Puerto Rico’s Public Debts: Accumulation and Restructuring

May 10, 2021 – May 2, 2022 R46788

Puerto Rico’s Public Debts:
May 2, 2022
Accumulation and Restructuring
D. Andrew Austin
Puerto Rico’s public debts totaled just over $70 billion when the Puerto Rico Oversight,
Analyst in Economic Policy
Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30,

2016. Most of those debts are now in the midst of perhaps the largest restructuring of public debt
in U.S. history. By way of comparison, the City of Detroit owed about $18 billion when it

entered bankruptcy in 2013. Puerto Rico’s debt restructuring has been one of the most expensive
ever, with professional fees projected to exceed $1 billion.
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. 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 termination on Puerto Rico’s ability to access
“short-term and long-term credit markets at reasonable interest rates.” The Oversight Board, after delays due to Hurricanes
Irma and María in September 2017, led efforts to restructure the island’s public debts through litigation and negotiations with
the Puerto Rican government, hedge funds, bond insurers, and others.
Puerto Rico’s public debts fall into four categories: general obligation (GO) bonds and other debt payable through the main
Treasury accounts of the Commonwealth of Puerto Rico (CPR, the island’s central government); sales-tax-backed debt
known by its Spanish acronym COFINA and other revenue bonds; debt of public corporations such as the Puerto Rico
Electric Power Authority (PREPA); and debt issued by local governments (municipios) and other smaller entities. In
February 2019, the Title III court confirmed the COFINA debt restructuring. Bonds with a par value of $17.6 billion were
then exchanged for $12 billion in new bonds.
After several postponements in proceedings to restructure debts of the island’s central government, in early February 2021
the Oversight Board announced an agreement with “certain bondholders” to restructure GO and related debts. The Board
filed the corresponding amended plan with the Title III court on March 8, 2021. As 2021 progressed, several key creditor
groups agreed to support the plan. Compromises with the Commonwealth government and legislature led to enactment of
legislation to enable issuance of new debt securities and changes in how public pensions would be treated. On August 2,
2021, the Title III court approved a disclosure statement and scheduled hearings on confirmation of the plan. On January 18,
2022, the court confirmed a plan of adjustment to restructure debts of the Commonwealth of Puerto Rico and certain closely
linked public authorities, as well as pension plans for teachers, public employees, and judges. That confirmation resolves
various legal disputes. On March 15, 2022, the plan was consummated. Recovery ratios vary by debt class, although for older
GO bonds recovery rates were estimated to reach as high as 95%. Attention now shifts to addressing debts of PREPA, the
island’s troubled electric power utility.
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 challenges since its postwar economic development strategy of industrialization faltered in the early 1970s,
including acute budget crises in 2006-2007 and 2013-2016. The island’s lack of access 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 Transportation Authority (HTA), and smaller public corporations
only in passing. The Puerto Rico Aqueduct and 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 generally tolerate more financial risk than many traditional investors, have played prominent roles in
Puerto Rico’s debt restructuring. As default risks on Puerto Rican public debt became evident, many mutual funds reduced
their holdings, allowing some hedge funds to increase theirs. In spring 2020, some accused 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. Some called for investigations of alleged trading on nonpublic information obtained in debt
negotiations. Legislation 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. A measure (P.L. 117-82) mandating professionals working on the
island’s debt restructuring to make certain disclosures was signed into law in January 2022. Appendices to this report list
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Puerto Rico’s Public Debts: Accumulation and Restructuring

Puerto Rico’s pre-PROMESA public debts, analyze the evolution of bond prices and trading volumes during the restructuring
process, set out a chronology of selected events, and provide a glossary of abbreviations in English and Spanish.
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Introduction
Puerto Rico’s public debts, which totaled just over $70 billion when the Puerto Rico Oversight,
Management, and Economic Stability Act (P.L. 114-187; PROMESA) became law on June 30,
2016, are now in the midst of one of the largest restructurings of public debt in U.S. history.
Puerto Rico’s fiscal troubles fell 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
the financial press noted the precarious state of Puerto Rico’s public finances.1 The City of
Detroit, by way of comparison, had about $18 billion in debt when it entered bankruptcy in
2013.2 Puerto Rico’s public debts, which in 2016 totaled over $70 billion before including
unfunded pension liabilities, were 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
$1.4 billion.3
PROMESA, among other provisions, created two paths for debt restructuring: one that draws on
the Bankruptcy Code and another that is similar to some sovereign debt procedures. It also
established a Financial Oversight and Management Board (FOMB; Oversight Board) and
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
government, hedge funds, bond insurers, and other creditors. The restructuring of Puerto Rico’s
public debts, some contend, could inform future federal responses to fiscal strains faced by some
state and local governments.4
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
Oversight Board decided to first restructure the sales-tax-backed bonds—known as COFINA
bonds after their Spanish acronym.5 After delays due to gubernatorial turnover in January 2017
and the destruction caused by Hurricanes Irma and María in September 2017, in August 2018 the
Oversight Board reached an agreement with COFINA bondholders on a split of sales tax revenues
between COFINA debt service and Puerto Rico’s central government, the Commonwealth of
Puerto Rico (CPR). On February 4, 2019, a federal district court judge confirmed a plan based on
that agreement, clearing the way to a restructuring of Puerto Rico’s COFINA debt. At that time,

1 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”
Barron’s, August 26, 2013.
2 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.
3 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-
fees-for-puerto-rico-bankruptcy-process/article_e6b6a3f4-6027-11eb-af4c-e796e78d7a4c.html.
4 For instance, one bankruptcy lawyer stated that Puerto Rico’s debt restructuring process would “almost certainly
shape future municipal restructurings.” David R. Doyle, “The 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-
sheet.
5 COFINA is the Corporación del Fondo de Interés Apremiante de Puerto Rico. Appendix D lists commonly used
abbreviations and acronyms.
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COFINA bonds represented nearly one-quarter of the island’s outstanding public debt.6 Bonds
with a par value of $17.6 billion were then exchanged for $12 billion in new bonds.7
On February 23, 2021, the Oversight Board pivoted toward restructuring the island’s GO bonds
and certain other central government debts by announcing an agreement with “certain
bondholders” on a revised restructuring plan.8 The Board filed a disclosure statement describing
the amended plan of adjustment with the Title III court on March 8, 2021.9 After a series of
hearings on the adequacy of plan disclosures in July 2021,10 on August 2, 2021, the Title III court
approved a disclosure statement and scheduled hearings on confirmation of the plan.11
As 2021 progressed, several key creditor groups came to support the plan once modifications had
been agreed to in negotiations. Compromises with the Commonwealth government and
legislature led to enactment of legislation to enable issuance of new debt securities and some
changes in public pensions.12 On January 18, 2022, the Title III court confirmed the plan of
adjustment to restructure debts of the Commonwealth of Puerto Rico and certain closely linked
public authorities, as well as modified pension plans for teachers, public employees, and judges.13
The confirmation resolves various legal disputes, albeit subject to appeals. That plan of
adjustment was consummated on March 15, 2022.14 A later section of this report discusses events
that led to the confirmation order in more detail.
PROMESA conditions the Oversight Board’s termination on Puerto Rico’s ability to access
“short-term and long-term credit markets at reasonable interest rates.”15 Finishing the
restructuring of the island’s debts into a fiscally sustainable form is a likely prerequisite to that
access.

