largest Holders of Puerto Rican Debt,” Intercept, October 3, 2017,
https://theintercept.com/2017/10/03/we-can-final y-identify-one-of-the-largest-holders-of-puerto-rican-debt/. https://theintercept.com/2017/10/03/we-can-final y-identify-one-of-the-largest-holders-of-puerto-rican-debt/.
The Oversight Board announced a deal with major COFINA creditors in August 2018. The Oversight Board announced a deal with major COFINA creditors in August 2018.
the Puerto Rican government enacted conforming legislation, the Puerto Rican government enacted conforming legislation,
revised COFINA fiscal plan.revised COFINA fiscal plan.
to Save Puerto Rico over $17 Billion,” August 8, 2018, https://drive.google.com/file/d/to Save Puerto Rico over $17 Billion,” August 8, 2018, https://drive.google.com/file/d/
1xGS5aCydodT T GhhCtk3OhHLFD6I_Qnny/view. 1xGS5aCydodT T GhhCtk3OhHLFD6I_Qnny/view.
Congressional Research Service Congressional Research Service
22 22
Puerto Rico’s Public Debts: Accumulation and Restructuring
detailed the proposed restructuring of COFINA debt. detailed the proposed restructuring of COFINA debt.
COFINA bondholders for approval.COFINA bondholders for approval.
creditors, conditional y approved the agreement in early November 2018 after having complained creditors, conditional y approved the agreement in early November 2018 after having complained
about the settlement. about the settlement.
Many junior COFINA bondholders contended the settlement was unfair. Some al eged that key Many junior COFINA bondholders contended the settlement was unfair. Some al eged that key
Senior COFINA Bondholders Coalition members had purchased enough junior bonds to attain a Senior COFINA Bondholders Coalition members had purchased enough junior bonds to attain a
decisive position in settlement negotiations, to the advantage of senior COFINA bondholders and decisive position in settlement negotiations, to the advantage of senior COFINA bondholders and
the detriment of junior COFINA bondholders. the detriment of junior COFINA bondholders.
mil ion in consummation costs awarded to major investors involved in negotiations.mil ion in consummation costs awarded to major investors involved in negotiations.
smal COFINA bondholder suits were dismissed by the Title III court. The U.S. Court of Appeals smal COFINA bondholder suits were dismissed by the Title III court. The U.S. Court of Appeals
for the First Circuit upheld those dismissals on February 8, 2021.for the First Circuit upheld those dismissals on February 8, 2021.
upheld on March 2, 2021, the dismissal of claims of Puerto Rico credit unions—cal ed upheld on March 2, 2021, the dismissal of claims of Puerto Rico credit unions—cal ed
cooperativas—who contended they were pressured to buy COFINA junior bonds.—who contended they were pressured to buy COFINA junior bonds.
Oversight Board, Title III Court Move to Wrap Up COFINA Restructuring
Arthur González, a member of the FOMB, argued that the proposed COFINA agreement was a Arthur González, a member of the FOMB, argued that the proposed COFINA agreement was a
prudent compromise, which avoided litigation that could end with a judgement that prudent compromise, which avoided litigation that could end with a judgement that
would either find that COFINA and its bondholders own the island’s sales tax revenues, would either find that COFINA and its bondholders own the island’s sales tax revenues,
which would sharply reduce the funds available for other constituencies, or that the which would sharply reduce the funds available for other constituencies, or that the
Commonwealth has the right to claw them back. A loss for the Commonwealth would be Commonwealth has the right to claw them back. A loss for the Commonwealth would be
a particularly devastating setback, costing the local government billions of dollars in a particularly devastating setback, costing the local government billions of dollars in
reduced debt and recouped revenue over the coming decades.reduced debt and recouped revenue over the coming decades.
file/d/1KL0LsMGXtOaNPJ8YPKMpJCCs37uKZT 9C/view. file/d/1KL0LsMGXtOaNPJ8YPKMpJCCs37uKZT 9C/view.
Corporation, Case No. 17-BK-3284 (LT S), October 18, 2018, https://cases.primeclerk.com/puertorico/Home-, Case No. 17-BK-3284 (LT S), October 18, 2018, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=ODk3NzAy&id2=0. Bankruptcy Code §1125 incorporated into PROMESA (§301(a)) required the DownloadPDF?id1=ODk3NzAy&id2=0. Bankruptcy Code §1125 incorporated into PROMESA (§301(a)) required the
Oversight Board to file a disclosure statement ahead of voting by creditors to accept or reject the plan. Oversight Board to file a disclosure statement ahead of voting by creditors to accept or reject the plan.
Home-DownloadPDF?id1=OT AwMT E5&id2=0. Home-DownloadPDF?id1=OT AwMT E5&id2=0.
Financing Corporation, Case No. 17-BK-3284 (LT S), November 16, 2018, https://cases.primeclerk.com/puertorico/, Case No. 17-BK-3284 (LT S), November 16, 2018, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=ODk5NzQw&id2=0. In re CPR and In re COFINA, Disclosure Statement for the Second Home-DownloadPDF?id1=ODk5NzQw&id2=0. In re CPR and In re COFINA, Disclosure Statement for the Second
Amended T itle III Plan of Adjustment, November 26, 2018, https://cases.primeclerk.com/puertorico/Home-Amended T itle III Plan of Adjustment, November 26, 2018, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OT AwMDAw&id2=0. DownloadPDF?id1=OT AwMDAw&id2=0.
2018, https://caribbeanbusiness.com/bonistas-tout-cofina-deal-impact-on-local-capital/. 2018, https://caribbeanbusiness.com/bonistas-tout-cofina-deal-impact-on-local-capital/.
disclosure statement of November 26, 2018. T he Consummation Cost provision is at pp. 362 -364. disclosure statement of November 26, 2018. T he Consummation Cost provision is at pp. 362 -364.
“COFINA $17.6B Deal Attacked in Appeals Court,” “COFINA $17.6B Deal Attacked in Appeals Court,” Bond Buyer, August 3, 2020. One of the judges who heard , August 3, 2020. One of the judges who heard
arguments in August 2020, Juan R. T orruella, died in October 2020. Pinto-Lugo et al. v. CPR, arguments in August 2020, Juan R. T orruella, died in October 2020. Pinto-Lugo et al. v. CPR, Judgem ent and and Opinion, ,
case 19-1181, U.S. Court of Appeals for the 1st Circuit, February 8, 2021, http://media.ca1.uscourts.gov/pdf.opinions/case 19-1181, U.S. Court of Appeals for the 1st Circuit, February 8, 2021, http://media.ca1.uscourts.gov/pdf.opinions/
19-1181P-01A.pdf. 19-1181P-01A.pdf.
for the 1st Circuit, March 2, 2021, http://media.ca1.uscourts.gov/pdf.opinions/19-1391P-01A.pdf. for the 1st Circuit, March 2, 2021, http://media.ca1.uscourts.gov/pdf.opinions/19-1391P-01A.pdf.
Congressional Research Service Congressional Research Service
23 23
Puerto Rico’s Public Debts: Accumulation and Restructuring
Natalie Jaresko, executive director of the Oversight Board, stated in a court filing that the Natalie Jaresko, executive director of the Oversight Board, stated in a court filing that the
alternative to the Plan is protracted litigation . . . which could lead to an all-or-nothing alternative to the Plan is protracted litigation . . . which could lead to an all-or-nothing
recovery for holders of either Commonwealth claims or COFINA’s Existing Securities. recovery for holders of either Commonwealth claims or COFINA’s Existing Securities.
Court Approves Restructuring and Bond Exchange in February 2019
On February 4, 2019, as noted above, Judge Swain approved the COFINA settlement and On February 4, 2019, as noted above, Judge Swain approved the COFINA settlement and
confirmed its restructuring plan,confirmed its restructuring plan,
U.S. history and thus resolving the GO-COFINA dispute.U.S. history and thus resolving the GO-COFINA dispute.
debt with a par value of $17.6 bil ion was exchanged for $12 bil ion in new COFINA bonds, debt with a par value of $17.6 bil ion was exchanged for $12 bil ion in new COFINA bonds,
which were divided into several current-interest-bearing bonds (CIBs; i.e., normal bonds) and which were divided into several current-interest-bearing bonds (CIBs; i.e., normal bonds) and
capital appreciation bonds (CABs), for which bal oon payments would be due in future decades, capital appreciation bonds (CABs), for which bal oon payments would be due in future decades,
the last ones ending in 2058. the last ones ending in 2058.
Concerns over COFINA Settlement and Ethical Conflicts
Some investment firms reported significant gains from holdings of Puerto Rican public debt and Some investment firms reported significant gains from holdings of Puerto Rican public debt and
in particular, COFINA bonds.in particular, COFINA bonds.
distressed prices and then spearheaded creditor negotiations, reportedly made “hundreds of distressed prices and then spearheaded creditor negotiations, reportedly made “hundreds of
mil ions of dollars” in profits.mil ions of dollars” in profits.
was mishandled and that their interests were not protected in negotiations, from which they were was mishandled and that their interests were not protected in negotiations, from which they were
excluded.excluded.
November 20, 2018, https://morningconsult.com/opinions/lawful-restructuring-compromises-are-key-to-puerto-ricos-November 20, 2018, https://morningconsult.com/opinions/lawful-restructuring-compromises-are-key-to-puerto-ricos-
future/. González had served as chief judge of the U.S. Bankruptcy Court for the Southern District of New York. future/. González had served as chief judge of the U.S. Bankruptcy Court for the Southern District of New York.
DownloadPDF?id1=OT AxNzgz&id2=0. DownloadPDF?id1=OT AxNzgz&id2=0.
Sales T ax Financing Corporation, U.S. District Court for Sales T ax Financing Corporation, U.S. District Court for
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMDUx&id2=0. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMDUx&id2=0.
filings in the COFINA docket (17-03284). On the CPR docket, see Memorandum Opinion and Order Approving filings in the COFINA docket (17-03284). On the CPR docket, see Memorandum Opinion and Order Approving
Settlement between Commonwealth of Puerto Rico and Puerto Rico Sales T ax Financing Corporation, U.S.Settlement between Commonwealth of Puerto Rico and Puerto Rico Sales T ax Financing Corporation, U.S.
Court for the District of Puerto Rico, Case 17-03283, February 4, 2019, https://cases.primeclerk.com/puertorico/Home-Court for the District of Puerto Rico, Case 17-03283, February 4, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OT AzMDUx&id2=0. On the COFINA docket, two filings on February 4, 2019, were superseded DownloadPDF?id1=OT AzMDUx&id2=0. On the COFINA docket, two filings on February 4, 2019, were superseded
by amended documents filed the next day. See Amended Order and Judgment Confirming the 3 rd Amended T itle III by amended documents filed the next day. See Amended Order and Judgment Confirming the 3 rd Amended T itle III
Plan Of Adjustment of Plan Of Adjustment of
Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMjM4&id2=0. Also Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMjM4&id2=0. Also
see Amended Memorandum of Findings of Fact and Conclusions of Law, U.S. District Court for the District of Puerto see Amended Memorandum of Findings of Fact and Conclusions of Law, U.S. District Court for the District of Puerto
Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMjI0&id2=0. Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT AzMjI0&id2=0.
Seven sets of CABs mature in years ranging from Seven sets of CABs mature in years ranging from
2046 ($1.1 billion) and 2051 ($640 million). 2046 ($1.1 billion) and 2051 ($640 million).
Bright Spot for Whitebox and Other Hedge Funds in an Otherwise Dismal Year,” Bright Spot for Whitebox and Other Hedge Funds in an Otherwise Dismal Year,” Institutional Investor, January 29, , January 29,
2019. Also see Michelle Celarier, “T ilden Park is Having a Big Year: Josh Birnbaum’s Firm is Up Double Digits on the 2019. Also see Michelle Celarier, “T ilden Park is Having a Big Year: Josh Birnbaum’s Firm is Up Double Digits on the
Back of a Deal for its Puerto Rico Bonds,” Back of a Deal for its Puerto Rico Bonds,” Institutional Investor, November 29, 2018, , November 29, 2018,
https://www.institutionalinvestor.com/article/b1c1175xfxk6t1/Tilden-Park-is-Having-a-Big-Year. https://www.institutionalinvestor.com/article/b1c1175xfxk6t1/Tilden-Park-is-Having-a-Big-Year.
Renegotiation Gain Substantial Profits,” Renegotiation Gain Substantial Profits,” Wall Street Journal, February 9, 2019, https://www.wsj.com/articles/hedge-, February 9, 2019, https://www.wsj.com/articles/hedge-
funds-bask-in-puerto-rico-bond-deal-11549713600. In court filings, the group calls itself the Senior COFINA funds-bask-in-puerto-rico-bond-deal-11549713600. In court filings, the group calls itself the Senior COFINA
Bondholders Coalition. Bondholders Coalition.
Congressional Research Service Congressional Research Service
24 24
link to page link to page
smal er holdings and advantaged those who held major positions. smal er holdings and advantaged those who held major positions.
objections that smal holders were excluded from mediation, stating that individual investors were objections that smal holders were excluded from mediation, stating that individual investors were
not prevented “from advocating their positions and seeking to participate in negotiations,” that not prevented “from advocating their positions and seeking to participate in negotiations,” that
investors were “welcome to reach out to the mediation team,” and that investors could object to investors were “welcome to reach out to the mediation team,” and that investors could object to
proposals resulting from mediation and other negotiations. proposals resulting from mediation and other negotiations.
Some contend that links among the Whitebox investment fund, a member of the Senior COFINA Some contend that links among the Whitebox investment fund, a member of the Senior COFINA
Bondholders Coalition; the Compass funds; and McKinsey, the main consultant to the Oversight Bondholders Coalition; the Compass funds; and McKinsey, the main consultant to the Oversight
Board, posed conflicts of interest that were not properly disclosed.Board, posed conflicts of interest that were not properly disclosed.
review that asserted that McKinsey’s investments posed no conflict, although they “could create review that asserted that McKinsey’s investments posed no conflict, although they “could create
the appearance of a potential conflict.”the appearance of a potential conflict.”
claims that it failed to disclose conflicts of interest in 14 other bankruptcy cases. claims that it failed to disclose conflicts of interest in 14 other bankruptcy cases.
Board Pivots GO Restructuring in 2019
The resolution—apart from certain appeals—of the COFINA restructuring cleared a path to The resolution—apart from certain appeals—of the COFINA restructuring cleared a path to
address restructuring of GO bonds and debts of other entities closely tied to the island address restructuring of GO bonds and debts of other entities closely tied to the island
government, such as the Employee Retirement System (ERS) and the Public Building Authority government, such as the Employee Retirement System (ERS) and the Public Building Authority
(PBA). The PBA constructs buildings that are leased to agencies of the island government. (PBA). The PBA constructs buildings that are leased to agencies of the island government.
On January 14, 2019, the Oversight Board, in conjunction with its special claims committee and On January 14, 2019, the Oversight Board, in conjunction with its special claims committee and
the UCC, chal enged the validity of $6 bil ion (at par value) of GO bonds issued after 2011— the UCC, chal enged the validity of $6 bil ion (at par value) of GO bonds issued after 2011—
referred to as “late vintage GO”—such as the $3.5 bil ion 2014 issue placed with hedge funds, referred to as “late vintage GO”—such as the $3.5 bil ion 2014 issue placed with hedge funds,
al egedly issued in violation of a constitutional debt limitation.al egedly issued in violation of a constitutional debt limitation.
Board and the UCC filed over 250 avoidance action Board and the UCC filed over 250 avoidance action
Home-DownloadPDF?id1=OT EzMzcw&id2=0. Home-DownloadPDF?id1=OT EzMzcw&id2=0.
https://www.bloomberg.com/news/articles/2019-02-22/puerto-rico-investors-fume-as-debt-swap-leaves-some-https://www.bloomberg.com/news/articles/2019-02-22/puerto-rico-investors-fume-as-debt-swap-leaves-some-
shortchanged. shortchanged.