6 Laura Taylor Swain, U.S. District Judge, “Memorandum of Opinion and Order Approving Settlement Between
Commonwealth of Puerto Rico and Puerto Rico Sales Tax Financing Corporation,” February 4, 2019, at
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAzMDUx&id2=0.
7 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” Bond Buyer, February 12, 2019.
8 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
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
Exit From Bankruptcy,” press release, February 23, 2021, https://drive.google.com/file/d/
1go1HKPzYdtGFVFSfEotCgGDW7THhtn0j/view.
9 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.goole.com/file/d/1IP-znS391lEFMcg35u6flHfcndndyxec/view.
10 Laura Taylor 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=
MTAxMjI3OA==&id2=0. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAyNDA4Mg==&
id2=0.
11 Laura Taylor Swain, U.S. District Judge, “Order Approving Disclosure Statement,” August 2, 2021,
https://cases.primeclerk.com//puertorico/Home-DownloadPDF?id1=MTAyOTMyOQ==&id2=0.
12 Maria Chutchian, “Puerto Rico Bankruptcy Nears End as Debt Plan Goes Up for Approval,” Reuters, November 9,
2021, https://www.reuters.com/legal/transactional/puerto-rico-bankruptcy-nears-end-debt-plan-goes-up-approval-2021-
11-08/.
13 Laura Taylor Swain, U.S. District Judge, “Order Confirming Plan of Adjustment,” January 18, 2022,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTA4MTY5MQ==&id2=-1.
14 Order Confirming Modified Eighth Amended Title III Plan of Adjustment of the CPR, et al., March 15, 2022,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTA4Njg3NQ==&id2=-1.
15 PROMESA §209 also requires implementation of modified accrual accounting standards and balanced budgets.
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This report outlines the accumulation of Puerto Rico’s debt and the restructuring of the island’s
public debt through processes established by PROMESA. 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.
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
Electric Power Authority (PREPA)16, the Highways and Transportation Authority (HTA), and
smaller 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.17
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
the restructuring process, a chronology of selected events, and a glossary of abbreviations in
English and Spanish.
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
to cover outlays, which led to rising public debt levels and growing unfunded pension liabilities.18
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
forth as a model for economic development through industrialization supported by generous tax
incentives.19 That energy crisis, along with broader changes in the global economy including
heightened trade competition from middle-income countries, brought Puerto Rico’s postwar era
of rapid economic progress to an end.20
During the 20th century, Puerto Rico closed much of the gap with the mainland in per capita
income, literacy, and health status.21 Nonetheless, by the 1970s Puerto Rico was still far poorer, in
terms of median household income, than the poorest mainland state. Since then, that income gap
has narrowed more slowly.22 Despite the economic slowdown in the 1970s, public debt levels

16 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. Oversight Board, Status Report, May 11, 2021,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAxMzMxNg==&id2=0.
17 The 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.
See PRASA, 2020 Fiscal Plan, 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.
18 For more information, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin.
19 Terrence Farrell, “Arthur Lewis and the Case for Caribbean Industrialisation,” Social and Economic Studies, vol. 29,
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,
“Arrested Development? Puerto Rico in an American Century,” Journal of Economic History, vol. 79, no. 3
(September 2019), pp. 708-735.
20 See CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin. Congressional clients may
request a longer memorandum version.
21 Brian Marein, “Economic Development in Puerto Rico after US Annexation: Anthropometric Evidence,” Economics
& Human Biology, vol. 38, August 2020.
22 The 1990 Census found Puerto Rico’s median household income was 44% of Mississippi’s and 30% of the U.S.
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remained nearly steady before increasing in the mid-1980s, as shown in Figure 1. By 2014, the
island’s public debt reached a level roughly equivalent to its gross national product (GNP).23
Figure 1. Puerto Rico’s Public Debt, 1960-2017
In billions of constant (FY2017) dollars

Source: Statistical Appendix (Apéndice Estadístico), various years; available at https://web.archive.org/web/
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
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
used to adjust levels for inflation. Recent Apéndices Estadístico omit debt data.

estimate. The 2014-2018 American Community Survey found Puerto Rico’s median household income was 46% of
Mississippi’s and 33% of the U.S. estimate.
23 Government Development Bank (GDB), Commonwealth Quarterly Financial Report, July 17, 2014, pp. 41-42,
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/
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 avoidance strategies
of multinational corporations with Puerto Rican subsidiaries.
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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,
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.24
The 2006 Budgetary Crisis
In 2006, the Puerto Rican legislature and then-Governor Aníbal Acevedo Vilá reached an impasse
on a budget and how to address looming fiscal challenges. By late 2006, after credit rating
agencies downgraded the island’s GO bonds nearly to junk status, island officials and their
financial advisors soon came to view bonds backed by sales tax revenues as one way to manage
fiscal challenges.
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
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.25 The tax-backed bonds were able to obtain
a high credit rating, and thus could be issued with a lower yield, reducing debt service costs to the
Puerto Rican government.
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
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
proceeds were not tied to infrastructure projects. Instead, funds covered past debts and continuing
operating budget deficits—a process termed “scoop and toss.”26 The legal status of COFINA and
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 will discuss.
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
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 2011.27 From 2009 through 2011, former Oversight
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
pension bonds and which accumulated large holdings of COFINA bonds.28

24 Carlos A. Colon de Armas, “La Constitución de Puerto Rico y su Requisito de un Presupuesto Balanceado,” Revista
Jurídica Universidad de Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832, esp. Table 2.
25 COFINA (Corporación del Fondo de Interés Apremiante), known in English as the Puerto Rico Sales Tax Financing
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
26, 2006. Kobre & Kim LLP, Final Investigative Report, 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
board acted as COFINA’s board. Act 56-2007 (pp. 3-4) granted COFINA the same legal privileges as GDB.
26 Mike Cherney, “Borrowing Maneuver Catches Flak: ‘Scoop and Toss’ Involves Selling New Debt to Pay Off
Existing Bonds,” Wall Street Journal, December 2, 2013.
27 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, pp. 179-188.
28 Santander Asset Management, “First Puerto Rico Tax Exempt Fund (Class A),” March 31, 2016,
http://periodismoinvestigativo.com/wp-content/uploads//2016/12/TE-1Q2016.pdf.
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Experiences with Pension Obligation Bonds
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
public pension systems were estimated at over $40 billion in 2016. Many beneficiaries of Puerto
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.
In 2006, Merrill Lynch advisors suggested that the Puerto Rico Employee Retirement System
(ERS) and Merrill Lynch issue at least $7 billion in pension obligation bonds (POBs). Merrill
Lynch was unable to place those bonds with investors because the bonds were ineligible for a
federal tax exemption.
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
could have been made using contributions pledged to back the bonds—an approach known as an
arbitrage strategy.29 That strategy might conceivably reduce unfunded pension liabilities 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.
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
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
banks in Puerto Rico, apparently bought nearly all of the remaining bonds in the second issue.30
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
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.31 The
underlying bonds’ poor performance and the use of leverage resulted in substantial losses for
retail investors who held those UBS mutual funds.32 A Puerto Rico subsidiary of UBS agreed to
pay $34 million 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
(FINRA) in September 2015. One UBS financial advisor pleaded guilty to criminal fraud charges
in November 2018.33