DownloadPDF?id1=OT YwMT E1&id2=0. DownloadPDF?id1=OT YwMT E1&id2=0.
https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. Sehttps://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. See Figure
3 for a summary of Whitebox holdings of COFINA bonds. Also see Mary Williams Walsh,for a summary of Whitebox holdings of COFINA bonds. Also see Mary Williams Walsh,
Rico on Debt. It May Profit on the Outcome,” Rico on Debt. It May Profit on the Outcome,” New York Tim es, September 26, 2018. , September 26, 2018.
February 18, 2019, https://drive.google.com/file/d/1avv872k0XNonEiN9x0UzNUCUYDtYkqOd/view?usp=drivesdk. February 18, 2019, https://drive.google.com/file/d/1avv872k0XNonEiN9x0UzNUCUYDtYkqOd/view?usp=drivesdk.
Entities, U.S. Bankruptcy Court, Southern District of T exas, Houston Division, February 19, 2019, , U.S. Bankruptcy Court, Southern District of T exas, Houston Division, February 19, 2019,
https://www.justice.gov/opa/press-release/file/1133251/download. Also see Peter Wells, “ McKinsey Agrees to $15M https://www.justice.gov/opa/press-release/file/1133251/download. Also see Peter Wells, “ McKinsey Agrees to $15M
Settlement over Bankruptcy Disclosures,” Settlement over Bankruptcy Disclosures,” Financial Times, February 19, 2019. , February 19, 2019.
Home-DownloadPDF?id1=OT AyMjAz&id2=0. T he motion alleged that after 2012, issuance of GO bonds violated the Home-DownloadPDF?id1=OT AyMjAz&id2=0. T he motion alleged that after 2012, issuance of GO bonds violated the
Puerto Rico’s Constitution’s Article VI Section 2 requirement that average debt service in the past two years not exceed Puerto Rico’s Constitution’s Article VI Section 2 requirement that average debt service in the past two years not exceed
15% of revenues. T he motion also 15% of revenues. T he motion also
PBA leases to CPR agencies constituted a scheme to avoid the 15% limit. T hose claims were pulled back after PBA leases to CPR agencies constituted a scheme to avoid the 15% limit. T hose claims were pulled back after
negotiations with creditors. negotiations with creditors.
5, 2019, https://news.littlesis.org/2019/06/05/puerto-ricos-debt-battles-the-oversight -board-goes-on-a-suing-spree/. T he 5, 2019, https://news.littlesis.org/2019/06/05/puerto-ricos-debt-battles-the-oversight -board-goes-on-a-suing-spree/. T he
Board acted through a Special Claims Committee. See “ Commonwealth of Puerto Rico Avoidance Actions,” Board acted through a Special Claims Committee. See “ Commonwealth of Puerto Rico Avoidance Actions,”
https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index. https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index.
Congressional Research Service Congressional Research Service
25 25
Puerto Rico’s Public Debts: Accumulation and Restructuring
2014 GO bond issue. 2014 GO bond issue.
debtors before the filing of a bankruptcy petition. debtors before the filing of a bankruptcy petition.
The Board did not explain why it chose to chal enge GO bonds backed by a constitutional The Board did not explain why it chose to chal enge GO bonds backed by a constitutional
guarantee, but did not chal enge the legal and constitutional basis of COFINA bonds. One guarantee, but did not chal enge the legal and constitutional basis of COFINA bonds. One
investment analyst concluded “[t]he tacit support [by U.S. District Court Judge Swain] for the investment analyst concluded “[t]he tacit support [by U.S. District Court Judge Swain] for the
securitized structure represented by COFINA should be a welcome development for a municipal securitized structure represented by COFINA should be a welcome development for a municipal
market that has been transitioning away from full faith and credit GO pledges and toward market that has been transitioning away from full faith and credit GO pledges and toward
dedicated revenue pledges with perfected liens.”dedicated revenue pledges with perfected liens.”
filed a motion defending the validity of the GO bonds on March 21, 2019. filed a motion defending the validity of the GO bonds on March 21, 2019.
2020: Oversight Board, Hedge Funds Negotiate Over GO Bonds
On May 31, 2019, after negotiations with creditors, the Oversight Board announced a Plan On May 31, 2019, after negotiations with creditors, the Oversight Board announced a Plan
Support Agreement (PSA) for GO bonds and debt issued by ERS and PBA. The PSA was Support Agreement (PSA) for GO bonds and debt issued by ERS and PBA. The PSA was
supported by the Lawful Constitutional Debt Coalition (LCDC); some other hedge funds, supported by the Lawful Constitutional Debt Coalition (LCDC); some other hedge funds,
including some members of the COFINA Senior Bondholders Coalition; and some retiree and including some members of the COFINA Senior Bondholders Coalition; and some retiree and
labor groups. labor groups.
The Oversight Board released an amended PSA on February 9, 2020, claiming to have the The Oversight Board released an amended PSA on February 9, 2020, claiming to have the
backing of holders of $10 bil ion in GO and Public Building Authority bonds,backing of holders of $10 bil ion in GO and Public Building Authority bonds,
draft disclosure statement on February 28, 2020.draft disclosure statement on February 28, 2020.
58% of outstanding GO and PBA debt had signed onto the PSA. 58% of outstanding GO and PBA debt had signed onto the PSA.
better terms for holders of GO and guaranteed debt, but worse terms for junior bonds.better terms for holders of GO and guaranteed debt, but worse terms for junior bonds.
debt service would fal from levels that fluctuate around $3 bil ion to $1.5 bil ion per year. debt service would fal from levels that fluctuate around $3 bil ion to $1.5 bil ion per year.
In contrast to the wrap-up of the COFINA case, the GO bond case has been delayed by a series of In contrast to the wrap-up of the COFINA case, the GO bond case has been delayed by a series of
obstacles. On March 27, 2020, the Title III court, at the request of the Oversight Board, obstacles. On March 27, 2020, the Title III court, at the request of the Oversight Board,
suspended consideration of the adequacy of the disclosure statement covering the proposed suspended consideration of the adequacy of the disclosure statement covering the proposed
restructuring of GO, PBA, and ERS debt due to the effects of the Coronavirus Disease 2019 restructuring of GO, PBA, and ERS debt due to the effects of the Coronavirus Disease 2019
OT ExMT Y2&id2=0. OT ExMT Y2&id2=0.
Institute Journal, March 2004. , March 2004.
Bond Buyer, February 5, 2019. , February 5, 2019.
Funds’, Assured’s, And QT CB Noteholder Group’s Rule 12(C) Motion for Judgment on the Pleadings,Funds’, Assured’s, And QT CB Noteholder Group’s Rule 12(C) Motion for Judgment on the Pleadings,
LT S, March 21, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT A3NDEx&id2=0. LT S, March 21, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT A3NDEx&id2=0.
Alternative Capital, T aconic Capital, and Whitebox Advisors. See Oversight Board, Alternative Capital, T aconic Capital, and Whitebox Advisors. See Oversight Board, Am ended Disclosure Statem ent, ,
February 9, 2019, p. 11, https://drive.google.com/file/d/1_JApEw_dGRQCpgAVo0SaffZrVuap6WqQ/view. Golden February 9, 2019, p. 11, https://drive.google.com/file/d/1_JApEw_dGRQCpgAVo0SaffZrVuap6WqQ/view. Golden
T ree, T aconic, and Whitebox were major members of the Senior COFINA Bondholders Coalition. T ree, T aconic, and Whitebox were major members of the Senior COFINA Bondholders Coalition.
February 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT Q0OTAy&id2=0. February 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT Q0OTAy&id2=0.
id1=OT YwMT E1&id2=0. id1=OT YwMT E1&id2=0.
on Foreign Relations Blog Post, February 11, 2020, https://www.cfr.org/blog/what -exactly-new-agreement -between-on Foreign Relations Blog Post, February 11, 2020, https://www.cfr.org/blog/what -exactly-new-agreement -between-
puerto-ricos-board-and-its-creditors. puerto-ricos-board-and-its-creditors.
Congressional Research Service Congressional Research Service
26 26
Puerto Rico’s Public Debts: Accumulation and Restructuring
(COVID-19) pandemic. (COVID-19) pandemic.
that case and on effects of the pandemic.that case and on effects of the pandemic.
negotiations continue, but declined to offer details due to confidentiality restrictions. negotiations continue, but declined to offer details due to confidentiality restrictions.
Accusations of Insider Trading in the GO Restructuring Process
On February 25, 2020, the Title III Court received al egations of insider trading by coalitions of On February 25, 2020, the Title III Court received al egations of insider trading by coalitions of
hedge funds involved in GO restructuring mediation and negotiations. On the same date, the UCC hedge funds involved in GO restructuring mediation and negotiations. On the same date, the UCC
cal ed for more specific disclosures of holdings by participants in the GO mediation. For instance, cal ed for more specific disclosures of holdings by participants in the GO mediation. For instance,
previous disclosure filings reported aggregate holdings that combined GO debt with a full faith previous disclosure filings reported aggregate holdings that combined GO debt with a full faith
and credit pledge and PBA bonds that carried a CPR guarantee, distinctions that potential y and credit pledge and PBA bonds that carried a CPR guarantee, distinctions that potential y
translated into different treatment in restructuring plans. On June 8, 2020, Judge Swain ordered translated into different treatment in restructuring plans. On June 8, 2020, Judge Swain ordered
that creditor disclosures fully conform to Federal Rule of Bankruptcy Procedure 2019(b) that creditor disclosures fully conform to Federal Rule of Bankruptcy Procedure 2019(b)
standards. standards.
One analysis of changes in mediation participants’ holdings as reported in amended disclosure One analysis of changes in mediation participants’ holdings as reported in amended disclosure
filings asserted that LCDC members had increased holdings of GO bonds issued after 2011—filings asserted that LCDC members had increased holdings of GO bonds issued after 2011—
referred to as late vintage GO bonds—while in an overlapping time period the LCDC and the referred to as late vintage GO bonds—while in an overlapping time period the LCDC and the
Oversight Board had sought to invalidate the late vintage bonds. Oversight Board had sought to invalidate the late vintage bonds.
bond price changes that appeared to coincide with confidential mediation sessions in mid-January bond price changes that appeared to coincide with confidential mediation sessions in mid-January
2020. Hedge funds and other institutional investors denied that their members had either traded 2020. Hedge funds and other institutional investors denied that their members had either traded
during restricted periods or traded on nonpublic information. during restricted periods or traded on nonpublic information.
Calls for Investigations of Alleged Insider Trading
In June 2020, Oversight Board Executive Director Natalie Jaresko testified that she was aware of In June 2020, Oversight Board Executive Director Natalie Jaresko testified that she was aware of
insider trading al egations, but considered those a matter for law enforcement.insider trading al egations, but considered those a matter for law enforcement.
2020, five House Members sent a letter to the New York State Attorney General requesting an 2020, five House Members sent a letter to the New York State Attorney General requesting an
investigation into possible violations of that state’s Martin Act, which covers a broad range of investigation into possible violations of that state’s Martin Act, which covers a broad range of
OT Q5Nzg0&id2=0. OT Q5Nzg0&id2=0.
OT U3MjM0&id2=0. Also see Oversight Board, OT U3MjM0&id2=0. Also see Oversight Board, Status Report, December 4, 2020, https://cases.primeclerk.com/, December 4, 2020, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=OT k2MDI5&id2=0. puertorico/Home-DownloadPDF?id1=OT k2MDI5&id2=0.
17 BK 3283-LTS, June 8, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT U5OT U2&id2=17 BK 3283-LTS, June 8, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OT U5OT U2&id2=
0. 0.
Insider T rading,” Public Accountability Initiative webpage, August 5, 2020, https://public-accountability.org/report/Insider T rading,” Public Accountability Initiative webpage, August 5, 2020, https://public-accountability.org/report/
the-21-vulture-funds-stalking-puerto-ricos-central-government-legal-challenges-investments-insider-trading/. the-21-vulture-funds-stalking-puerto-ricos-central-government-legal-challenges-investments-insider-trading/.
October 15, 2020. Also see October 15, 2020. Also see Reply of LCDC, In re: CPR, October 15, 2020, https://cases.primeclerk.com/puertorico/, In re: CPR, October 15, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OT g1NzM2&id2=0. T rading of securities by an insider while in possession of material Home-DownloadPDF?id1=OT g1NzM2&id2=0. T rading of securities by an insider while in possession of material
nonpublic information may constitute insider trading barred by federal securities law. See Cindy A. Schipani and H. nonpublic information may constitute insider trading barred by federal securities law. See Cindy A. Schipani and H.
Nejat Seyhun, “Defining ‘Material, Nonpublic’: What Should Constitute Illegal Insider Information?” Nejat Seyhun, “Defining ‘Material, Nonpublic’: What Should Constitute Illegal Insider Information?” Fordham
Journal of Corporate & Financial Law, vol. XXI, 2016, pp. 327-378. , vol. XXI, 2016, pp. 327-378.
Resources, Resources, PROMESA Im plem entation During the Coronavirus Pandem ic, 116th Cong., 2nd sess., June 11, 2020, Serial , 116th Cong., 2nd sess., June 11, 2020, Serial
116–35, p. 97. 116–35, p. 97.
Congressional Research Service Congressional Research Service
27 27
Puerto Rico’s Public Debts: Accumulation and Restructuring
securities dealings. securities dealings.
Exchange Commission to consider whether securities laws were violated. Exchange Commission to consider whether securities laws were violated.
On October 5, 2020, House Committee on Natural Resources Chair Raúl Grijalva and other On October 5, 2020, House Committee on Natural Resources Chair Raúl Grijalva and other
Members sent the Oversight Board a letter requesting an investigation into those al egations.Members sent the Oversight Board a letter requesting an investigation into those al egations.
On the same day, a bond insurer, National Public Finance, asked the Title III Court to investigate On the same day, a bond insurer, National Public Finance, asked the Title III Court to investigate
insider trading and related al egations.insider trading and related al egations.
demurred on an investigation, but pledged to contact the U.S. Department of Justice, explaining demurred on an investigation, but pledged to contact the U.S. Department of Justice, explaining
that that
given the investigative resources available to Department and its expertise in investigating given the investigative resources available to Department and its expertise in investigating
the conduct at issue, the Oversight Board believes the Department is better suited than the the conduct at issue, the Oversight Board believes the Department is better suited than the
Oversight Board to evaluate the evidence and to determine whether federal laws have been Oversight Board to evaluate the evidence and to determine whether federal laws have been
violated. This approach will also avoid saddling the Commonwealth with a potentialy violated. This approach will also avoid saddling the Commonwealth with a potentialy
expansive and expensive investigation.expansive and expensive investigation.
Judge Swain declined bond insurer National Public Finance’s motion to direct the U.S. Trustee or Judge Swain declined bond insurer National Public Finance’s motion to direct the U.S. Trustee or
another entity to conduct an investigation, writing that “neither PROMESA nor any provision of another entity to conduct an investigation, writing that “neither PROMESA nor any provision of
an independent investigation along the lines of the investigation sought by National in its an independent investigation along the lines of the investigation sought by National in its
Motion.”Motion.”
to support a reasonable inference that any participant in the Mediation has traded on inside to support a reasonable inference that any participant in the Mediation has traded on inside
information to the detriment of counterparties or the bond market, much less to the detriment of information to the detriment of counterparties or the bond market, much less to the detriment of
the Title III and Mediation processes.” the Title III and Mediation processes.”