29 See Kobre & Kim, Final Investigative Report, August 20, 2018, Part VII.
30 Craig McCann and Edward O'Neal, “UBS Succumbed to Conflicts and Purchased $1.7 Billion of Employee
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.
31 Conway Mackenzie, Review of the Events and Decisions That Have Led to the Current Financial Crisis of the
Employees Retirement System of the Government of Puerto Rico, October 2010, http://www.slcg.com/pdf/blog/
13409.pdf.
32 Craig McCann, Edward O'Neal, and Susan Song, “UBS and Santander’s Role in Underwriting Employee 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 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, 2015,
https://www.bloomberg.com/news/articles/2015-09-22/how-ubs-spread-the-pain-of-puerto-rico-s-debt-crisis-to-clients.
33 U.S. Department of Justice, “Former Registered Financial Advisor Pleads Guilty to Bank Fraud,” press release,
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 in
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Bonds and Municipal Finance
State and local governments borrow to finance schools, streets, sewers, and other public infrastructure projects,
or to support certain private projects, as well as to close short-term gaps between public revenues and outlays.
U.S. state and local borrowing totaled over $3 tril ion in mid-2020.34 Municipal securities, such as bonds and notes,
are generally 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—
that is, exempt from federal, state, and local taxes—that made them attractive to municipal mutual fund managers
and to high-income households.35
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.
76-768).36
Municipal—or muni—securities mostly fall into two broad categories. General obligation (GO) bonds are typically
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
from a project or source—such as sales of water or electric power, sewer charges, or highway tol s—or by a
broadly applied tax. Revenue bonds, while tied to narrower income streams than GO debt, can qualify for certain
investor protections.37
Default rates for muni securities historically have been well below rates for corporate debt, although municipal
default rates have risen in the past two decades. The credit rating agency Moody’s found that over a 10-year
period (2008-2017) almost 10% of corporate issuances defaulted, but less than 0.5% of municipal issuances did.38
Major defaults in recent decades include a mismanaged nuclear power project in Washington State, Orange
County in Southern California, and the City of Detroit.39 Arkansas was in default in the 1930s, and several states
and the Territory of Florida defaulted or repudiated debts in the 19th century.40
2013-2015: Fiscal Pressures Intensify
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

Puerto Rico,” May 1, 2018, PBS Frontline, https://www.pbs.org/wgbh/frontline/article/former-ubs-insider-says-banks-
fueled-economic-crisis-in-puerto-rico/.
34 Federal Reserve System Board of Governors, “State and Local Governments; Debt Securities and Loans; Liability,
Level [SLGSDODNS],” https://fred.stlouisfed.org/series/SLGSDODNS.
35 The exemption was included in the 1917 Jones Act (P.L. 64-368) and is codified as 48 U.S.C. §745. Employee
Retirement System (ERS) bonds, for example, did not qualify for certain mainland tax exemptions. See Kobre & Kim
LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, p. 338.
36 P.L. 115-174 §506, enacted in May 2018, set a three-year phaseout period for that exemption, which the SEC can
extend for another three years.
37 James E. Spiotto, “The History and Justification for Timely 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.
38 Moody’s, U.S. Municipal Bond Defaults and Recoveries 1970-2017, July 31, 2018. Excerpt available at
https://www.treasurer.ca.gov/cdiac/seminars/2019/20190212/day2/6.pdf.
39 Michael Johnston, “The Biggest Municipal Bond Disasters Of All Time,” MunicipalBonds.com,
https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/.
40 William A. Scott, Repudiation of State Debts in the United States, (New York: Crowley, 1893), p. 276. Those states
were Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and
Virginia. Also see William B. English, “Understanding the Costs of Sovereign Default: American State Debts in the
1840s,” American Economic Review, vol. 86, no. 1 (March 1996), pp. 259-275.
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criticized Puerto Rico’s fiscal condition.41 Then-Governor Alejandro García Padilla, who was
inaugurated in January 2013, hired a team of debt restructuring advisors in early 2014.42
Ratings on the island’s public debt—which had reached a level roughly equivalent to the island’s
gross national product (GNP)43—were downgraded in February 2014.44 Following enactment of a
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
downgraded.45 The downgrades and the state of Puerto Rico’s public finances ended the island’s
access to capital markets.46
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
billion in GO bonds to a syndicate of hedge funds47 in March 2014—a month after the credit
ratings on the island’s GO bonds had been downgraded to junk status.48 The bonds carried an
8.6% yield, well above usual rates in the municipal finance market.49 The 2014 GO bonds were
issued with a provision that New York State law would govern disputes, then viewed as a

41 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”
Barron’s, August 26, 2013.
42 Mark Tannenbaum and Martin Z. Braun, “Puerto Rico GDB Hires Millstein Unit as Financial Adviser,” Bloomberg,
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:
Government Development Bank for Puerto Rico Hires Cleary Gottlieb Steen & Hamilton,” Wall Street Journal, April
7, 2014.
43 GDB, Commonwealth Quarterly Financial Report, July 17, 2014, pp. 41-42, http://www.gdb-pur.com/documents/
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 domestic
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.
44 Commonwealth of Puerto Rico, Consolidated Annual Financial Report for FY2013, note 22, pp. 230-231,
http://www.hacienda.gobierno.pr/downloads/pdf/cafr/FINANCIAL_REPORT_2013.pdf.
45 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico
(Ley 71 de 2014; Act 71-2014; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto
Rico). The law is also called the “Recovery Act” or the “Local Bankruptcy Law” (“Ley de Quiebra Criolla”).
46 See Moody’s Investor’s Service, “Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations
and the Commonwealth,” July 3, 2013. Also see Kobre & Kim LLP, Final Investigative Report, August 20, 2018,
https://drive.google.com/file/d/19-lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 189-190; and CRS Report
R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin, Puerto Rico’s Current Fiscal Challenges, by
D. Andrew Austin.
47 Joel Cintrón Arbasetti, “275 Investment Firms Jumped on Puerto Rico’s Junk Debt,” Centro de Periodismo
Investigativo, August 31, 2016, https://periodismoinvestigativo.com/2016/08/275-investment-firms-jumped-on-puerto-
ricos-junk-debt/.
48 “Fitch Cuts Puerto Rico’s Debt to Junk,” New York Times, February 11, 2014, https://dealbook.nytimes.com/2014/
02/11/fitch-cuts-puerto-ricos-debt-to-junk/. Downgrades were triggered by warnings that the Government Development
Bank faced liquidity challenges.
49 The Series A bonds—CPR’s sole bond issuance in 2014—offered at 93¢ on the dollar, carry an 8% coupon rate,
implying an initial yield of 8.6%. The average yield for Bond Buyer 20-Bond GO Index for 2014 was 4.25%. See WM
Financial Strategies, “Rates Over Time,” November 2020, http://www.munibondadvisor.com/market.htm. The bond’s
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://
www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF.
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significant investor protection. Moreover, the Puerto Rico Constitution sets debt service as a top
priority, before other public outlays.
About $900 million of the bond proceeds went to pay off bank loans, including to banks involved
in underwriting the issue.50 SEC staff reportedly recommended actions against bankers involved
in the deal, including former GDB head Jorge Irizarry, who later led a coalition said to represent
local junior COFINA bondholders.51 The SEC declined to pursue those charges.52 Investment
funds Paulson & Company, Och-Ziff Capital,53 Fir Tree Partners, Perry Capital, and Brigade
Capital reportedly each bought more than $100 million of the issue.54
After the 2014 GO issuance, hedge funds expanded their involvement in Puerto Rico, both in
purchases of bonds as well as contact with officials and policymakers. The ratings agency Fitch,
according to reports, found that some 60 hedge funds held about $16 billion of Puerto Rico’s
public debt, about 22% of the total amount, by fall 2014.55 In addition, the investment bank
Goldman Sachs’s holdings of Puerto Rican debt increased to a reported $1.3 billion in 2014.56
Federal Courts Strike Down Local Bankruptcy Law
The Puerto Rican government lost access to Chapter 9 of the U.S. Bankruptcy Code, which
governs the adjustment of municipal debts, in 1984.57 Lacking that access and with major public
corporations facing severe liquidity challenges, island policymakers sought to create a path to

50 Laura Sullivan, “How Puerto Rico’s Debt Created A Perfect Storm Before The Storm,” NPR/Frontline, May 2, 2018,
https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-debt-created-a-perfect-storm-before-the-storm.
51 Martin Z. Braun, “SEC Probes Barclays, Morgan Stanley Bankers Over Puerto Rico,” Bloomberg, June 28, 2017,
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,” Bond
Buyer, April 30, 2013. Irizarry later headed the Bonistas del Patio group, which played a role in the COFINA
restructuring.
52 Carlos A. Otero, “Concluye sin Acusaciones Pesquisa de la SEC,” [SEC Investigation Concludes without Charges],
El Vocero, April 9, 2018, p. 5, https://issuu.com/vocero.com/docs/v04092018__1_/4.
53 Och-Ziff changed its name to Sculptor Capital in 2019, two weeks before a deferred prosecution agreement with the
U.S. Department of Justice related to trade in conflict diamonds and minerals expired. See Sculptor Capital, “Och-Ziff
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-
Name-to-Sculptor-Capital-Management.html. Also see U.S. v. Och-Ziff, Deferred Prosecution Agreement, September
26, 2016, https://www.justice.gov/criminal-fraud/file/900261/download.
54 Joel Cintrón Arbasetti, “Vulture Funds have Puerto Rico Cornered,” Center for Investigative Journalism, April 9,
2015, https://periodismoinvestigativo.com/2015/04/vulture-funds-have-puerto-rico-cornered/.
55 Michael Corkery, “Let Us Help You, Hedge Funds Tell Puerto Rico,” New York Times, September 12, 2014,
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
14, 2015, https://periodismoinvestigativo.com/2015/07/out-in-the-open-hedge-funds-in-puerto-rico/.
56 Brian Chappatta, “Puerto Rico’s 10% Yields Prove Too Tempting for Goldman to Skip,” Bloomberg Business, May
26, 2015.
57 P.L. 98-353 amended the Bankruptcy Code to exclude Puerto Rico from the definition of “State” for “the purpose of
defining who may be a debtor under chapter 9,” which removed Puerto Rico’s access to Chapter 9. See Jon Greenberg,
“Mystery: Strom Thurmond, 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-/.
The late Judge Torruella, 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
through the halls of Congress sheds less light than a piece of coal on a moonless night regarding the reason for its
enactment.” Franklin Cal. Tax-Free Tr. v. Puerto Rico, 805 F.3d 322, 349 (1st Cir. 2015) (Torruella, J., concurring in
the judgment), aff’d, Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938 (2016).
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restructuring debts through local laws. In particular, the deterioration of PREPA’s finances and
operations became evident in spring 2014.58 In August 2014, PREPA, unable to afford fuel,
signed a restructuring support agreement (RSA) with its creditors, which included appointment of
an outside chief restructuring officer.59
In June 2014, Puerto Rico enacted a local bankruptcy law, which heightened concerns of default
risks.60 The hedge fund Blue Mountain Capital Management, along with the Oppenheimer and
Franklin mutual fund groups, challenged the law.61 Other hedge funds reportedly supported the
law, which would enhance CPR’s ability to pay GO debt by allowing cramdowns of public
corporations’ debt.62 The Supreme Court struck down the local bankruptcy law,63 holding that,
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
from enacting its own municipal bankruptcy scheme to restructure debt.64
Governor García Padilla Calls Debt “Unpayable,” Declares Fiscal Emergency
Then-Governor García Padilla called Puerto Rico’s public debts “unpayable” at the end of June
2015.65 In the following year, the governor took a series of actions to conserve the government’s
liquidity in the face of mounting fiscal pressures. At the beginning of August 2015, three small
public bond issues were in default.66 At the end of November 2015, Governor Padilla signed an
executive order authorizing a clawback of balances and revenues from transportation and
infrastructure entities.67 In April 2016, he signed into law Act 21-2016, which declared that a debt