Restructuring on Hold in 2020
The final resolution to the Title III case for GO bonds and related debts was in limbo for much of The final resolution to the Title III case for GO bonds and related debts was in limbo for much of
2020 for several reasons. First, the COVID-19 pandemic, as elsewhere, has disrupted normal 2020 for several reasons. First, the COVID-19 pandemic, as elsewhere, has disrupted normal
operations and cast in doubt previous projections of Puerto Rico’s economic and fiscal future. A operations and cast in doubt previous projections of Puerto Rico’s economic and fiscal future. A
series of earthquakes hit the southwest of Puerto Rico in early 2020, further disrupting operations. series of earthquakes hit the southwest of Puerto Rico in early 2020, further disrupting operations.
Second, al egations that hedge funds involved in negotiations had traded bonds using nonpublic Second, al egations that hedge funds involved in negotiations had traded bonds using nonpublic
information prompted Judge Swain to order more detailed disclosures, which in turn has information prompted Judge Swain to order more detailed disclosures, which in turn has
prompted further litigation. Third, former Resident Commissioner Pedro Pierluisi Urrutia was prompted further litigation. Third, former Resident Commissioner Pedro Pierluisi Urrutia was
inaugurated as governor in January 2021. Changes in the governor’s office have typical y led to inaugurated as governor in January 2021. Changes in the governor’s office have typical y led to
Oversight Board members have stepped down and the process of appointing new members or Oversight Board members have stepped down and the process of appointing new members or
https://naturalresources.house.gov/download/grijalva-house-letter-to-fomb-on-insider-trading-investigation-october-21-https://naturalresources.house.gov/download/grijalva-house-letter-to-fomb-on-insider-trading-investigation-october-21-
2020. 2020.
Home-DownloadPDF?id1=OT g1NzM2&id2=0. Home-DownloadPDF?id1=OT g1NzM2&id2=0.
VOUfAT YZtRSWOO1GqZWDMQC/view. VOUfAT YZtRSWOO1GqZWDMQC/view.
OT g2Mjgz&id2=0. OT g2Mjgz&id2=0.
https://caribbeanbusiness.com/pierluisi-delgado-win-puerto-rico-primaries/. Pierluisi also worked as a consultant to the https://caribbeanbusiness.com/pierluisi-delgado-win-puerto-rico-primaries/. Pierluisi also worked as a consultant to the
Oversight Board after his term as Resident Commissioner. Oversight Board after his term as Resident Commissioner.
Congressional Research Service Congressional Research Service
28 28
link to page link to page
extending appointments of current members remains unfinished. Until the reappointment process extending appointments of current members remains unfinished. Until the reappointment process
had concluded, the Board’s composition and priorities were unclear. Fifth, the pace of disaster had concluded, the Board’s composition and priorities were unclear. Fifth, the pace of disaster
recovery funding, which was expected to bolster the island’s economy—and thus its ability to recovery funding, which was expected to bolster the island’s economy—and thus its ability to
service debts—in the medium term has been slow and uncertain.service debts—in the medium term has been slow and uncertain.
released some of those recovery funds. released some of those recovery funds.
The Oversight Board discussed proposals to revise the plan of adjustment to reflect effects of the The Oversight Board discussed proposals to revise the plan of adjustment to reflect effects of the
COVID-19 pandemic on the island economy at its October 30, 2020, public meeting. A newly COVID-19 pandemic on the island economy at its October 30, 2020, public meeting. A newly
appointed member, Justin Peterson, left the online meeting, blocking a vote to modify the plan. appointed member, Justin Peterson, left the online meeting, blocking a vote to modify the plan.
Oversight Board Announces Revised GO PSA in February 2021
On October 29, 2020, Judge Swain ordered the Oversight Board to present “an informative On October 29, 2020, Judge Swain ordered the Oversight Board to present “an informative
motion presenting a term sheet disclosing the material economic and structural features of an motion presenting a term sheet disclosing the material economic and structural features of an
amended plan of adjustment that the Oversight Board intends to propose for confirmation” by amended plan of adjustment that the Oversight Board intends to propose for confirmation” by
February 10, 2021, which would cover GO debt, as wel as debts of the Public Building February 10, 2021, which would cover GO debt, as wel as debts of the Public Building
Authority.Authority.
support agreement (PSA), which it filed with the Title III court on March 8, 2021.support agreement (PSA), which it filed with the Title III court on March 8, 2021.
compares terms of the February 2021 PSA with those of a plan discussed by the Oversight Board compares terms of the February 2021 PSA with those of a plan discussed by the Oversight Board
in October 2020. in October 2020.
Although the total recovery value of the newly proposed GO settlement is higher than the plan Although the total recovery value of the newly proposed GO settlement is higher than the plan
outlined by the Board in October 2020,outlined by the Board in October 2020,
filed in February 2020 ($15.2 bil ion) or the creditors’ counterproposal of August 2020 ($15.3 filed in February 2020 ($15.2 bil ion) or the creditors’ counterproposal of August 2020 ($15.3
bil ion), in part reflecting effects of the COVID-19 pandemic. bil ion), in part reflecting effects of the COVID-19 pandemic.
Irm a and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster., coordinated by Elizabeth M. Webster.
the Federal Government has Promised More than $67.7 Billion for the Island’s Recovery and Reconstruction, the Federal Government has Promised More than $67.7 Billion for the Island’s Recovery and Reconstruction,
However, Only a T hird of the Money has Arrived,” However, Only a T hird of the Money has Arrived,” El Nuevo Día, January 6, 2021, https://www.elnuevodia.com/, January 6, 2021, https://www.elnuevodia.com/
english/news/story/white-house-approves-37-billion-to-repair-prasa/.english/news/story/white-house-approves-37-billion-to-repair-prasa/.
managing director of the DCI Group, which had worked on behalf of GO bondholders during Governor García managing director of the DCI Group, which had worked on behalf of GO bondholders during Governor García
Padilla’s term in office (2013-3017). José A. Delgado Robles and Joanisabel González, “Donald T rump Picks Justin Padilla’s term in office (2013-3017). José A. Delgado Robles and Joanisabel González, “Donald T rump Picks Justin
Peterson as New Oversight Board Member: T he President Announces his Intention to Appoint a Partner of a Peterson as New Oversight Board Member: T he President Announces his Intention to Appoint a Partner of a
Controversial Firm Representing Bondholders,” Controversial Firm Representing Bondholders,” El Nuevo Día, October 8, 2020, https://www.elnuevodia.com/english/, October 8, 2020, https://www.elnuevodia.com/english/
news/story/donald-trump-picks-justin-peterson-as-new-oversight-board-member/. news/story/donald-trump-picks-justin-peterson-as-new-oversight-board-member/.
Home-DownloadPDF?id1=OT g2NDIy&id2=0. Home-DownloadPDF?id1=OT g2NDIy&id2=0.
Rico, et al., March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. Also see , March 8, 2021, https://drive.google.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view. Also see
Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of Oversight Board, “Oversight Board Reaches Agreement in Principle on Debt: Creditors Holding About $7 Billion of
General Obligation and Public Building Authority Bonds Committed; Mediation Continues General Obligation and Public Building Authority Bonds Committed; Mediation Continues
Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/
149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, 149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, Am ended Plan Support Agreem ent, ,
February 23, 2021, https://drive.google.com/file/d/15zWXi83c0EOI8Pzw2uS_lYGgxRbugBsV/vie w.February 23, 2021, https://drive.google.com/file/d/15zWXi83c0EOI8Pzw2uS_lYGgxRbugBsV/vie w.
Años [New proposal for debt service would leave Puerto Rico without cash in eight years] ,” press release, February 10, Años [New proposal for debt service would leave Puerto Rico without cash in eight years] ,” press release, February 10,
2021, https://espaciosabiertos.org/nueva-propuesta-del-pago-de-la-deuda-deja-a-puerto-rico-sin-dinero-en-efectivo-en-2021, https://espaciosabiertos.org/nueva-propuesta-del-pago-de-la-deuda-deja-a-puerto-rico-sin-dinero-en-efectivo-en-
ocho-anos/. ocho-anos/.
1UDwg3-wMpsRhUdDbkpGS- wuZsoWte38d/view. 1UDwg3-wMpsRhUdDbkpGS- wuZsoWte38d/view.
Congressional Research Service Congressional Research Service
29 29
link to page link to page
Table 1. Comparison of February 2021 PSA and October 2020 Board Proposal
Dol ar amounts in mil ions Dol ar amounts in mil ions
February 2021
October 2020
Item
PSA
PSA
Difference
Cash GO Cash GO
$7,02 $7,024a
$5,984 $5,984
$1,040 $1,040
Cash PBA Cash PBA
$1,073 $1,073
b
— —
Annual fixed payment GO & COFINA Sr Annual fixed payment GO & COFINA Sr
$1,150 $1,150
$1,050 $1,050
$100 $100
Time period Time period
25 years 25 years
20 years 20 years
5 years 5 years
GO bond issue GO bond issue
$6,683 $6,683
$4,980 $4,980
$1,703 $1,703
Capital Appreciation Bond issue Capital Appreciation Bond issue
$730; rises to $730; rises to
$1066 $1066
$0 $0
$730 $730
Annual Maximum on CVI Annual Maximum on CVI
from $200 to $400 from $200 to $400
$50 $50
from $150 to $350 from $150 to $350
Cumulative Maximum on CVI Cumulative Maximum on CVI
$3,500 $3,500
$1,000 $1,000
$2,500 $2,500
Time period for CVI Time period for CVI
22 years 22 years
20 years 20 years
2 years 2 years
Source: CRS analysis of CPR PSAs, Espacios Abiertos, Oversight Board, CRS analysis of CPR PSAs, Espacios Abiertos, Oversight Board, Plan of Adjustment Discussion, pp. 51-57, , pp. 51-57,
October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view. October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view.
Notes: CAB capital appreciation bonds are no-coupon bonds with bal oon payments near maturity. Contingent CAB capital appreciation bonds are no-coupon bonds with bal oon payments near maturity. Contingent
valuation instruments (CVIs) pay creditors more if economic growth exceeds fiscal plan baseline projections. valuation instruments (CVIs) pay creditors more if economic growth exceeds fiscal plan baseline projections.
a. Includes potential $350 mil ion contingent on revenues above benchmarks. a. Includes potential $350 mil ion contingent on revenues above benchmarks.
b. PBA terms not included in October Board proposal. b. PBA terms not included in October Board proposal.
If terms of the most recent PSA were implemented, existing bonds covered by the agreement If terms of the most recent PSA were implemented, existing bonds covered by the agreement
would be exchanged for cash, new GO bonds, capital appreciation bonds (with interest only would be exchanged for cash, new GO bonds, capital appreciation bonds (with interest only
payable in future years), and contingent valuation instruments (CVIs) that would pay creditors payable in future years), and contingent valuation instruments (CVIs) that would pay creditors
extra amounts if the island’s economic growth exceeded Oversight Board projections. The mix of extra amounts if the island’s economic growth exceeded Oversight Board projections. The mix of
new assets received would differ for each old bond, with estimated recovery rates ranging from new assets received would differ for each old bond, with estimated recovery rates ranging from
67.7% for the 2014 GO bond to 80.3% for pre-2011 PBA bonds, excluding CVI payments. 67.7% for the 2014 GO bond to 80.3% for pre-2011 PBA bonds, excluding CVI payments.
Those recovery rates are wel above what market prices indicate were expected recovery rates for Those recovery rates are wel above what market prices indicate were expected recovery rates for
much of the period of the debt restructuring, as a later section discusses. much of the period of the debt restructuring, as a later section discusses.
The Oversight Board chairman claimed the proposed plan aimed at consensual agreement; that it The Oversight Board chairman claimed the proposed plan aimed at consensual agreement; that it
reflected harm to the island from hurricanes, the COVID-19 pandemic, and other natural reflected harm to the island from hurricanes, the COVID-19 pandemic, and other natural
disasters; that it was a fair deal for creditors; and that it would be a “once and done deal.”disasters; that it was a fair deal for creditors; and that it would be a “once and done deal.”
plan also includes reductions of 2%-3% in some pension payments above certain thresholds, plan also includes reductions of 2%-3% in some pension payments above certain thresholds,
which the Board contends would protect most pensioners from those reductions.which the Board contends would protect most pensioners from those reductions.
reductions, creditor concerns, and macroeconomic uncertainties, among other considerations, reductions, creditor concerns, and macroeconomic uncertainties, among other considerations,
may spur opposition to the Board’s plan. may spur opposition to the Board’s plan.
23, 2021. 23, 2021.
2021. 2021.
February 26, 2021, p. 6, https://drive.google.com/file/d/1wT LXvJRu2GI38DRcpOWuVHX2OvT wvAVo/view. February 26, 2021, p. 6, https://drive.google.com/file/d/1wT LXvJRu2GI38DRcpOWuVHX2OvT wvAVo/view.
Congressional Research Service Congressional Research Service
30 30
link to page link to page
Governor Pedro Pierluisi was quoted as stating that the agreement was a “step forward,” although Governor Pedro Pierluisi was quoted as stating that the agreement was a “step forward,” although
he vowed to oppose any plan that would result in reductions in public pension payments to he vowed to oppose any plan that would result in reductions in public pension payments to
retirees.retirees.
bond insurers, Assured Guaranty and National Public Finance Guarantee.bond insurers, Assured Guaranty and National Public Finance Guarantee.
agreement was announced on May 5, 2021, which removes one hurdle to implementation of the agreement was announced on May 5, 2021, which removes one hurdle to implementation of the
CPR PSA. The agreement involves treatment of the CPR clawback of revenues from certain CPR PSA. The agreement involves treatment of the CPR clawback of revenues from certain
public corporations. public corporations.
Market Perspectives on Debt Restructuring
Trends in bond prices provide a window on investors’ views of the restructuring process and Trends in bond prices provide a window on investors’ views of the restructuring process and
proposals as they proceed through the events described in previous sectionsproposals as they proceed through the events described in previous sections. Figure 4 shows shows
bond prices as a percentage of par from 2013 through 2020 for selected issues of GO bonds; bond prices as a percentage of par from 2013 through 2020 for selected issues of GO bonds;
PRASA, and HTA. PRASA, and HTA.
Bond prices, according to finance theory, reveal market expectations of the probability of default Bond prices, according to finance theory, reveal market expectations of the probability of default
restructuring.restructuring.
market expectations of recovery ratesmarket expectations of recovery rates. Appendix B presents data on bond prices and trading presents data on bond prices and trading
volumes for a narrower time peri volumes for a narrower time period. Appendix C lists key dates with links to key documents. lists key dates with links to key documents.
https://thehill.com/homenews/state-watch/542318-puerto-rico-debt-restructure-plan-threatens-public-pensions. https://thehill.com/homenews/state-watch/542318-puerto-rico-debt-restructure-plan-threatens-public-pensions.
https://drive.google.com/file/d/1ZOE9M4oqBlFNyhgrbFpN71NW8b6-f4Pa/view. https://drive.google.com/file/d/1ZOE9M4oqBlFNyhgrbFpN71NW8b6-f4Pa/view.
Guarantee Corp.: Settles Asserted Clawback Claims Against the Guarantee Corp.: Settles Asserted Clawback Claims Against the
HT A T itle III Plan of Adjustment,” press release, May 5, 2021, https://drive.google.com/file/d/HT A T itle III Plan of Adjustment,” press release, May 5, 2021, https://drive.google.com/file/d/
file/d/1BqBUrjT k_xjtg1wEhOdnv3ul4WfUorld/view. file/d/1BqBUrjT k_xjtg1wEhOdnv3ul4WfUorld/view.
α*(recovery value), where α is the probability of default. Given that default on the bulk of Puerto Rico’s debt was α*(recovery value), where α is the probability of default. Given that default on the bulk of Puerto Rico’s debt was
highly likely or certain by mid-2015, bond prices would then directly reflect market expectations of recovery rates. highly likely or certain by mid-2015, bond prices would then directly reflect market expectations of recovery rates.
Holders of some bonds backed by dedicated revenue streams have argued that default on those bonds was not Holders of some bonds backed by dedicated revenue streams have argued that default on those bonds was not
inevitable, although such arguments gained no traction in the T itle III court. inevitable, although such arguments gained no traction in the T itle III court.