58 In June 2014, Municipal Market Analytics (MMA) reported that “PREPA’s reality is that it is operating deep in the
red, with antiquated technology, high costs and declining sales.” See Testimony of Robert Donahue, MMA Managing
Director, in U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And
Antitrust Law, H.R. 870, 114th Cong., 1st sess., February 26, 2015, p. 28, https://www.jonesday.com/files/upload/robert-
donahue-testimony.pdf.
59 For details, see CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin.
60 Ley para el Cumplimiento con las Deudas y para la Recuperación de las Corporaciones Públicas de Puerto Rico
(Ley 71 de 2014; Act 71; Law Pursuant to the Debts and for the Recovery of the Public Corporations of Puerto Rico).
The law was also called the “Recovery Act” or the “Local Bankruptcy Law” (“Ley de Quiebra Criolla”). See also
Moody’s Investor’s Service, “Puerto Rico’s Debt Restructuring Law Raises Default Risk for Public Corporations and
the Commonwealth,” July 3, 2013.
61 Carlos F. Ugalde, “Puerto Rico’s Municipal Debt Crisis: A Two-Front Battle?” Fordham Urban Law Journal, March
17, 2015, https://news.law.fordham.edu/fulj/2015/03/17/puerto-ricos-municipal-debt-crisis-a-two-front-battle/.
62 Michael Cembalest, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market, July 11, 2016,
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.
63 Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938 (2016). Also see Stephen J. Lubben, “Puerto Rico and the
Bankruptcy Clause,” American Bankruptcy Law Journal, vol. 88, no. 4 (fall 2014), pp. 553-578 (at p. 573).
64 See 136 S. Ct. at 1942. Chapter 9 of the Bankruptcy Code defines a municipality as a “political subdivision or public
agency or instrumentality of a State.” Cf. 11 U.S.C. §101(40). The Bankruptcy Code thus covers a wider set of public
entities than the term municipalities usually connotes. In Puerto Rico, municipalities (municipios) resemble county
governments on the mainland.
65 Mensaje del Gobernador Alejandro García Padilla Sobre Situación Fiscal de Puerto Rico (Governor Alejandro
García Padilla’s Message on the Fiscal Situation of Puerto Rico), June 29, 2015, https://www.elnuevodia.com/noticias/
politica/nota/mensajedelgobernadoralejandrogarciapadillasobresituacionfiscaldepuertorico-2066574/.
66 Puerto Rico Standard & Poors, “Rating on Three Puerto Rico PFC Series Lowered to ‘D’ On Non-Payment,”
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. Valentín Ortiz, “Light Shed on Clawed-Back
Funds,” Caribbean Business, August 24, 2016, https://caribbeanbusiness.com/light-shed-on-clawed-back-funds/.
67 Gov. Alejandro García Padilla, Executive Order 2015-46, November 30, 2015, https://estado.pr.gov/es/ordenes-
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service moratorium could be invoked to preserve funding for essential public services.68 As
Puerto Rico’s defaults widened, Congress considered measures to address the island’s fiscal
crisis, which culminated in PROMESA’s enactment.
On June 29, 2016—two days before a $780 million GO debt service payment was due—
Governor Padilla suspended payments on GO and Commonwealth-guaranteed bonds, leading to
the first defaults on CPR debt.69 The following day, June 30, 2016, PROMESA was signed into
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.
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
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
Commonwealth of Puerto Rico (CPR)—as well as some 50 public corporations.70 These public
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
public debt, issued by 18 distinct public entities, presents an unusually complex debt structure.
Transfers and cross-subsidies among different public agencies and corporations, often routed
through the former Government Development Bank, added to that complexity.71
Government Development Bank as Fiscal Agent and
Financial Advisor
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
the island’s industrialization strategy and served a mix of public and private clients. A GDB head
in 2015 described its role as “really a combination of things that the Treasury, the New York Fed
and a development bank like the Inter-American Development Bank do.”72 In particular, the GDB
controlled debt issuance and negotiated with investment banks. The GDB defaulted on bond

ejecutivas/.
68 Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, Act 21-2016, http://www.lexjuris.com/lexlex/
Leyes2016/lexl2016021.htm.
69 Gov. Alejandro García Padilla, Executive Order 2016-30, June 29, 2016, https://www.estado.pr.gov/es/ordenes-
ejecutivas/. For the July 1, 2016, GO debt service payment, see Act 21-2016 at p. 53. Some other sources cite other
amounts for that payment.
70 Oficina de Gerencia y Presupuesto (Puerto Rico Office of Management and Budget; OGP), Organigrama
(Organization Chart), March 2, 2017, http://ogp.pr.gov/SobreOGP/Pages/organigrama.aspx. That version depicted 128
government entities. Former Governor Ricardo Rosselló Nevares (2017-2019) consolidated some smaller public
corporations into central government departments.
71 For example, a disclosure for the March 2014 NY Law GO bond issue stated (p. II-74) “GDB, however, has provided
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
Official Statement, March 14, 2020, https://emma.msrb.org/ER892398-ER588507-ER990528.pdf.
72 Mary Williams Walsh and Michael Corkery, “Behind Puerto Rico’s Woes, a Broadly Powerful Development Bank,”
New York Times, November 29, 2015; and Arturo C. Porzecanski, “The Government Development Bank: At the Heart
of Puerto Rico’s Financial Crisis,” American University working paper, September 18, 2014,
http://auapps.american.edu/aporzeca/www/
The%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf.
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payments in May 2016. In 2017, the newly formed Fiscal Agency and Financial Advisory
Authority (FAFAA) assumed most of GDB’s functions.73
Categories of Public Debt
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
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
GDB, and the 2019 restructuring of sales-tax-backed COFINA bonds (COFINA—an acronym for
the Corporación del Fondo de Interés Apremiante—is also known as the Puerto Rico Sales Tax
Financing Corporation). Figure 2 and Table A-1 show debt levels as of the end of July 2016.
Unfunded obligations of Puerto Rico’s pension systems, which were estimated at $49 billion as of
June 2015, are not included.74 Puerto Rico’s public debt, after adjustments to avoid double-
counting, totaled $68.7 billion at the end of July 2016.75
These debts can be divided by the source of funds used to repay them,76 namely
1. the Commonwealth’s General Fund;
2. the sales & use tax or other specific revenue sources;
3. public corporations’ revenues;
4. other debts, including local governments (municipios) and nonrecourse debt.77
By July 2016, the category of debt repaid through the General Fund included $12.7 billion in GO
debt backed by the good faith, credit, and taxing power of the Commonwealth, as well as
$4.2 billion in Public Building Authority debt, most of which carried a CPR guarantee. Another
$25.5 billion of Puerto Rico’s public sector debt was payable from selected tax receipts, including
$17.3 billion in COFINA bonds. An additional $11.5 billion was payable through Commonwealth
appropriations. Outstanding bonds for the island’s largest public corporations, PREPA ($9.0
billion) and PRASA ($4.6 billion), are mostly repaid through utility charges.

73 Enabling Act of the Fiscal Agency and Financial Advisory Authority, Act 2 of 2017, January 18, 2017,
https://www.aafaf.pr.gov/wp-content/uploads/a-002-2017-1.pdf.
74 GDB, Commonwealth Statement, December 18, 2016, p. 222, https://web.archive.org/web/20170101045953/http://
bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf.
75 Ibid. Also see Table A-1.
76 For a detailed discussion of different categories of public debts, see GDB, Commonwealth Statement, December 18,
2016, pp. 172-208.
77 The Children’s Fund, which comprises most of the nonrecourse debt, stems from settlements of 1990s tobacco suits.
Archived CRS Report RL30058, Tobacco Master Settlement Agreement (1998): Overview, Implementation by States,
and Congressional Issues, by C. Stephen Redhead, is available to congressional clients upon request.
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Figure 2. Puerto Rico’s Public Debt as of July 31, 2016, in $Billions

Source: CRS calculations based on Commonwealth Statement, December 18, 2016, https://web.archive.org/web/20170101045953/http://bgfpr.com/documents/
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
document for other important notes and caveats.
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Puerto Rico’s Public Debts: Accumulation and Restructuring