31 31
Figure 4. Price Trends for Selected Puerto Rico Bonds
Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/. CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/.
Notes: Al prices quoted as percentage of par value. CUSIPS (codes used to identify issuers and financial securities) are 2006A (74514LHN0), 2009B (74514LVW4), Al prices quoted as percentage of par value. CUSIPS (codes used to identify issuers and financial securities) are 2006A (74514LHN0), 2009B (74514LVW4),
2011A GO (74514LYW1), 2012A (74514LA98), 2014A NY Law GO (74514LE86), PREPA (74526QVX7), PRASA (745160QF1), HTA (745181K97), COFINA 2011A GO (74514LYW1), 2012A (74514LA98), 2014A NY Law GO (74514LE86), PREPA (74526QVX7), PRASA (745160QF1), HTA (745181K97), COFINA
Subordinated (74529JHN8), and COFINA Senior (74529JNX9). The first vertical grey line indicates the release of the August Subordinated (74529JHN8), and COFINA Senior (74529JNX9). The first vertical grey line indicates the release of the August
introduction of a local bankruptcy measure. COFINA bonds were exchanged for new bonds on February 12, 2019. Values interpolated between trade dates. introduction of a local bankruptcy measure. COFINA bonds were exchanged for new bonds on February 12, 2019. Values interpolated between trade dates.
CRS-32 CRS-32
link to page link to page
Bond prices have changed dramatically over the course of the debt restructuring process.205 Many Puerto Rican bonds traded above par before mid-2013. Al of these bond prices fel sharply in 2013, reacting to the Detroit bankruptcy filing and a business press article on Puerto Rico’s fiscal distress.206 The introduction of a local bankruptcy measure in June 2014 and the announcement by Puerto Rico’s governor a year later that the island’s debts were “unpayable” also pushed bond prices down. Not al categories of debt moved to the same extent. For instance, COFINA subordinate bond Not al categories of debt moved to the same extent. For instance, COFINA subordinate bond
prices reacted more sharply to events of 2015 than GO bond prices, although they recovered more prices reacted more sharply to events of 2015 than GO bond prices, although they recovered more
ground than other bonds in the lead-up to the enactment of PROMESA at the end of June 2016. ground than other bonds in the lead-up to the enactment of PROMESA at the end of June 2016.
The COFINA default in May 2017 depressed senior and especial y subordinate COFINA bonds. The COFINA default in May 2017 depressed senior and especial y subordinate COFINA bonds.
The devastation left by Hurricanes Irma and María in September 2017 severely depressed almost The devastation left by Hurricanes Irma and María in September 2017 severely depressed almost
al Puerto Rico bond prices.al Puerto Rico bond prices.
subordinates briefly traded at about 10% of par. Prices began to recover in 2018, with the subordinates briefly traded at about 10% of par. Prices began to recover in 2018, with the
February enactment of the Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123), which February enactment of the Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123), which
to Oversight Board proposals in April 2018 that combined cal s for fiscal austerity with relatively to Oversight Board proposals in April 2018 that combined cal s for fiscal austerity with relatively
optimistic macroeconomic forecasts. optimistic macroeconomic forecasts.
In January 2018, the Oversight Board cal ed for invalidating late vintage GO issues, causing the In January 2018, the Oversight Board cal ed for invalidating late vintage GO issues, causing the
older GOs to trade at a premium to the 2014 issue. The 2014 GO issue had traded above older GO older GOs to trade at a premium to the 2014 issue. The 2014 GO issue had traded above older GO
issues until Hurricane María, reflecting the New York law provision. Some of the al egations of issues until Hurricane María, reflecting the New York law provision. Some of the al egations of
insider trading—discussed in insider trading—discussed in “Accusations of Insider Trading in the GO Restructuring Process,” ,”
above—center on divergences between earlier and late vintage GO bonds. Those differences above—center on divergences between earlier and late vintage GO bonds. Those differences
CPR, ERS, and PBA in February 2020. CPR, ERS, and PBA in February 2020.
The relationship between bond prices and estimated recovery rates in the consummated COFINA The relationship between bond prices and estimated recovery rates in the consummated COFINA
Several activists assert that the marked recovery of bond prices after some of those prices reached Several activists assert that the marked recovery of bond prices after some of those prices reached
extremely low levels in fal 2017 implies that investors took advantage of island residents. The extremely low levels in fal 2017 implies that investors took advantage of island residents. The
recovery of those prices, per se, need not imply any misbehavior on the part of investors, but recovery of those prices, per se, need not imply any misbehavior on the part of investors, but
could reflect a transfer of bond holdings to investors and funds more wil ing to tolerate risk, or could reflect a transfer of bond holdings to investors and funds more wil ing to tolerate risk, or
less adverse to litigation, or better informed about long-term prospects. less adverse to litigation, or better informed about long-term prospects.
The shift in holdings from smal er bondholders to hedge funds acting within coalitions may also The shift in holdings from smal er bondholders to hedge funds acting within coalitions may also
play a role. Hedge funds, some contend, can serve to mitigate collection action chal enges to play a role. Hedge funds, some contend, can serve to mitigate collection action chal enges to
enforcing creditor interests facing dispersed investors. enforcing creditor interests facing dispersed investors.
What Can Puerto Rico Afford to Pay?
A “once and done deal,” as the Oversight Board chair put it, would require a manageable future A “once and done deal,” as the Oversight Board chair put it, would require a manageable future
debt service burden. Capacity to service public debt depends on growth in the tax base—largely debt service burden. Capacity to service public debt depends on growth in the tax base—largely
University Law Review, vol. 103, no. 1 (winter 2009), pp. 281, vol. 103, no. 1 (winter 2009), pp. 281
covenants, the authors note, may impair interests of issuers. Some COFINA creditors argued that actions of hedge covenants, the authors note, may impair interests of issuers. Some COFINA creditors argued that actions of hedge
funds impaired their interests, but were unable to persuade courts to intervene. funds impaired their interests, but were unable to persuade courts to intervene.
Congressional Research Service Congressional Research Service
33 33
link to page 39 link to page 39
In recent decades economic growth in Puerto Rico has been uneven, if not stagnant.In recent decades economic growth in Puerto Rico has been uneven, if not stagnant.
2020, along with the COVID-19 pandemic, also hindered economic activity. The island’s 2020, along with the COVID-19 pandemic, also hindered economic activity. The island’s
economy, according to April 2021 Oversight Board estimates, shrank by 3.0% in 2020. economy, according to April 2021 Oversight Board estimates, shrank by 3.0% in 2020.
The Board projects negligible economic growth over the next five years, as shown i The Board projects negligible economic growth over the next five years, as shown in Figure 5.
The 2021 CPR Fiscal Plan projects somewhat more growth than plans from recent past years. The 2021 CPR Fiscal Plan projects somewhat more growth than plans from recent past years.
Growth projections that adjust for income increases due to federal COVID-19 relief measures Growth projections that adjust for income increases due to federal COVID-19 relief measures
show stronger growth in 2021 (3.8%) and 2022 (1.5%), but weaker growth for later years. Puerto show stronger growth in 2021 (3.8%) and 2022 (1.5%), but weaker growth for later years. Puerto
Rico’s projected economic growth trajectory, according to Oversight Board projections, wil be Rico’s projected economic growth trajectory, according to Oversight Board projections, wil be
would nearly match the projected U.S. growth rate in 2025. would nearly match the projected U.S. growth rate in 2025.
1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Growth is measured for fiscal years of the Puerto Rican government, 1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Growth is measured for fiscal years of the Puerto Rican government,
which start on July 1. Economic growth is measured using gross national product, which avoids distortions due to profit which start on July 1. Economic growth is measured using gross national product, which avoids distortions due to profit
shifting. shifting.
Committee, 116th Cong., 2nd sess., hearing, Committee, 116th Cong., 2nd sess., hearing, PROMESA Im plem entation During the
2020, p. 10, https://www.govinfo.gov/content/pkg/CHRG-116hhrg40637/pdf/CHRG-116hhrg40637.pdf. 2020, p. 10, https://www.govinfo.gov/content/pkg/CHRG-116hhrg40637/pdf/CHRG-116hhrg40637.pdf.
Congressional Research Service Congressional Research Service
34 34
Puerto Rico’s Public Debts: Accumulation and Restructuring
Figure 5. Projected Puerto Rican and U.S. Economic Growth Rates, 2020-2025 Source: Oversight Board, Fiscal Plan Macroeconomic Overview and Fiscal Plan, August 18, 2020; and Oversight Board, Certified 2021 Fiscal Plan, April 23, 2021. Notes: Puerto Rico projections use GNP, which avoids distortions in GDP measures related to tax avoidance strategies of multinational firms with Puerto Rican subsidiaries. Puerto Rican growth rates are for the CPR fiscal year, which starts on July 1. The 2021 CPR Fiscal Plan anticipates that Puerto Rico wil receive $110 bil ion in federal funds The 2021 CPR Fiscal Plan anticipates that Puerto Rico wil receive $110 bil ion in federal funds
over the coming decade, although mainland firms or contractors would receive some of that over the coming decade, although mainland firms or contractors would receive some of that
amount. Federal and private disaster assistance is estimated to drop from $8.1 bil ion in 2019 to amount. Federal and private disaster assistance is estimated to drop from $8.1 bil ion in 2019 to
$2.3 bil ion in 2020, and to rise in following years as Community Development Block Grant $2.3 bil ion in 2020, and to rise in following years as Community Development Block Grant
Disaster Recovery (CDBG-DR), Federal Emergency Management Agency (FEMA) permanent Disaster Recovery (CDBG-DR), Federal Emergency Management Agency (FEMA) permanent
public assistance, and certain other federal program funds are disbursed. public assistance, and certain other federal program funds are disbursed.
The island’s shrinking population, due to continuing net outmigration to the mainland and low The island’s shrinking population, due to continuing net outmigration to the mainland and low
birth rates, also affects its growth prospects.birth rates, also affects its growth prospects.
population fel from 3.73 mil ion in 2010 to 3.16 mil ion in 2020, a decrease of 15%. population fel from 3.73 mil ion in 2010 to 3.16 mil ion in 2020, a decrease of 15%.
Oversight Board projects that its population wil decline to 2.76 mil ion by 2026. Oversight Board projects that its population wil decline to 2.76 mil ion by 2026.
https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Also see Sergio M. Marxuach, https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. Also see Sergio M. Marxuach,
“Federal Funds Anchor New Fiscal Plan,” Center for a New Economy blog, April 29, 2021, https://grupocne.org/2021/“Federal Funds Anchor New Fiscal Plan,” Center for a New Economy blog, April 29, 2021, https://grupocne.org/2021/
04/29/federal-funds-anchor-new-fiscal-plan/. 04/29/federal-funds-anchor-new-fiscal-plan/.
Center for Puerto Rican Studies, issue brief RB2018-05, September 2018, https://centropr.hunter.cuny.edu/sites/default/Center for Puerto Rican Studies, issue brief RB2018-05, September 2018, https://centropr.hunter.cuny.edu/sites/default/
files/RB2018-05_SEPT 2018%20%281%29.pdf. files/RB2018-05_SEPT 2018%20%281%29.pdf.
https://www.census.gov/programs-surveys/popest/technical-documentation/research/evaluation-estimates/2020-https://www.census.gov/programs-surveys/popest/technical-documentation/research/evaluation-estimates/2020-
evaluation-estimates/2010s-total-puerto-rico-municipios.html. evaluation-estimates/2010s-total-puerto-rico-municipios.html.
https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view. https://drive.google.com/file/d/1reetKnfKsa1uR-A0u9l3FM6PfGamHCrx/view.
http://espaciosabiertos.org/wp-content/uploads/Puerto-Ricos-Debt -Dilemma-Final-Report -May-2019.pdf; and Omaya http://espaciosabiertos.org/wp-content/uploads/Puerto-Ricos-Debt -Dilemma-Final-Report -May-2019.pdf; and Omaya
Sosa Pascual and Luis Valentín Ortiz, “Fantasy of the Fiscal Plan for Puerto Rico,” Center for Sosa Pascual and Luis Valentín Ortiz, “Fantasy of the Fiscal Plan for Puerto Rico,” Center for
February 20, 2018, https://periodismoinvestigativo.com/2018/02/the-fantasy-of-the-fiscal-plan-for-puerto-rico/. February 20, 2018, https://periodismoinvestigativo.com/2018/02/the-fantasy-of-the-fiscal-plan-for-puerto-rico/.
Restore Debt Sustainability, National Bureau of Economic Research, working paper no. 25256, November 2018,, National Bureau of Economic Research, working paper no. 25256, November 2018,
http://www.nber.org/papers/w25256. Also see Brad W. Setser, “ Could Maria’s Legacy Be a New Debt T rap for Puerto http://www.nber.org/papers/w25256. Also see Brad W. Setser, “ Could Maria’s Legacy Be a New Debt T rap for Puerto
Rico?” Council on Foreign Relations blog post, November 13, 2018, https://www.cfr.org/blog/could-marias-legacy-be-Rico?” Council on Foreign Relations blog post, November 13, 2018, https://www.cfr.org/blog/could-marias-legacy-be-
new-debt-trap-puerto-rico. new-debt-trap-puerto-rico.
Hypothesis,” in Susan M. Collins, Barry P. Bosworth, and Miguel A. SotoHypothesis,” in Susan M. Collins, Barry P. Bosworth, and Miguel A. Soto
Restoring Growth (Brookings: Washington, DC, 2006). (Brookings: Washington, DC, 2006).
Evidence from the Caribbean, International Monetary Fund, working paper 16/82, April 7, 2016, https://www.imf.org/, International Monetary Fund, working paper 16/82, April 7, 2016, https://www.imf.org/
en/Publications/WP/Issues/2016/12/31/Structural-Reform-and-Growth-What-Really-Matters-Evidence-from-the-en/Publications/WP/Issues/2016/12/31/Structural-Reform-and-Growth-What-Really-Matters-Evidence-from-the-
Caribbean-43855. T hose authors find that, among Caribbean countries, structural reforms only appear in the long Caribbean-43855. T hose authors find that, among Caribbean countries, structural reforms only appear in the long
and depend on investments in institutional qualityand depend on investments in institutional quality
economist said “it was strongly felt that if you have sufficiently flexible labour markets and product markets, labour economist said “it was strongly felt that if you have sufficiently flexible labour markets and product markets, labour
and capital will move freely to wherever you have the highest wages or the highest returns. But the truth is that doesn’t and capital will move freely to wherever you have the highest wages or the highest returns. But the truth is that doesn’t
happen very easily, especially when you’re talking about labour mobility.” Martin Sandbu, “Gita Gopinath: ‘Fiscal happen very easily, especially when you’re talking about labour mobility.” Martin Sandbu, “Gita Gopinath: ‘Fiscal
Policy Plays an Essential Role in Recovery,’” Policy Plays an Essential Role in Recovery,’” Financial Tim es, November 19, 2020. , November 19, 2020.
economic growth that translates into more tax revenues for the Commonwealth. While no Federal economic growth that translates into more tax revenues for the Commonwealth. While no Federal
used to pay debt, the used to pay debt, the
of the Fiscal Plan.” T estimony of Executive Director Natalie Jaresko , in U.S. Congress, House Committee on Natural of the Fiscal Plan.” T estimony of Executive Director Natalie Jaresko , in U.S. Congress, House Committee on Natural
Resources, Oversight Hearing on PROMESA, Resources, Oversight Hearing on PROMESA,
question 13, Ser. 116-14, https://www.govinfo.gov/content/pkg/CHRG-116hhrg36258/html/CHRG-116hhrg36258.htm. question 13, Ser. 116-14, https://www.govinfo.gov/content/pkg/CHRG-116hhrg36258/html/CHRG-116hhrg36258.htm.