Public Debt and the Puerto Rico Constitution
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.78 Puerto Rico treated public corporations
as legally separate from the island’s central government,79 although in practice governors largely
have controlled them indirectly via appointments of those corporations’ boards.80 Debts of most
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
 a balanced budget requirement that appropriations (asignaciones aprobadas)
not exceed available resources (los recursos disponibles) (Article VI, Section 8);
 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
shortfall (Article VI, Section 8);
 a “clawback” provision, mandating the reapplication of revenues to debt service
of full faith and credit pledges (Article VI Section 2);
 a prohibition on issuance of new GO debt if average debt service costs over the
two preceding fiscal years equaled or exceeded 15% of the average of total
revenues for those two years (Article VI Section 2);81
 a 30-year limit on GO bond maturities, except for housing bonds, which were
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
Attorney General’s opinion held that bond proceeds counted as “available resources,” thus
relaxing the balanced budget requirement.82 The 15% limit and the 30-year maturity limit were
considered to apply only to central government GO debt, not to so-called “extraconstitutional”
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
distinction between “constitutional” and “extraconstitutional” debt.83 Moreover, some have

78 The English version of the Puerto Rico Constitution is available at https://web.archive.org/web/20130302224519/
http://www.oslpr.org/english/PDF/
The%20Constitution%20of%20the%20Commonwealth%20of%20Puerto%20Rico.pdf.
79 For instance, the law (Act 83 of 1941; 22 L.P.R.A. §193) creating PREPA’s predecessor states that “debts,
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
corporation and not of the central government.”
80 Geoff G. Burrows, “The New Deal in Puerto Rico: Public Works, Public Health, and the Puerto Rico Reconstruction
Administration, 1935-1955,” City University of New York (CUNY) dissertation, 2014,
https://academicworks.cuny.edu/gc_etds/315.
81 This limit was interpreted as “15% of the average annual revenues raised under the provisions of Commonwealth
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
assigned to COFINA) and excise taxes.” GDB, Commonwealth Statement, December 18, 2016, p. 177.
82 P.R. Op. Sec. Just. 1974-15, 1974 WL 326062 (P.R. Atty. Gen.). Also see Carlos Colón De Armas, “La Constitución
de Puerto Rico y Su Requisito de un Presupuesto Balanceado,” [Puerto Rico’s Constitution and its Balanced Budget
Requirement], Law Review of the University of Puerto Rico, vol. 85, no. 3 (2016), pp. 819-832; and Sergio M.
Marxuach, “The 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.
83 Arturo C. Porzecanski, “The Government Development Bank: At the Heart of Puerto Rico’s Financial Crisis,”
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contested whether some post-2012 debt issues conformed to the 15% limit, as well as the reach of
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 well as PROMESA
Title III litigation, which later sections describe.84
PROMESA Enacted in 2016 to Address the Crisis
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.85 Title II 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-
certified fiscal plans and other PROMESA provisions.
Oversight Board Appointments and Organization
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
leaders and a seventh of his own choosing.86 The Puerto Rico governor was empowered to
appoint a nonvoting representative to the Board. The Board chose José B. Carrión, an island
insurance broker, as chair.87
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
expired in August 2019. The Supreme Court rejected those challenges in June 2020, clearing the
way for new nominations and appointments.88
The Oversight Board chooses which instrumentalities will be “covered.”89 The Board can require
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
a covered territory and 62 public corporations and other entities as covered instrumentalities.90
The Board also represents covered entities in debt restructuring processes set up by PROMESA.

American University working paper, September 18, 2014, http://auapps.american.edu/aporzeca/www/
The%20GDB%20at%20the%20Heart%20of%20Puerto%20Ricos%20Financial%20Crisis.pdf.
84 For instance, see “Restructuring COFINA and GO Bonds.”
85 See CRS Report R44532, The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA; H.R.
5278, S. 2328), coordinated by D. Andrew Austin.
86 White House, “President Obama Announces the Appointment of Seven Individuals to the Financial Oversight and
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.
87 Mr. Carrión’s relatives have served in various leadership roles in Banco Popular, the island’s largest bank. Guillermo
A. Baralt, Tradition into the Future: The First Century of the Banco Popular de Puerto Rico: 1893-1993 (San Juan:
Banco Popular, 1993). José Carrión was brother-in-law of Pedro Pierluisi Urrutia, Resident Commissioner at the time.
88 Financial Oversight and Management Bd. for Puerto Rico v. Aurelius Investment, LLC, 140 S.Ct. 1649 (2020),
https://www.supremecourt.gov/opinions/19pdf/18-1334_8m58.pdf.
89 PROMESA §101(d)(1). For context, see Jesse Barron, “Isle of Debt,” New York Times Magazine, December 1, 2019,
p. 42.
90 Oversight Board, “Covered Entities List,” November 18, 2016, https://drive.google.com/file/d/
1D37UiofV0T5s1Q4J54vs3xX_ArGF9532/view.
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PROMESA Established Two Paths to Restructure Debt
PROMESA’s Title III establishes a debt restructuring process that draws on Chapters 9 and 11 of
the U.S. Bankruptcy Code.91 Title VI establishes a debt restructuring process for voluntary
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
PROMESA Title III processes in proceedings in San Juan and New York.
Chapter 9 of the U.S. Bankruptcy Code92 and Debt Restructuring under
PROMESA Title III
Congress first enacted a municipal bankruptcy law during the Great Depression of the 1930s to allow local
governments to reorganize their debts under the supervision of a federal court.93 State governments cannot file
for bankruptcy, but may allow—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
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.94
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
faith or demonstrates such negotiations are impracticable.95 A municipality’s petition stays creditors from taking
action to col ect debts, within certain limits and subject to certain challenges. A bankruptcy court, however,
cannot control a municipality’s regular operations, with some narrow exceptions.96 A municipality’s final plan of
adjustment, typically 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
some requirements and omits others.97 First, Title III uses the terms “covered territory”—meaning Puerto Rico—
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
Board decides which public entities are covered territorial instrumentalities, chooses whether they can seek debt
relief, and represents those entities through the Title III process.98 PROMESA requires formulation and
certification of Fiscal Plans for covered entities,99 which are necessarily integrated with debt restructuring plans.
Filing a Title III relief petition triggers an initial stay of litigation, although creditors may challenge the petition
afterward.100

91 See the appendix of CRS Report R44532, The Puerto Rico Oversight, Management, and Economic Stability Act
(PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew Austin, for a listing of Bankruptcy Code provisions
incorporated into Title III.
92 See CRS Report R45137, Bankruptcy Basics: A Primer, by Kevin M. Lewis; and CRS Legal Sidebar LSB10116,
When the City Goes Broke: Pensions, Retirees, and Municipal Bankruptcies, by Kevin M. Lewis.
93 U.S. Courts, “Chapter 9—Bankruptcy Basics,” https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/chapter-9-bankruptcy-basics. Also see Michael W. McConnell and Randal C. Picker, “When Cities Go Broke: a
Conceptual Introduction to Municipal Bankruptcy,” University of Chicago Law Review, vol. 60(2), spring 1993, pp.
425-495.
94 11 U.S.C. §101(40).
95 That condition also may be met by reaching agreement with creditors holding a majority of claims in each affected
class, or if the municipality reasonably believes a creditor may try to obtain a preferential transfer. 11 U.S.C.
§109(c)(5).
96 11 U.S.C. §904.
97 For a list of provisions referenced in PROMESA Title III, see Appendix B of CRS Report R44532, The Puerto Rico
Oversight, Management, and Economic Stability Act (PROMESA; H.R. 5278, S. 2328), coordinated by D. Andrew
Austin.
98 PROMESA §§206, 304, 312, 315; 48 U.S.C. §§2146, 2164, 2172, 2175.
99 PROMESA §201; 48 U.S.C. §2141.
100 PROMESA §304; 48 U.S.C. §2164.
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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
the Title III court, used its authority to appoint agents to represent interests of bondholders and other
creditors.101 The court also appointed a mediation team headed by Judge Barbara Houser to oversee
negotiations.102 A plan support agreement (PSA) outlines terms of negotiations and may be modified as additional
parties sign on or as terms shift.
The Oversight Board is charged with proposing a plan of adjustment to implement negotiated terms of 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
PROMESA strictures.103 Obtaining legislative or regulatory changes consistent with the plan of adjustment is one
prerequisite of court confirmation of the plan.104
The Oversight Board, as agent of the debtor, must file a disclosure statement for a plan of adjustment to inform
creditors.105 If the Title III court holds that the disclosure statement is adequate, creditors vote on the plan of
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
reject it. Approval of at least one class of impaired creditors is required. Other requirements for confirmation by
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.106 After approval, creditors are compensated
according to the plan, in cash, in new bonds, or in other ways, equal to payment in ful , nothing, or some
intermediate amount.
Restructuring COFINA and GO Bonds
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
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.
Some suspected that issuing COFINA bonds sidestepped a limitation on debt issuance in the
Puerto Rico Constitution, an accusation denied by others.107 COFINA bonds were sold as
“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
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.108 While the
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

101 PROMESA §104; 48 U.S.C. §2124. Also see Stipulation and Order Approving Procedure to Resolve
Commonwealth-COFINA Dispute, In re CPR, case 17-03283-LTS, August 10, 2017, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=NzAwNDI5&id2=0.
102 In re: CPR, case 17-03283-LTS, Order Appointing Mediation Team, June 23, 2017, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=NjU3Njgy&id2=0. The 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 Texas.
103 PROMESA §§303, 314; 48 U.S.C. §§2163, 2174.
104 PROMESA §314; 48 U.S.C. §2174(b)(5).
105 PROMESA §§301, 310; 11 U.S.C. §1125.
106 PROMESA §314; 48 U.S.C. §2174(b); 11 U.S.C. §1129.
107 William Isaac, “Banks Have Huge Stake in Outcome of Puerto Rico Crisis,” American Banker, November 5, 2015,
https://www.americanbanker.com/opinion/banks-have-huge-stake-in-outcome-of-puerto-rico-crisis. The 2018 Kobre &
Kim report claimed the GDB sought to compute the 15% debt limitation appropriately.
108 Official Statement, “Puerto Rico Sales Tax Financing Corporation Sales Tax Revenue Bonds, Series 2007B,” July
23, 2007, https://emma.msrb.org/MS261958-MS237266-MD462937.pdf.
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law firm partner expressed doubt that a court would bar clawback of COFINA funds—an opinion
not shared with investors.109 In 2009, bond filings began to note, in general terms, the potential
legal risks presented by COFINA’s structure.110
Some major mutual funds, which had bought Puerto Rico securities at par when issued before the
island’s fiscal challenges became evident, sharply reduced their holdings of the island’s public
debt in late 2013 and 2014, prompting sharp drops in bond prices.111 A significant portion of those
sales were to hedge funds with a stronger appetite for complex debt restructuring processes.112
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,
prompting contention with COFINA bondholder groups.113 Conflicts also emerged between
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.114
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
Bonistas del Patio, a group claiming to represent island-based junior COFINA bondholders.115
Three bond insurers (Ambac, National Public Finance, and Assured Guaranty), also known as
monolines, also participated actively in negotiations and litigation.116 These groups played a role
in congressional deliberations that led to PROMESA’s enactment.
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
group of GO bondholders sued then-Governor García Padilla to demand a clawback of COFINA-
pledged revenues. In April 2017, a federal appeals court held that PROMESA stay provisions
applied.117 That suit and other litigation, however, convinced the Oversight Board that the GO-
COFINA dispute needed to be resolved through the PROMESA Title III process.118

109 Kobre & Kim LLP, Final Investigative Report, August 20, 2018, https://drive.google.com/file/d/19-
lauVo3w9MPS03xYVe0SWhQin-Q6FEf/view, pp. 160-161, 164-165, 174-175.
110 Ibid., pp. 187-188.
111 Bond Buyer, “Oppenheimer, Franklin Cut Puerto Rico Debt Holdings Amid Rally,” September 12, 2018.
112 Matt Wirz, Andrew Scurria, and Heather Gillers, “Bond Funds Dump Puerto Rico: Investor Exodus from Puerto
Rico Built Speed in October,” Wall Street Journal, October 25, 2017, https://www.wsj.com/articles/bond-funds-dump-
puerto-rico-1508929380.
113 Michael Cembalist, “Passage to Puerto Rico,” J.P. Morgan, Eye on the Market, July 11, 2016,
https://www.jpmorgan.com/directdoc/passagetopuertorico.pdf.
114 Joanisabel González, “COFINA Bondholders Head to Boston,” El Nuevo Día, March 16, 2017,
https://www.elnuevodia.com/english/english/nota/cofinabondholdersheadtoboston-2301236/.
115 Joel Cintrón Arbasetti and Carla Minet, “Old Colleagues Gather in a Group that Requires Puerto Rico to Pay the
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
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/.
116 Heather Gillers, “Bond Insurers Prepare for the Worst in Puerto Rico,” Wall Street Journal, June 30, 2016.
117 Order and Opinion, Lex Claims, LLC, et al. v. Garcia-Padilla, et al, case 17-1241, April 4, 2017,
media.ca1.uscourts.gov/pdf.opinions/17-1241P-01A.pdf.
118 Jaresko Declaration, In re: COFINA, p. 10, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OTAxNzgz&id2=0.
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New Governor Inaugurated in January 2017
In January 2017, Governor Ricardo Rosselló Nevares succeeded Governor García Padilla, who
did not seek reelection.119 The new governor took steps to restructure the island government,
including setting up FAFAA,120 which took over financial management roles from the GDB.
Rothschild & Co. were brought in to replace previous restructuring advisors.121 The new governor
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
appointees.122 Rosselló Nevares also disbanded a commission set up by his predecessor to audit
the island’s public debts.123
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
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.124 That designation required the governor to
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,
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
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
2017. Puerto Rico enacted a measure to claw back COFINA funds to the general fund,125
triggering a default declaration on COFINA bonds on May 4, 2017.126 A day before, on May 3,
2017, the FOMB filed a petition to restructure CPR’s obligations under Title III of PROMESA.127