Relief Funds: Department Removes Onerous Restrictions that Limited Island’s Access to Funds, Obligates $8.2 Billion Relief Funds: Department Removes Onerous Restrictions that Limited Island’s Access to Funds, Obligates $8.2 Billion
in Federal Mitigation Funding,” press release 21-066, April 19, 2021, https://www.hud.gov/press/in Federal Mitigation Funding,” press release 21-066, April 19, 2021, https://www.hud.gov/press/
press_releases_media_advisories/HUD_No_21_066. Also see HUD Office of the Inspector General, press_releases_media_advisories/HUD_No_21_066. Also see HUD Office of the Inspector General, Review of HUD’s
Disbursem ent of Grant Funds Appropriated for Disaster Recovery and Mitigation Activities in Puerto Rico , report , report
2019SU008945I, April 20, 2021, https://www.hudoig.gov/reports-publications/investigation-summary/review-huds-2019SU008945I, April 20, 2021, https://www.hudoig.gov/reports-publications/investigation-summary/review-huds-
About one-fifth of the CPR’s revenue stems from Act 154 taxes on transactions between About one-fifth of the CPR’s revenue stems from Act 154 taxes on transactions between
multinational corporation subsidiaries based in Puerto Rico and the mainland, which often can be multinational corporation subsidiaries based in Puerto Rico and the mainland, which often can be
credited against federal tax liabilities. In September 2019, then-Treasury Secretary Mnuchin had credited against federal tax liabilities. In September 2019, then-Treasury Secretary Mnuchin had
pushed to phase out Act 154 taxes. pushed to phase out Act 154 taxes.
article/how-tax-cut-sacks-puerto-rico. Also see Francisco Luis, “ Acts 20 & 22 Interplay With New U.S. T ax Reform ,” article/how-tax-cut-sacks-puerto-rico. Also see Francisco Luis, “ Acts 20 & 22 Interplay With New U.S. T ax Reform ,”
Caribbean Business, February 8, 2018. , February 8, 2018.
19/a-tax-haven-called-puerto-rico/. Also see Jesse Barron, “ How Puerto Rico Became the Newest T ax Haven for the 19/a-tax-haven-called-puerto-rico/. Also see Jesse Barron, “ How Puerto Rico Became the Newest T ax Haven for the
Super Rich,” Super Rich,” GQ, September 18, 2018, https://www.gq.com/story/how-puerto-rico-became-tax-haven-for-super-rich. , September 18, 2018, https://www.gq.com/story/how-puerto-rico-became-tax-haven-for-super-rich.
Also see T estimony of Miriam J. Ramirez, former Puerto Rico Senator, in U.S. Congress, House Committee on Natural Also see T estimony of Miriam J. Ramirez, former Puerto Rico Senator, in U.S. Congress, House Committee on Natural
Resources, Subcommittee on Indian, Insular and Resources, Subcommittee on Indian, Insular and
Rico’s Political Status and Economic Outlook, Oversight hearing, 114th Cong., 1st sess., June 24, 2015, Ser. 114-13, , Oversight hearing, 114th Cong., 1st sess., June 24, 2015, Ser. 114-13,
https://www.govinfo.gov/content/pkg/CHRG-114hhrg95300/html/CHRG-114hhrg95300.htm. https://www.govinfo.gov/content/pkg/CHRG-114hhrg95300/html/CHRG-114hhrg95300.htm.
and Commerce Manuel Laboy River, October 31, 2018, ahttps://drive.google.com/file/d/and Commerce Manuel Laboy River, October 31, 2018, ahttps://drive.google.com/file/d/
1HWNVx0Ce6gkH4Ijy2YJfbbKtttz7MrvR/view. 1HWNVx0Ce6gkH4Ijy2YJfbbKtttz7MrvR/view.
12, 2019. 12, 2019.
Judicial decisions in Puerto Rico cases could shape case law, thus affecting the future disposition Judicial decisions in Puerto Rico cases could shape case law, thus affecting the future disposition
of mainland municipal debtors. of mainland municipal debtors.
In the case of Puerto Rico, issues with federal tax exemptions, al eged violations of securities In the case of Puerto Rico, issues with federal tax exemptions, al eged violations of securities
laws, and the interpretation of provisions of the Bankruptcy Code incorporated into PROMESA laws, and the interpretation of provisions of the Bankruptcy Code incorporated into PROMESA
Titles III and VI may provide lessons for policymakers. Titles III and VI may provide lessons for policymakers.
More general y, many have complained that the restructuring process has taken too long to More general y, many have complained that the restructuring process has taken too long to
complete.complete.
“extraordinarily expensive,” have been higher than expected.“extraordinarily expensive,” have been higher than expected.
operations and litigation are borne by island taxpayers and residents. operations and litigation are borne by island taxpayers and residents.
Federalism and Municipal Debt Markets
The federal government has three main instruments to shape municipal bond markets: tax The federal government has three main instruments to shape municipal bond markets: tax
policies, securities laws, and bankruptcy laws. Requirements for exemptions from federal income policies, securities laws, and bankruptcy laws. Requirements for exemptions from federal income
taxation play a fundamental role in municipal finance because marketing bonds without that taxation play a fundamental role in municipal finance because marketing bonds without that
232 Brad Setser, “ Is Puerto Rico Back on a Path T oward Debt Sustainability?” Council on Foreign Relations blog post, September 30, 2019, https://www.cfr.org/blog/puerto-rico-back-path-toward-debt-sustainability. Setser was a U.S. T reasury official involved in discussions leading up to enactment of PROMESA. 233 Oversight Board, “Lowering Puerto Rico’s Debt to Sustainable Levels: Plan Support Agreement with Bondholders,” February 26, 2021, p. 5, https://drive.google.com/file/d/1wT LXvJRu2GI38DRcpOWuVHX2OvT wvAVo/view. 234 John Dizard, “‘Bottom-Feeding’ Hedge Funds are Big Winners on Puerto Rico Bonds,” Financial Times, November 9, 2018. 235 Robert Slavin, “Puerto Rico Bond Negotiations Slog T oward Seventh Year,” Bond Buyer, January 25, 2021. 236 Oversight Board, letter to congressional leaders, March 12, 2018, https://drive.google.com/file/d/17oP8ppSHFN9YbprGMkjT scVmnH_cDoo3 /view?usp=drivesdk. 237 PROMESA §107, 48 U.S.C. § 2127. Congressional Research Service 38 Puerto Rico’s Public Debts: Accumulation and Restructuring exemption is more difficult.238
investors make informed choices so that financial resources and risk-bearing can be al ocated in investors make informed choices so that financial resources and risk-bearing can be al ocated in
an efficient way. an efficient way.
The federal government, to a large extent, has exercised light oversight of municipal bond The federal government, to a large extent, has exercised light oversight of municipal bond
markets, which provide state and local governments with lower-cost access to capital to build markets, which provide state and local governments with lower-cost access to capital to build
roads, schools, public buildings, and water and sewer systems, among other ends, as wel as to roads, schools, public buildings, and water and sewer systems, among other ends, as wel as to
responsibilities between the federal government and states, which have the flexibility to responsibilities between the federal government and states, which have the flexibility to
accommodate policies to local conditions. Congress, however, has greater authority to oversee accommodate policies to local conditions. Congress, however, has greater authority to oversee
territories through its Article IV powers. territories through its Article IV powers.
Great Depression-era securities laws were not considered to apply to municipal securities until Great Depression-era securities laws were not considered to apply to municipal securities until
the early 1970s, when questionable practices by some municipal finance specialty firms and New the early 1970s, when questionable practices by some municipal finance specialty firms and New
York City’s fiscal crisis prompted federal responses.York City’s fiscal crisis prompted federal responses.
(P.L. 94-29) extended the reach of federal regulations to the municipal securities market, (P.L. 94-29) extended the reach of federal regulations to the municipal securities market,
provisions.provisions.
Benefits?” Benefits?” National Tax Journal, December 2014, vol. 67(4), pp. 901, December 2014, vol. 67(4), pp. 901 -924, https://www.urban.org/sites/default/files/-924, https://www.urban.org/sites/default/files/
publication/33631/109047-municipal-debt-what -does-it-buy-and-who-benefits-.pdf. publication/33631/109047-municipal-debt-what -does-it-buy-and-who-benefits-.pdf.
Address Them , GAO-18-387, pp. 38-40, May 9, 2018, https://www.gao.gov/products/GAO-18-387. , GAO-18-387, pp. 38-40, May 9, 2018, https://www.gao.gov/products/GAO-18-387.
Securities, March 2008, https://www.nfma.org/assets/documents/DG.WP.securities_law_0803.doc.pdf. , March 2008, https://www.nfma.org/assets/documents/DG.WP.securities_law_0803.doc.pdf.
data standards for financial disclosure, although it would not have imposed new disclosure data standards for financial disclosure, although it would not have imposed new disclosure
standards. standards.
The scale of Puerto Rico’s debt restructuring could conceivably lead to other modifications of The scale of Puerto Rico’s debt restructuring could conceivably lead to other modifications of
municipal finance practice. Federal bankruptcy law, which during the Great Depression was municipal finance practice. Federal bankruptcy law, which during the Great Depression was
extended to cover instrumentalities of state governments such as cities and public authorities, also extended to cover instrumentalities of state governments such as cities and public authorities, also
plays a role in how municipal bond contracts are structured and how investors and creditors share plays a role in how municipal bond contracts are structured and how investors and creditors share
risks. Past municipal bond defaults have affected how municipal bond markets operate. New York risks. Past municipal bond defaults have affected how municipal bond markets operate. New York
City’s financial crisis in the mid-1970s led to stronger investor disclosure requirements, and the City’s financial crisis in the mid-1970s led to stronger investor disclosure requirements, and the
early 1980s defaults of the Washington Public Power Supply System (WPPSS) led to the early 1980s defaults of the Washington Public Power Supply System (WPPSS) led to the
expansion of bond insurance.expansion of bond insurance.
frequent than corporate or individual defaults. frequent than corporate or individual defaults.
Congress controls tax policy and the tax treatment of municipal securities more directly. Congress controls tax policy and the tax treatment of municipal securities more directly.
Modifications of the federal tax treatment of municipal securities could lead to significant Modifications of the federal tax treatment of municipal securities could lead to significant
changes in government finance because of the importance that tax advantages play in marketing changes in government finance because of the importance that tax advantages play in marketing
those securities. For instance, in 2006, Merril Lynch advisors suggested that ERS and Merril those securities. For instance, in 2006, Merril Lynch advisors suggested that ERS and Merril
Lynch issue at least $7 bil ion in pension obligation bonds (POBs). Because those bonds were Lynch issue at least $7 bil ion in pension obligation bonds (POBs). Because those bonds were
ineligible for federal tax exemptions, Merril Lynch was unable to place those bonds. UBS then ineligible for federal tax exemptions, Merril Lynch was unable to place those bonds. UBS then
sold less than half that amount, as noted above, largely purchased through its own proprietary sold less than half that amount, as noted above, largely purchased through its own proprietary
accounts.accounts.
a strategy that an independent review concluded “was so badly structured that, rather than a strategy that an independent review concluded “was so badly structured that, rather than
yielding profits, it resulted in tremendous losses that have accelerated the demise of [the] yielding profits, it resulted in tremendous losses that have accelerated the demise of [the]
Retirement System.”Retirement System.”
certain types of bonds might restrain issues of debt that could create serious fiscal risks. Congress certain types of bonds might restrain issues of debt that could create serious fiscal risks. Congress
has also limited tax exemptions on some types of municipal bonds on other grounds. has also limited tax exemptions on some types of municipal bonds on other grounds.
Federal Policies and Municipal Debt Structures
Federal tax and bankruptcy law help shape financial decisions of state, local, and territorial Federal tax and bankruptcy law help shape financial decisions of state, local, and territorial
governments on how they structure their debts. For instance, constraints on issuance of private governments on how they structure their debts. For instance, constraints on issuance of private
activity bonds (PABs) and on advance refundings of municipal bonds have changed the “muni” activity bonds (PABs) and on advance refundings of municipal bonds have changed the “muni”
markets. Congress may consider how the different treatment of municipal bonds in federal markets. Congress may consider how the different treatment of municipal bonds in federal
bankruptcy law might affect how local governments approach municipal finance decisions. bankruptcy law might affect how local governments approach municipal finance decisions.
In municipal finance, GO bonds are typical y used to support publicly provided services and In municipal finance, GO bonds are typical y used to support publicly provided services and
infrastructure, such as streets, schools, and other public buildings, and are backed by a infrastructure, such as streets, schools, and other public buildings, and are backed by a
jurisdiction’s commitment to collect sufficient tax revenues. GO bonds, backed by the full faith jurisdiction’s commitment to collect sufficient tax revenues. GO bonds, backed by the full faith
and credit of a jurisdiction, have the advantage of being supported by a broad set of budgetary 247 Walter (2009), op. cit. Also see Beverly Hirtle, “Growth of the Financial Guarantee Market,” Federal Reserve Bank of New York Quarterly Review, Spring 1987, p. 18, https://fraser.stlouisfed.org/title/economic-policy-review-federal-reserve-bank-new-york-1170/spring-1987-3020/growth-financial-guarantee-market-401663. 248 S&P Global, 2017 Annual U.S. Public Finance Default Study and Rating Transitions, May 8, 2018. 249 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 158-159. 250 Statement of Motives, Act 116-2011, July 6, 2011, http://osl.pr/download/en/2011/A-0116-2011.pdf. 251 See CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire and Joseph S. Hughes. Congressional Research Service 40 Puerto Rico’s Public Debts: Accumulation and Restructuring resources, without a specific lien on revenues. The experience of restructuring Puerto Rico’s resources, without a specific lien on revenues. The experience of restructuring Puerto Rico’s
public debts could affect how future municipal finance arrangements are made. public debts could affect how future municipal finance arrangements are made.
Revenue bonds have typical y been used to finance infrastructure to supply services that generate Revenue bonds have typical y been used to finance infrastructure to supply services that generate
their own revenue through fees or charges, such as electric power, toll roads, water and sewers, their own revenue through fees or charges, such as electric power, toll roads, water and sewers,
and airports, often administered through authorities with some measure of independence from and airports, often administered through authorities with some measure of independence from
elected governments.elected governments.
debt service, revenue bondholders general y could not obtain support from other revenue sources, debt service, revenue bondholders general y could not obtain support from other revenue sources,
flows, they carry the advantage that liens could be applied to a stream of fees and charges. flows, they carry the advantage that liens could be applied to a stream of fees and charges.
In 1988, Congress enacted bankruptcy legislation that included particular protections for In 1988, Congress enacted bankruptcy legislation that included particular protections for
added Section 928 to the Bankruptcy Code, which states “special revenues acquired by the debtor added Section 928 to the Bankruptcy Code, which states “special revenues acquired by the debtor
after the commencement of the case shal remain subject to any lien resulting from any security after the commencement of the case shal remain subject to any lien resulting from any security
agreement entered into by the debtor before the commencement of the case.”agreement entered into by the debtor before the commencement of the case.”
exception, special revenues collected by a debtor would not be subject to lien.exception, special revenues collected by a debtor would not be subject to lien.
confusion and confusion and
revenues pledged to them in payment of their debt obligations of a municipality, a new section is provided in the revenues pledged to them in payment of their debt obligations of a municipality, a new section is provided in the
Amendment to ensure that revenue bondholders receive the benefit of their bargain with the municipal issuer and that Amendment to ensure that revenue bondholders receive the benefit of their bargain with the municipal issuer and that
they will have unimpaired rights to the project revenues pledged to them.” U.S. Congress, Senate Committee on the they will have unimpaired rights to the project revenues pledged to them.” U.S. Congress, Senate Committee on the
Judiciary, Judiciary, Report to Accom pany S. 1863, 100th Cong., 2nd sess., S.Rept. 100-506, 1988, p. 12. , 100th Cong., 2nd sess., S.Rept. 100-506, 1988, p. 12.
resulting from any security agreement resulting from any security agreement
revenues pledged to them without any interference and on a timely basis.” James E. Spiotto, revenues pledged to them without any interference and on a timely basis.” James E. Spiotto,
Adjustm ent: Chapter 9, 2012, p. 28, https://web.archive.org/web/20160206065733/http://afgi.org/resources/, 2012, p. 28, https://web.archive.org/web/20160206065733/http://afgi.org/resources/
Bankruptcy_Primer.pdf. 256 See 1st Circuit, Opinion, Assured Guaranty Corporation v. Commonwealth of Puerto Rico , cases 18-1165 and 18-1166, p. 14, March 26, 2019, http://media.ca1.uscourts.gov/pdf.opinions/18-1165P-01A.pdf. T he U.S. Supreme Court declined to review the case on January 13, 2020; see https://www.supremecourt.gov/docket/docketfiles/html/public/19-391.html. Also see Karen Pierog, “ Court Ruling in Puerto Rico Bankruptcy Fans Revenue Bond Fears,” Reuters, March 28, 2019, https://www.reuters.com/article/usa-puertorico-bonds/court -ruling-in-puerto-rico-bankruptcy-fans-revenue-bond-fears-idUSL1N21E1HY. 257 James E. Spiotto, “T he History and Justification for T imely Payment of Statutory Liens and Pledged Special Revenues Bond Financing in a Chapter 9 Municipal Debt Adjustment Proceeding: Is a Model State Law Necessary or Required?” Municipal Finance Journal, vol. 39(4), winter 2019, pp. 47-97. Congressional Research Service 41 Puerto Rico’s Public Debts: Accumulation and Restructuring securities and that governments had come to rely on increasingly complex structured securities securities and that governments had come to rely on increasingly complex structured securities
and derivatives.and derivatives.
of municipal debt widely marketed to individual investors.of municipal debt widely marketed to individual investors.
POBs to retail investors in Puerto Rico has raised concerns. POBs to retail investors in Puerto Rico has raised concerns.
Congress passed PROMESA, among other ends, to create a debt restructuring process that would Congress passed PROMESA, among other ends, to create a debt restructuring process that would
economic climate.economic climate.
could compound potential chal enges embedded in the use of COFINA CABs. Some analysts could compound potential chal enges embedded in the use of COFINA CABs. Some analysts
have noted that the use of financial instruments or public-private partnership agreements that have noted that the use of financial instruments or public-private partnership agreements that
provide governments with up-front proceeds may yield few benefits in later years and may shift provide governments with up-front proceeds may yield few benefits in later years and may shift
fiscal burdens to future generations that may have benefited little from the use of those fiscal burdens to future generations that may have benefited little from the use of those
proceeds. proceeds.
https://www.sec.gov/info/municipal/mr-munimarketreport1993.pdf. https://www.sec.gov/info/municipal/mr-munimarketreport1993.pdf.
Retirement System Bonds,” Securities Litigation & Consulting Group blog, May 16, 2017, http://blog.slcg.com/2017/Retirement System Bonds,” Securities Litigation & Consulting Group blog, May 16, 2017, http://blog.slcg.com/2017/
05/ubs-and-santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished 05/ubs-and-santanders-role-in-underwriting.html. See also Nick Brown, “ Puerto Rico’s Other Crisis: Impoverished
Pensions,” Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also Pensions,” Reuters, April 7, 2016, https://www.reuters.com/investigates/special-report/usa-puertorico-pensions/. Also
see David Evans, “How UBS Spread the Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg, September 22, see David Evans, “How UBS Spread the Pain of Puerto Rico’s Debt Crisis to Clients,” Bloomberg, September 22,
2015, https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-2015, https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-
clients. clients.
22, 2016, https://www.nationalreview.com/2016/05/puerto-rico-debt-crisis-promesa-bill-positive-solution/. 22, 2016, https://www.nationalreview.com/2016/05/puerto-rico-debt-crisis-promesa-bill-positive-solution/.
vol. 72, no. 6 (November/December 2017), pp. 856vol. 72, no. 6 (November/December 2017), pp. 856
Congressional Research Service Congressional Research Service
link to page link to page
complex bankruptcy cases, in which debt and other claims are increasingly treated as liquid complex bankruptcy cases, in which debt and other claims are increasingly treated as liquid
overcoming collective action chal enges facing smal er or more traditional investors, as noted overcoming collective action chal enges facing smal er or more traditional investors, as noted
above. Hedge funds and similar funds, acting either singly or in concert, however, may above. Hedge funds and similar funds, acting either singly or in concert, however, may
disadvantage other claimants.disadvantage other claimants.
and debt restructuring processes because major cases have involved a relatively narrow set of and debt restructuring processes because major cases have involved a relatively narrow set of
professionals.professionals.
concerns. concerns.
Stronger disclosure requirements on holdings of debt instruments and on potential conflicts of Stronger disclosure requirements on holdings of debt instruments and on potential conflicts of
interest may help level the playing field, an issue that Congress has addressed in the past. One interest may help level the playing field, an issue that Congress has addressed in the past. One
legal scholar argued that Congress crafted provisions of the 1934 Bankruptcy Act to curtail legal scholar argued that Congress crafted provisions of the 1934 Bankruptcy Act to curtail
opportunities for collusion among insiders to the disadvantage of other parties.267 Another scholar argues that requiring investors to disclose “material rights against or affecting distressed firms, whether direct or derivative, and whether held singly or collectively, in real time, using online market portals or similar information systems” would curtail potential abuses by unregulated private investors such as hedge funds.268 Research on other asset-trading disclosure requirements suggests that they limit insiders’ excess gains.269 According to economic theory, reducing insiders’ excess gains would enhance assets’ attractiveness to rational smal investors. 263
roaring controversy over their disclosure obligations under Federal Rule of Bankruptcy Procedure 2019.” Henry T .C. roaring controversy over their disclosure obligations under Federal Rule of Bankruptcy Procedure 2019.” Henry T .C.
Hu and Jay L. Westbrook, “Hu and Jay L. Westbrook, “ Abolition of the Corporate Duty to Creditors,” Abolition of the Corporate Duty to Creditors,”
(October 2007), http://ssrn.com/abstract=977582. (October 2007), http://ssrn.com/abstract=977582.
Pennsylvania Law Review, vol. 155 (May 2007), pp. 1077-1079, http://scholarship.law.upenn.edu/faculty_scholarship/, vol. 155 (May 2007), pp. 1077-1079, http://scholarship.law.upenn.edu/faculty_scholarship/
94. T he authors suggest a reconsideration of Securities and Exchange Commission rule 13(d) filing requirements in the 94. T he authors suggest a reconsideration of Securities and Exchange Commission rule 13(d) filing requirements in the
context of corporate control (cf. SEC Rule 13d-5(b)(1), 17 C.F.R. §240.13d-5(b)(1)). context of corporate control (cf. SEC Rule 13d-5(b)(1), 17 C.F.R. §240.13d-5(b)(1)).
pp. 289-320. pp. 289-320.
https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. Mary https://www.institutionalinvestor.com/article/b1g5zjdcr97k2y/The-Story-McKinsey-Didn-t-Want-Written. Mary
Williams Walsh, “ One Man vs. McKinsey: A Billionaire Says the Consultancy Has Rigged the Bankruptcy System ,” Williams Walsh, “ One Man vs. McKinsey: A Billionaire Says the Consultancy Has Rigged the Bankruptcy System ,”
New York Tim es, April 11, 2019. Also see the section , April 11, 2019. Also see the section “ Concerns over COFINA Settlement and Ethical Conflicts.”
An Audit of Puerto Rico’s Public Debt
H.R. 6975, introduced on May 22, 2020, would have established a commission to audit al public H.R. 6975, introduced on May 22, 2020, would have established a commission to audit al public
debt issued by Puerto Rico since 1972.debt issued by Puerto Rico since 1972.
some unsecured debts, applied certain ethics requirements to the Oversight Board, provided some unsecured debts, applied certain ethics requirements to the Oversight Board, provided
federal funding for Board activities, and commissioned a Government Accountability Office federal funding for Board activities, and commissioned a Government Accountability Office
(GAO) report on the Board’s spending and activities, among other provisions. (GAO) report on the Board’s spending and activities, among other provisions.
This proposal to audit the island’s public debt followed other initiatives. In July 2015, the Puerto This proposal to audit the island’s public debt followed other initiatives. In July 2015, the Puerto
Rico legislature enacted Act 97-2015, which, among other provisions, established a Commission Rico legislature enacted Act 97-2015, which, among other provisions, established a Commission
for a Comprehensive Audit of Public Credit. for a Comprehensive Audit of Public Credit.
As one of the necessary mechanisms to proceed towards a broad fiscal and financial As one of the necessary mechanisms to proceed towards a broad fiscal and financial
restructuring, this Legislative Assembly recognizes as prudent and necessary the creation restructuring, this Legislative Assembly recognizes as prudent and necessary the creation
of an independent commission composed of members from the public sector and private of an independent commission composed of members from the public sector and private
citizens, drawn from diverse strategic sectors of civil society, entrusted with the citizens, drawn from diverse strategic sectors of civil society, entrusted with the
included many of the provisions included in H.R. 6975. U.S. Congress, House Committee on Natural Resources, included many of the provisions included in H.R. 6975. U.S. Congress, House Committee on Natural Resources,
PROMESA: Discussion Draft (Day One), 116th Cong., 1st sess., October 22, 2019. Discussion draft is available at , 116th Cong., 1st sess., October 22, 2019. Discussion draft is available at
http://docs.house.gov/meetings/II/II00/20191022/110103/BILLS-116pih-http://docs.house.gov/meetings/II/II00/20191022/110103/BILLS-116pih-
T T
reestructuración fiscal y financiera, esta Asam blea Legislativa entiende prudente y necesaria la creación de una
com isión independiente integrada por funcionarios del sector publico y de
diversos sectores estrategicos en la sociedad civil, encom endada con la responsabilidad de auditar la totalidad de la
deuda publica puertorriqueña. La com isión operara de m anera autónoma y tendrá la autoridad necesaria para
evaluar todas las transacciones gubernam entales que entienda pertinentes para las tareas que le serán encom endadas
por esta Ley.
of possible conflicts of interest among those involved in debt restructuring in various roles. The of possible conflicts of interest among those involved in debt restructuring in various roles. The
UCC has also sought to obtain documents and other evidence in PROMESA Title III litigation.UCC has also sought to obtain documents and other evidence in PROMESA Title III litigation.
Director Natalie Jaresko, responding to congressional questions in an October 2019 hearing, Director Natalie Jaresko, responding to congressional questions in an October 2019 hearing,
opposed a new effort to audit Puerto Rico’s public debts, which, in her view, would delay opposed a new effort to audit Puerto Rico’s public debts, which, in her view, would delay
restructuring processes now underway and the resolution of PROMESA Title III litigation. restructuring processes now underway and the resolution of PROMESA Title III litigation.
A bil was introduced in the Puerto Rican Senate on February 25, 2021, that would again establish A bil was introduced in the Puerto Rican Senate on February 25, 2021, that would again establish
a commission to audit the island’s public debts.a commission to audit the island’s public debts.
commission would duplicate work done by Kobre & Kim and suggested the Puerto Rican Senate commission would duplicate work done by Kobre & Kim and suggested the Puerto Rican Senate
modify the bil . modify the bil .
After the Enactment of the Federal PROMESA Law and the Imposition of a Fiscal Control Board, Puerto Rico Still After the Enactment of the Federal PROMESA Law and the Imposition of a Fiscal Control Board, Puerto Rico Still
Lacks a Public Debt Audit that Shows, Without Doubt, How Much Debt was Legally Contracted,” Center for Lacks a Public Debt Audit that Shows, Without Doubt, How Much Debt was Legally Contracted,” Center for
Investigative Journalism, June 11, 2018, http://periodismoinvest igativo.com/2018/06/puerto-rico-debt-audit-drags-on-Investigative Journalism, June 11, 2018, http://periodismoinvest igativo.com/2018/06/puerto-rico-debt-audit-drags-on-
as-creditor-negotiations-heat-up/. as-creditor-negotiations-heat-up/.
Natural Resources, Natural Resources, Proposed Am endm ents to the Puerto Rico Oversight, Managem ent, and Econom ic Stability Act
(PROMESA), hearings, 116th Cong., 1st sess., October 22, 2019, http://naturalresources.house.gov/download/ms-, hearings, 116th Cong., 1st sess., October 22, 2019, http://naturalresources.house.gov/download/ms-
natalie-jaresko-testimony-fc-leg-hrg-102219-promesa-ii-day-1. natalie-jaresko-testimony-fc-leg-hrg-102219-promesa-ii-day-1.
1HfBUZEHAzrXB5Po_pySrLSQ7wZp_mKvQ/view. 1HfBUZEHAzrXB5Po_pySrLSQ7wZp_mKvQ/view.
Congressional Research Service Congressional Research Service
Appendix A. Details of Puerto Rico’s Public Debt
Table A-1 presents data underlyipresents data underlying Figure 2, which provides a breakdown of Puerto Rico’s which provides a breakdown of Puerto Rico’s
public debts at the end of July 2016, shortly before the PROMESA debt restructuring process public debts at the end of July 2016, shortly before the PROMESA debt restructuring process
commenced. One column shows indebtedness to the GDB (commenced. One column shows indebtedness to the GDB (GDB Loan), which had been the ), which had been the
Puerto Rican government’s fiscal agent and advisor. Public agencies and corporations deposited Puerto Rican government’s fiscal agent and advisor. Public agencies and corporations deposited
funds in GDB accounts, and the GDB extended loans to some public corporations as an funds in GDB accounts, and the GDB extended loans to some public corporations as an
alternative to issuing bonds to the municipal finance market. GDB bonds are excluded from alternative to issuing bonds to the municipal finance market. GDB bonds are excluded from
Figure 2 to minimize double counting. to minimize double counting.
Table A-1. Puerto Rico’s Public Debt As of July 31, 2016, in $ Millions
Bonds &
GDB
Other
Total
Private Loans
Loans
Loans
Debt
Direct Good Faith & Credit: General Obligations
12,543
169
- -
12,713
Indebtedness Payable Primarily from Commonwealth Taxes
COFINA COFINA
17,322 17,322
- -
- -
17,322 17,322
Highways & Transportation Authority Highways & Transportation Authority
4,176 4,176
1,734 1,734
- -
5,910 5,910
PRIFA (Guaranteed Portion) PRIFA (Guaranteed Portion)
1,861 1,861
- -
- -
1,861 1,861
Puerto Rico Convention Center District Authority Puerto Rico Convention Center District Authority
386 386
4 4
- -
391 391
Metropolitan Bus Authority Metropolitan Bus Authority
28 28
- -
- -
28 28
Subtotal
23,774
1,738
- -
25,512
Indebtedness Payable Primarily from Commonwealth
Appropriations
Public Building Authority (Guaranteed Portion) Public Building Authority (Guaranteed Portion)
4,005 4,005
182 182
- -
4,187 4,187
Retirement System for Employees (ERS) Retirement System for Employees (ERS)
3,144 3,144
- -
- -
3,144 3,144
Public Finance Corporation (PFC) Public Finance Corporation (PFC)
1,091 1,091
- -
- -
1,091 1,091
Other Agencies & Public Corporations Other Agencies & Public Corporations
- -
2,999 2,999
102 102
3,101 3,101
Subtotal
8,239
3,181
102
11,523
Indebtedness Payable by Tax-Supported Public Corporations
Government Development Bank (Guaranteed Government Development Bank (Guaranteed
4,014 4,014
- -
- -
4,014 4,014
Portion) Portion)
University of Puerto Rico University of Puerto Rico
496 496
76 76
- -
573 573
Puerto Rico Industrial Development Company Puerto Rico Industrial Development Company
159 159
78 78
- -
237 237
(PRIDCO) (PRIDCO)
Port of the Americas Authority (APLA; Guaranteed) Port of the Americas Authority (APLA; Guaranteed)
226 226
2 2
- -
227 227
Highways & Transportation Authority T. Moscoso Highways & Transportation Authority T. Moscoso
140 140
- -
- -
140 140
Bonds Bonds
Puerto Rico Infrastructure Finance Authority Puerto Rico Infrastructure Finance Authority
226 226
- -
- -
226 226
( (
OPto OPto
h r h r
e trs & e trs &
Ag A Ag A
enM enM
ci S ci S
e C e C
s A s A
a ) a )
n d Public Corporation n d Public Corporation
0 0
609 609
- -
609 609
Subtotal
5,262
765
- -
6,027
Indebtedness Payable by Non-Tax-Supported Public Corporations
Puerto Rico Energy Power Authority (PREPA) Puerto Rico Energy Power Authority (PREPA)
8,955 8,955
35 35
1 1
8,991 8,991
Puerto Rico Aqueduct & Sewer Authority (PRASA) Puerto Rico Aqueduct & Sewer Authority (PRASA)
3,980 3,980
66 66
581 581
4,627 4,627
Guaranteed) Guaranteed)
Subtotal
12,935
101
582
13,618
Municipios’ Indebtedness
General Obligations (Property Tax) General Obligations (Property Tax)
881 881
1,316 1,316
- -
2,197 2,197
Municipal Finance Authority (Property Tax) Municipal Finance Authority (Property Tax)
620 620
- -
- -
620 620
Sales & Use Tax Sales & Use Tax
5 5
533 533
- -
538 538
Special Obligations and Other Special Obligations and Other
221 221
236 236
- -
457 457
Subtotal
1,726
2,085
- -
3,811
Congressional Research Service Congressional Research Service
46 46
Puerto Rico’s Public Debts: Accumulation and Restructuring
Bonds &
GDB
Other
Total
Private Loans
Loans
Loans
Debt
Nonrecourse Indebtedness
Children’s Trust Children’s Trust
1,442 1,442
- -
- -
1,442 1,442
Housing Finance Authority (HFA) Housing Finance Authority (HFA)
487 487
85 85
- -
572 572
Puerto Rico Industrial Investment Corporation Puerto Rico Industrial Investment Corporation
103 103
- -
- -
103 103
(PRIICO) (PRIICO)
Other Agencies and Public Corporations Other Agencies and Public Corporations
14 14
0 0
- -
14 14
Subtotal
2,046
85
- -
2,132
Total
66,526
8,124
684
75,334
Exclusions to Eliminate Double Counting
Total Indebtedness Total Indebtedness
75,334 75,334
Less: Government Development Bank Bonds Less: Government Development Bank Bonds
-3,766 -3,766
Total “Public Sector Debt” Including COFINA Capital Appreciation Bond Accretion Total “Public Sector Debt” Including COFINA Capital Appreciation Bond Accretion
71,568 71,568
Less: Capital Appreciation Bond (CAB) Accretion Less: Capital Appreciation Bond (CAB) Accretion
-2,914 -2,914
TOTAL PUBLIC SECTOR DEBT
68,654
Source: CRS calculations based on CRS calculations based on Commonwealth of Puerto Rico Financial Information and Operating Data Report, ,
December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/
CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf. CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.
Notes: Items might not sum to totals due to rounding. Debt of COFINA ( Items might not sum to totals due to rounding. Debt of COFINA (Corporación del Fondo de Interés
Apremiante; Puerto Rico Sales Tax Financing Corporation) was restructured in January 2019. Debt of the ; Puerto Rico Sales Tax Financing Corporation) was restructured in January 2019. Debt of the
Government Development Bank was restructured in November 2018. AMSCA is the Spanish acronym of the Government Development Bank was restructured in November 2018. AMSCA is the Spanish acronym of the
Mental Health and Anti-Addiction Services Administration. See source document for other notes and caveats. Mental Health and Anti-Addiction Services Administration. See source document for other notes and caveats.
Congressional Research Service Congressional Research Service
47 47
link to page link to page
Appendix B. Price Trends and Trading Volumes for
Selected Bonds
Prices of Puerto Rico’s bonds have experienced wide swings since the island’s fiscal precarity Prices of Puerto Rico’s bonds have experienced wide swings since the island’s fiscal precarity
became more widely known in 2013. Prices reveal market views of the value of future cash flows, became more widely known in 2013. Prices reveal market views of the value of future cash flows,
which in the case of Puerto Rico’s public bonds wil be determined in large part by the debt which in the case of Puerto Rico’s public bonds wil be determined in large part by the debt
restructuring processes created by PROMESA. restructuring processes created by PROMESA.
Some in Congress have expressed concerns that some investors may have traded on nonpublic Some in Congress have expressed concerns that some investors may have traded on nonpublic
information obtained in the course of PROMESA Title III negotiations among creditors, the information obtained in the course of PROMESA Title III negotiations among creditors, the
Oversight Board, and representatives of Puerto Rico’s government. Charts shown below depict Oversight Board, and representatives of Puerto Rico’s government. Charts shown below depict
price trajectories and trading volumes for selected bonds. CRS chose specific bonds either price trajectories and trading volumes for selected bonds. CRS chose specific bonds either
because the U.S. Treasury had identified them as representative in materials distributed in the because the U.S. Treasury had identified them as representative in materials distributed in the
legislative deliberations that led to PROMESA or because they were larger issues that would legislative deliberations that led to PROMESA or because they were larger issues that would
likely be more liquid than smal er issues. CRS also chose bonds that would have been affected by likely be more liquid than smal er issues. CRS also chose bonds that would have been affected by
initiatives by the Oversight Board and the UCC to invalidate certain GO and PBA bonds. initiatives by the Oversight Board and the UCC to invalidate certain GO and PBA bonds.
Some 18 entities issued public debt on behalf of Puerto Rico, which added to the complexity of Some 18 entities issued public debt on behalf of Puerto Rico, which added to the complexity of
the island’s debt structure. In addition, most bond issuances were divided into multiple subissues. the island’s debt structure. In addition, most bond issuances were divided into multiple subissues.
Therefore, the figures below give a partial view of trading activity. Therefore, the figures below give a partial view of trading activity.
The charts also show, by means of vertical lines, some key events in the restructuring processes. The charts also show, by means of vertical lines, some key events in the restructuring processes.
Those key dates, and other events, are listed iThose key dates, and other events, are listed in Table C-1, with links to related documents. with links to related documents.
Rational investors trade when they have new information, when assets’ risk characteristics are Rational investors trade when they have new information, when assets’ risk characteristics are
perceived to have shifted, or due to liquidity needs. perceived to have shifted, or due to liquidity needs.
COFINA Prices and Volumes
Figure B-1 shows the evolution of prices and trading volumes for senior and subordinate (junior) shows the evolution of prices and trading volumes for senior and subordinate (junior)
COFINA bonds from 2016 through February 2019, when old COFINA bonds were exchanged for COFINA bonds from 2016 through February 2019, when old COFINA bonds were exchanged for
new ones. Trading amounts are aggregated by week, with bars centered on Mondays. new ones. Trading amounts are aggregated by week, with bars centered on Mondays.
volumes are typical y larger for junior bonds, which was a larger issue, but also may reflect volumes are typical y larger for junior bonds, which was a larger issue, but also may reflect
strategic purchases, as described in a previous section. Other things equal, larger bond issues are strategic purchases, as described in a previous section. Other things equal, larger bond issues are
more liquid and trade more frequently. more liquid and trade more frequently.
Trades in junior bonds picked up after PROMESA’s enactment, but those volumes were dwarfed Trades in junior bonds picked up after PROMESA’s enactment, but those volumes were dwarfed
by some large trades after COFINA defaulted and before the Title III court appointed by some large trades after COFINA defaulted and before the Title III court appointed
representatives for the debt negotiations. Prices for COFINA junior bonds fel to nearly 10% of representatives for the debt negotiations. Prices for COFINA junior bonds fel to nearly 10% of
par after Hurricane María, but both senior and junior bond prices began to recover at the end of par after Hurricane María, but both senior and junior bond prices began to recover at the end of
2017, and especial y after the February 2018 passage of the Balanced Budget Act of 2018 (BBA 2017, and especial y after the February 2018 passage of the Balanced Budget Act of 2018 (BBA
2018; P.L. 115-123), which provided funds for Puerto Rico. Those prices jumped sharply after an 2018; P.L. 115-123), which provided funds for Puerto Rico. Those prices jumped sharply after an
agreement on a split of COFINA revenues was announced in June 2018 and, to a lesser extent, agreement on a split of COFINA revenues was announced in June 2018 and, to a lesser extent,
once the Oversight Board announced details of the final COFINA deal. once the Oversight Board announced details of the final COFINA deal.
limit comprehensive collection of trading data for a given issuer. limit comprehensive collection of trading data for a given issuer.
occurring ahead of the event. occurring ahead of the event.
Congressional Research Service Congressional Research Service
48 48
link to page link to page
Figure B-1. Trading Volumes for COFINA Bonds, 2016-2019
Source: CRS calculations based on Municipal Securities Rulemaking Board EMMA data: https://emma.msrb.org/. CUSIPs are COFINA Subordinated (74529JHN8), and CRS calculations based on Municipal Securities Rulemaking Board EMMA data: https://emma.msrb.org/. CUSIPs are COFINA Subordinated (74529JHN8), and
COFINA Senior (74529JNX9). COFINA Senior (74529JNX9).
Notes: Trade volume aggregated by week, centered on Mondays. See text an Trade volume aggregated by week, centered on Mondays. See text and Table C-1 for information on key events. Vertical scales differ. Volumes include inter-for information on key events. Vertical scales differ. Volumes include inter-
dealer transactions used to execute block trades. dealer transactions used to execute block trades.
CRS-49 CRS-49
link to page link to page
GO and PBA Bond Prices and Trading Volumes
Figure B-2 shows prices and trading volumes for selected GO bonds from 2018 through 2020. shows prices and trading volumes for selected GO bonds from 2018 through 2020.
Figure B-3 shows that information for selected Public Building Authority (PBA) bonds. These shows that information for selected Public Building Authority (PBA) bonds. These
charts, as noted elsewhere, provide a partial view of the price and trading of GO and PBA bonds charts, as noted elsewhere, provide a partial view of the price and trading of GO and PBA bonds
due to the degree of fragmentation of Puerto Rico’s debt structure. due to the degree of fragmentation of Puerto Rico’s debt structure.
From the time of their issuance until around the time that Hurricane María hit Puerto Rico, the From the time of their issuance until around the time that Hurricane María hit Puerto Rico, the
2014 GO bonds, issued with a provision to be governed by New York law, traded at a premium to 2014 GO bonds, issued with a provision to be governed by New York law, traded at a premium to
other GO bonds. After María, that premium vanished and GO bonds traded at similar prices, just other GO bonds. After María, that premium vanished and GO bonds traded at similar prices, just
above 20% of par (as shown iabove 20% of par (as shown in Figure 4). During 2018, those bonds’ prices rose to about 50% of ). During 2018, those bonds’ prices rose to about 50% of
par, with marked increases after enactment of the Balanced Budget Act of 2018 (P.L. 115-123) in par, with marked increases after enactment of the Balanced Budget Act of 2018 (P.L. 115-123) in
February, the April release of Oversight Board proposals for pension reductions and other February, the April release of Oversight Board proposals for pension reductions and other
changes, and the Board’s announcement of a framework for a COFINA settlement in August. changes, and the Board’s announcement of a framework for a COFINA settlement in August.
GO bond prices began to diverge in January 2019, when the Oversight Board and the UCC GO bond prices began to diverge in January 2019, when the Oversight Board and the UCC
chal enged the validity of late vintage GO bonds and PBA bonds. The 2014 GO bonds began to chal enged the validity of late vintage GO bonds and PBA bonds. The 2014 GO bonds began to
trade at lower prices than earlier vintage GO bonds. That gap increased after GO/PBA PSA trade at lower prices than earlier vintage GO bonds. That gap increased after GO/PBA PSA
negotiations began in April 2019. Sculptor Capital, a hedge fund member of the Lawful negotiations began in April 2019. Sculptor Capital, a hedge fund member of the Lawful
Constitutional Debt Coalition, outlined four no-trade periods, beginning with the start of the PSA Constitutional Debt Coalition, outlined four no-trade periods, beginning with the start of the PSA
negotiations, and claimed that its trades of relevant bonds took place outside of those periods negotiations, and claimed that its trades of relevant bonds took place outside of those periods
(Table B-1). Some large trades in 2011 GO bonds, however, took place during the first no-trade . Some large trades in 2011 GO bonds, however, took place during the first no-trade
period, although whether those traders possessed nonpublic information is unclear. Many trades period, although whether those traders possessed nonpublic information is unclear. Many trades
also occurred soon after the end of those periods. As those periods ended when previously private also occurred soon after the end of those periods. As those periods ended when previously private
information became public, one would expect markets to react. information became public, one would expect markets to react.
Table B-1. No-Trade Periods According to Sculptor Capital
Dates
Starting and Ending Dates of No-Trade Periods
April 22, 2019 April 22, 2019
Commencement of PSA negotiations Commencement of PSA negotiations
June 16, 2019 June 16, 2019
Oversight Board publishes PSA Oversight Board publishes PSA
October 2, 2019 October 2, 2019
Sculptor receives material nonpublic information Sculptor receives material nonpublic information
October 17, 2019 October 17, 2019
Financial data released by FAFAA to EMMA and Reorg Research Financial data released by FAFAA to EMMA and Reorg Research
October 25, 2019 October 25, 2019
Sculptor receives Oversight Board proposal Sculptor receives Oversight Board proposal
February 9, 2020 February 9, 2020
Publication of amended PSA Publication of amended PSA
August 15, 2020 August 15, 2020
Oversight Board circulates PSA proposal Oversight Board circulates PSA proposal
October 1, 2020 October 1, 2020
Oversight Board announces PSA proposals Oversight Board announces PSA proposals
Source: In re: CPR, Informative Motion of Sculptor Capital, October 26, 2020, https://cases.primeclerk.com/ In re: CPR, Informative Motion of Sculptor Capital, October 26, 2020, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=OTg1Njc5&id2=0. puertorico/Home-DownloadPDF?id1=OTg1Njc5&id2=0.
Notes: Initial date indicates when parties to negotiation may have obtained material nonpublic information. Initial date indicates when parties to negotiation may have obtained material nonpublic information.
Second date notes a “cleansing event” when that information became publicly available. EMMA is the Municipal Second date notes a “cleansing event” when that information became publicly available. EMMA is the Municipal
Securities Rulemaking Board’s electronic data website. Reorg Research covers restructurings for investors. Securities Rulemaking Board’s electronic data website. Reorg Research covers restructurings for investors.
GO bond spreads narrowed after the fourth no-trade period ended with the Oversight Board PSA GO bond spreads narrowed after the fourth no-trade period ended with the Oversight Board PSA
announcement. GO and PBA bond prices dipped in spring 2020, but stabilized after May 2020, announcement. GO and PBA bond prices dipped in spring 2020, but stabilized after May 2020,
when the Title III court required detailed Rule 2019(b) disclosures. when the Title III court required detailed Rule 2019(b) disclosures.
Congressional Research Service Congressional Research Service
50 50
link to page link to page
Figure B-2. Price Trends and Trading Volumes for Selected GO Bonds, 2018-2021
Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/. CUSIPs are 2006A (74514LHN0), 2009B CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/. CUSIPs are 2006A (74514LHN0), 2009B
(74514LVW4), 2011A GO (74514LYW1), 2012A (74514LA98), and 2014A NY Law GO (74514LE86). (74514LVW4), 2011A GO (74514LYW1), 2012A (74514LA98), and 2014A NY Law GO (74514LE86).
Notes: See text an See text and Table C-1 for information on key events. Trade volumes are summed by week, centered on Mondays. Vertical scales differ. Light grey areas for information on key events. Trade volumes are summed by week, centered on Mondays. Vertical scales differ. Light grey areas
denote no-trade periods as described by Sculptor Capital. Volumes include inter-dealer transactions used to execute block trades. denote no-trade periods as described by Sculptor Capital. Volumes include inter-dealer transactions used to execute block trades.
CRS-51 CRS-51
link to page link to page
Figure B-3. Selected Puerto Rico Building Authority Bond Price Trends and Trading Volumes, 2018-2020
Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/. CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/.
Notes: See text an See text and Table C-1 for information on key events. Trade volumes are summed by week, centered on Mondays. Vertical scales differ. Light grey areas for information on key events. Trade volumes are summed by week, centered on Mondays. Vertical scales differ. Light grey areas
denote no-trade periods as described by Sculptor Capital. Volumes include inter-dealer transactions used to execute block trades. denote no-trade periods as described by Sculptor Capital. Volumes include inter-dealer transactions used to execute block trades.
CRS-52 CRS-52
link to page link to page
Appendix C. Chronology of Selected Events
Table C-1 lists many key events in the restructuring of Puerto Rico’s public debts. lists many key events in the restructuring of Puerto Rico’s public debts.
Table C-1. Selected Chronology of Puerto Rico’s Debt Restructuring
Items are in reverse chronological order and include links to supporting documents Items are in reverse chronological order and include links to supporting documents
Date
Action
2021 July 13, 2021 Title III Court hearing on CPR plan disclosure statement May 11, 2021 Oversight Board reaffirms support for PREPA restructuring plan May 5, 2021 Oversight Board, and CPR announce plan support agreement with bond insurers to resolve Oversight Board, and CPR announce plan support agreement with bond insurers to resolve
May 4, 2021 Title III Court schedules hearing on adequacy of information in disclosure statement for restructuring of debts of CPR and related entities April 12, 2021 April 12, 2021
Oversight Board announces agreement in principle with bond insurers Oversight Board announces agreement in principle with bond insurers
March 8, 2021 Oversight Board announces progress in ERS negotiations; files disclosure statement for CPR Oversight Board announces progress in ERS negotiations; files disclosure statement for CPR
February 23, 2021 February 23, 2021
Oversight Board releases amended PSA proposal for CPR and related debt Oversight Board releases amended PSA proposal for CPR and related debt
February 10, 2021 Title III court deadline for FOMB to present outline for CPR/ERS/PBA/etc. plan;Title III court deadline for FOMB to present outline for CPR/ERS/PBA/etc. plan;
January 6, 2021 January 6, 2021
David Skeel, Jr. and Arthur J. González reappointed to the Oversight Board David Skeel, Jr. and Arthur J. González reappointed to the Oversight Board
January 2, 2021 January 2, 2021
Pedro Pierluisi Urrutia inaugurated as Governor of Puerto Rico Pedro Pierluisi Urrutia inaugurated as Governor of Puerto Rico
President appoints John Nixon and Betty Rosa, President appoints John Nixon and Betty Rosa,
October 29, 2020 Title III Court sets February 2021 date for Oversight Board to outline term sheet for Title III Court sets February 2021 date for Oversight Board to outline term sheet for
amended plan October October
term sheet for GO and PBA restructuring by February 10, 2021. term sheet for GO and PBA restructuring by February 10, 2021.
October 21, 2020 October 21, 2020
Chairman Grijalva et al. ask Oversight Board to investigate insider trading al egations Chairman Grijalva et al. ask Oversight Board to investigate insider trading al egations
October 15, 2020 October 15, 2020
LDCD objection to National Public Finance Guarantee motion LDCD objection to National Public Finance Guarantee motion
October 13, 2020 October 13, 2020
Ad Hoc GO Group objection to National Public Finance Guarantee motion Ad Hoc GO Group objection to National Public Finance Guarantee motion
October 13, 2020 October 13, 2020
QTCB Group objection to National Public Finance Guarantee motion QTCB Group objection to National Public Finance Guarantee motion
October 9, 2020 October 9, 2020
Justin Peterson appointed to Oversight Board Justin Peterson appointed to Oversight Board
October 6, 2020 October 6, 2020
David Skeel, Jr. selected as Oversight Board Chair; former Chair David Skeel, Jr. selected as Oversight Board Chair; former Chair
October 5, 2020 October 5, 2020
National Public Finance asks Title III Court for investigation of insider trading al egations National Public Finance asks Title III Court for investigation of insider trading al egations
October 1, 2020 October 1, 2020
FOMB Announces PSA proposals for CPR and related debt FOMB Announces PSA proposals for CPR and related debt
August 15, 2020 August 15, 2020
FOMB Circulates PSA proposal FOMB Circulates PSA proposal
August 5, 2020 August 5, 2020
Five Members of House NY Delegation send letter to NY State Attorney General Five Members of House NY Delegation send letter to NY State Attorney General
July 2, 2020 July 2, 2020
Title III Court rules against HTA, other revenue bond holders. Title III Court rules against HTA, other revenue bond holders.
July 1, 2020 July 1, 2020
Oversight Board Chair José Carrión and Board Member Carlos García to step down. Oversight Board Chair José Carrión and Board Member Carlos García to step down.
June 8, 2020 June 8, 2020
Judge Swain orders compliance with Federal Rule of Bankruptcy Procedure 2019(b) Judge Swain orders compliance with Federal Rule of Bankruptcy Procedure 2019(b)
disclosures disclosures
May 21, 2020 May 21, 2020
Amended PSA for CPR, PBA, ERS, etc. Amended PSA for CPR, PBA, ERS, etc.
Congressional Research Service 53 Puerto Rico’s Public Debts: Accumulation and Restructuring Date Action May 26, 2020 May 26, 2020
Title III Court Opinion & Order Re: UCC et al. Motion 2019(b) disclosures Title III Court Opinion & Order Re: UCC et al. Motion 2019(b) disclosures
March 2, 2020 Correspondence al eging insider trading among GO creditors filed on CPR docket (C.Long, Correspondence al eging insider trading among GO creditors filed on CPR docket (C.Long,
February 28, 2020 February 28, 2020
Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico
February 28, 2020 February 28, 2020
Disclosure Statement for Amended Title III Plan Disclosure Statement for Amended Title III Plan
Unsecured Creditors Committee asks for more specific Unsecured Creditors Committee asks for more specific
February 9, 2020 Amended Plan Support Agreement for CPR, PBA, ERS, etc. “The PSA was signed by the Amended Plan Support Agreement for CPR, PBA, ERS, etc. “The PSA was signed by the
holders of approximately $8 bil ion in claims of GO Bonds and PBA bonds. The PSA also holders of approximately $8 bil ion in claims of GO Bonds and PBA bonds. The PSA also
of one mil ion dol ars to join the PSA. Since its execution, holders of an additional $2 bil ion of one mil ion dol ars to join the PSA. Since its execution, holders of an additional $2 bil ion
in GO Bonds or PBA Bonds have joined the PSA.” Amd. Discl. Stmt. p. 8 in GO Bonds or PBA Bonds have joined the PSA.” Amd. Discl. Stmt. p. 8
January 16, 2020 “Apparently a deal was reached . .in mediation which was widely known among municipal “Apparently a deal was reached . .in mediation which was widely known among municipal
October 17, 2019 October 17, 2019
EMMA and Reorg Research publish financial data from AAFAF EMMA and Reorg Research publish financial data from AAFAF
September 27, 2019 Oversight Board commences PBA Title III case September 27, 2019 Oversight Board commences PBA Title III case
September 27, 2019 Oversight Board proposes initial plan of adjustment for CPR, ERS, etc. September 27, 2019 Oversight Board proposes initial plan of adjustment for CPR, ERS, etc.
September 11, 2019 Title III Court order re: Mediation confidentiality restrictions September 11, 2019 Title III Court order re: Mediation confidentiality restrictions
August 7, 2019 August 7, 2019
Wanda Vázquez Garced, the Puerto Rican Justice Minister, sworn in as Governor Wanda Vázquez Garced, the Puerto Rican Justice Minister, sworn in as Governor
August 7, 2019 August 7, 2019
Puerto Rico’s Supreme Court rules succession violates PR Constitution Puerto Rico’s Supreme Court rules succession violates PR Constitution
August 2, 2019 August 2, 2019
Gov. Ricardo Rossel ó’s resignation effective, replaced by Pierluisi Gov. Ricardo Rossel ó’s resignation effective, replaced by Pierluisi
July 31, 2019 July 31, 2019
H Nat Resources Chairman Raúl Grijalva circulates PROMESA discussion draft H Nat Resources Chairman Raúl Grijalva circulates PROMESA discussion draft
July 24, 2019 July 24, 2019
Title III Court orders stay on specified litigation Title III Court orders stay on specified litigation
July 18, 2019 July 18, 2019
UCC files chal enges to PBA bonds UCC files chal enges to PBA bonds
June 16, 2019 June 16, 2019
Executed Plan Support Agreement Executed Plan Support Agreement
June 16, 2019 June 16, 2019
FOMB Publishes Plan Support Agreement FOMB Publishes Plan Support Agreement
June 7, 2019 June 7, 2019
Plan Support Agreement (“Retiree Committee PSA”) Plan Support Agreement (“Retiree Committee PSA”)
June 7, 2019 June 7, 2019
Plan Support Agreement (“AFSCME PSA”) Plan Support Agreement (“AFSCME PSA”)
May 31, 2019 Oversight Board reaches agreements (Plan Support Agreement) with certain creditor Oversight Board reaches agreements (Plan Support Agreement) with certain creditor
April 22, 2019 April 22, 2019
Commencement of GO PSA Negotiations Commencement of GO PSA Negotiations
February 5, 2019 February 5, 2019
Plan of adjustment for COFINA confirmed by Title III Court Plan of adjustment for COFINA confirmed by Title III Court
January 14, 2019 January 14, 2019
Oversight Board and UCC chal enge validity of GO bonds issued after 2011 Oversight Board and UCC chal enge validity of GO bonds issued after 2011
August 30, 2018 August 30, 2018
Board approves Plan Support Agreement for COFINA Board approves Plan Support Agreement for COFINA
August 20, 2018 August 20, 2018
Kobre & Kim issues commissioned review of the Government’s debt Kobre & Kim issues commissioned review of the Government’s debt
August 8, 2018 August 8, 2018
Board announces deal with senior & junior COFINA creditors, bond insurers Board announces deal with senior & junior COFINA creditors, bond insurers
July 5, 2018 July 5, 2018
Gov. Ricardo Rossel ó Nevares sues Oversight Board Gov. Ricardo Rossel ó Nevares sues Oversight Board
February 9, 2018 February 9, 2018
Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123) enacted: provides emergency Balanced Budget Act of 2018 (BBA 2018; P.L. 115-123) enacted: provides emergency
response funds response funds
Congressional Research Service 54 Puerto Rico’s Public Debts: Accumulation and Restructuring Date Action 2017 September 2017 September 2017
Hurricanes Irma and María hit Puerto Rico Hurricanes Irma and María hit Puerto Rico
July 2, 2017 July 2, 2017
Oversight Board commences PREPA Title III case Oversight Board commences PREPA Title III case
May 21, 2017 May 21, 2017
Oversight Board commences HTA Title III case Oversight Board commences HTA Title III case
May 5, 2017 May 5, 2017
Oversight Board commences COFINA Title III case Oversight Board commences COFINA Title III case
Oversight Board commences ERS Title III case Oversight Board commences ERS Title III case
May 3, 2017 May 3, 2017
Oversight Board commences CPR Title III case Oversight Board commences CPR Title III case
February 15, 2017 February 15, 2017
Original expiration date for PROMESA stay: extended 75 days Original expiration date for PROMESA stay: extended 75 days
Source: Compiled by CRS. Compiled by CRS.
Congressional Research Service Congressional Research Service
55 55
Puerto Rico’s Public Debts: Accumulation and Restructuring
Appendix D. Table of Common Acronyms
Table D-1. Puerto Rico Table of Common Acronyms
Spanish
Acronym
Full Name
Acronym
COFINA COFINA
Puerto Rico Sales Tax Financing Puerto Rico Sales Tax Financing
COFINA COFINA
Corporación del Fondo de Interés Corporación del Fondo de Interés
Corporation Corporation
Apremiante de Puerto Rico Apremiante de Puerto Rico
CPR CPR
Commonwealth of Puerto Rico Commonwealth of Puerto Rico
ELA ELA
Estado Libre Asociado de Puerto Rico Estado Libre Asociado de Puerto Rico
ERS ERS
Puerto Rico Employees Retirement Puerto Rico Employees Retirement
ASR ASR
Administración de los Sistemas de Administración de los Sistemas de
System System
Retiro de los Empleados del Gobierno Retiro de los Empleados del Gobierno
y la Judicatura y la Judicatura
FAFAA FAFAA
Puerto Rico Fiscal Agency and Puerto Rico Fiscal Agency and
AAFAF AAFAF
Autoridad de Asesoría Financiera y Autoridad de Asesoría Financiera y
Financial Advisory Authority Financial Advisory Authority
Agencia Fiscal Agencia Fiscal
GDB GDB
Government Development Bank Government Development Bank
BGF BGF
Banco Gubernamental de Fomento Banco Gubernamental de Fomento
GO GO
General obligation bond General obligation bond
— —
— —
LCDC LCDC
Lawful Constitutional Debt Coalition Lawful Constitutional Debt Coalition
— —
— —
Oversight Oversight
Financial Oversight and Management Financial Oversight and Management
JSF JSF
La Junta de Supervisión Fiscal La Junta de Supervisión Fiscal
Board, FOMB Board, FOMB
Board Board
PBA PBA
Puerto Rico Public Buildings Puerto Rico Public Buildings
AEP AEP
Autoridad de Edificios Públicos Autoridad de Edificios Públicos
Authority Authority
P3 P3
Public-Private Partnerships Authority Public-Private Partnerships Authority
Autoridad para las Alianzas Público- Autoridad para las Alianzas Público-
AAPP AAPP
Privadas Privadas
PRASA PRASA
Puerto Rico Aqueduct & Sewer Puerto Rico Aqueduct & Sewer
AAA AAA
Autoridad de Acueductos y Autoridad de Acueductos y
Authority Authority
Alcantaril ados Alcantaril ados
PREPA PREPA
Puerto Rico Electric Power Authority Puerto Rico Electric Power Authority
AEE AEE
Autoridad de Energía Eléctrica Autoridad de Energía Eléctrica
PRHTA PRHTA
Puerto Rico Highways & Puerto Rico Highways &
ACT ACT
Autoridad de Carreteras y Autoridad de Carreteras y
Transportation Authority Transportation Authority
Transportación Transportación
PROMESA PROMESA
Puerto Rico Oversight, Management, Puerto Rico Oversight, Management,
and Economic Stability Act (P.L. 114-and Economic Stability Act (P.L. 114-
— —
— —
187) 187)
PSA PSA
Plan Support Agreement Plan Support Agreement
— —
— —
SUT SUT
Sales and Use Tax Sales and Use Tax
IVU IVU
Impuesto sobre Ventas y Uso Impuesto sobre Ventas y Uso
UCC UCC
Unsecured Creditors Committee Unsecured Creditors Committee
— —
— —
Source: Compiled by CRS. Compiled by CRS.
Congressional Research Service Congressional Research Service
56 56
Puerto Rico’s Public Debts: Accumulation and Restructuring
Author Information
D. Andrew Austin D. Andrew Austin
Analyst in Economic Policy Analyst in Economic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material. copy or otherwise use copyrighted material.
Congressional Research Service Congressional Research Service
R46788 R46788 · VERSION
57 57