119 His father, Pedro Rosselló González, served as governor of Puerto Rico from 1993 until 2001. Former Governor
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
have traditionally distinguished the island’s political parties in the postwar era.
120 Act 2 of 2017, January 18, 2017, and Oversight Board, “Covered Entities List,” November 18, 2016,
https://drive.google.com/file/d/1D37UiofV0T5s1Q4J54vs3xX_ArGF9532/view.
121 Eric Platt, “Rothschild to Advise Puerto Rico on $69bn Debt Restructuring,” Financial Times, January 18, 2017,
https://www.ft.com/content/b00acb45-341b-3501-888a-4685fc9ee4e6.
122 The PREPA RSA of November 2015 specified that the Puerto Rican governor choose a board of three members
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 that take into account professional and educational backgrounds.” See GDB,
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
appointed chair of the PREPA board. See Javier Balmaceda, “Puerto Rico’s PREPA Privatization: A Sale Too Private,”
Forbes, April 3, 2018, https://www.forbes.com/sites/debtwire/2018/04/03/puerto-ricos-prepa-privatization-a-sale-too-
private/?sh=4a5358a27490.
123 Gloria Ruiz Kuilan, “Rosselló Elimina la Comisión para la Auditoría de la Deuda,” El Nuevo Día, April 19, 2017,
https://www.elnuevodia.com/noticias/politica/notas/rossello-elimina-la-comision-para-la-auditoria-de-la-deuda/. See
further discussion in the section “An Audit of Puerto Rico’s Public Debt.”
124 PROMESA §101(d)(1)(A).
125 Fiscal Plan Compliance Act, Act 26-2017, April 29, 2017.
126 Robert Slavin, “COFINA Trustee Declares Default; Seniors Call for End of Subordinate Payments,” Bond Buyer,
May 10, 2017. Also see Bank of New York Mellon, letter to COFINA Trustees, May 4, 2017,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjIwMzQ1&id2=0.
127 Financial Oversight and Management Board (FOMB), Petition for Relief on Behalf of the Commonwealth of Puerto
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On May 5, 2017, the Board then filed a Title III petition for COFINA,128 and on May 21, 2017, it
filed a petition for HTA.129 The Board also initiated a Title III process for PREPA on July 2, 2017,
and thus rejected the previous RSA framework.130
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
the bank was dissolved in November 2018.131 Most of its functions, as noted above, were taken
over by the FAFAA.
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,
2017, Judge Swain appointed the Unsecured Creditors Committee (UCC) to represent
Commonwealth interests and Bettina Whyte to represent COFINA interests.132 Negotiations were
surrounded by a cascade of litigation by various interested parties.133
Hurricanes Irma and María Hit Puerto Rico in September 2017
Two Category 5 hurricanes soon stalled progress in those negotiations. In September 2017,
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.134 The hurricanes affected the
debt restructuring process in several ways. First, the island’s electrical grid was disabled, which
crippled many water and sewer facilities, as well as most manufacturing facilities and
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
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
fiscal plan to reflect reduced economic activity and tax revenues. The Board anticipated that
federal disaster recovery funding—which it estimated would total $82 billion—would enhance

Rico, May 3, 2017, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NjE3NjAy&id2=0.
128 FOMB, Petition for Relief on Behalf of COFINA, May 5, 2018, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=NjE3ODQx&id2=0.
129 FOMB, Petition for Relief on Behalf of HTA, May 21, 2017, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=NjIzMjkw&id2=0.
130 FOMB, Petition for Relief on Behalf of PREPA, July 2, 2017, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=NzA4NjU1&id2=0.
131 In re: GDB, Findings of Fact, Conclusions of Law, and Order, November 7, 2018, https://document.epiq11.com/
document/getdocumentbycode/?docId=3427095&projectCode=PR4&source=DM.
132 Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute, In re FOMB as
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
Alvarez & Marsal, a New York financial advisory firm.
133 At this writing in May 2022, the Commonwealth Title III docket contained over 20,600 filings—a rough indicator of
the complexity of the case.
134 John P. Cangialosi, Andrew S. Latto, and Robbie Berg, “Tropical Cyclone Report: Hurricane Irma,” National
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, “Tropical Cyclone Report: Hurricane Maria,” National Hurricane Center,
February 14, 2019, AL152017, https://www.nhc.noaa.gov/data/tcr/AL152017_Maria.pdf.
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the ability to repay creditors in future years.135 Much of that funding, however, has been slow in
coming.136
Settling the COFINA/GO Dispute
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
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
the law firm Quinn Emanuel and lead counsel Susheel Kirpalani.137
After selling off about half of their COFINA junior bonds after Hurricane María hit, the coalition
increased its holdings of those bonds from $709 million in October 2017 to $2.222 billion at the
end of October 2018, as shown in Figure 3.138 Over that interval—October 2017 to October
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.
On May 14, 2018, the COFINA Senior Bondholders Coalition proposed a framework to settle the
GO/COFINA dispute,139 which the Oversight Board reportedly rejected as offering the CPR no
“meaningful debt relief.”140 Further negotiations led to an agreement in principle, announced on
June 5, 2018, that would allocate 53.65% of the Pledged Sales Tax Base Amount—set at 5.5% of
the 10.5% Sales & Use Tax—to COFINA.141 Judge Swain, according to media reports, viewed
the draft agreement favorably, as it could sidestep calls to rule on the validity of COFINA’s legal
structure under the Puerto Rico Constitution.142
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
protections. Certain COFINA creditors were to collect about $1.2 billion held in escrow.143 The
reduction in COFINA claims allowed the CPR government a greater share of sales and use tax

135 Oversight Board, Commonwealth Revised Fiscal Plan, October 23, 2018, p. 17, https://drive.google.com/file/d/
17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view.
136 See CRS Report R46609, The Status of Puerto Rico’s Recovery and Ongoing Challenges Following Hurricanes
Irma and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster.
137 Second Supplemental Verified Statement of the Senior COFINA Bondholders’ Coalition Pursuant to Federal Rule
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/
1094205/mvp-quinn-emanuel-s-susheel-kirpalani. In that interview, UCC lead counsel Luc Despins is described as a
mentor.
138 See the corresponding 7th verified statement, November 16, 2018, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=ODk5ODcw&id2=0.
139 BusinessWire, “COFINA Senior Bondholders Coalition Discloses Participation in Constructive Settlement
Discussions to Help Resolve Puerto Rico’s Debt Crisis,” May 14, 2018, https://www.businesswire.com/news/home/
20180514005558/en/.
140 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018,
https://caribbeanbusiness.com/go-cofina-bondholder-sides-head-for-shootout/.
141 Michelle Kaske, “Puerto Rico’s Sales-Tax Bonds Soar on Optimism About Deal,” Bloomberg News, June 8, 2018,
https://www.bloomberg.com/news/articles/2018-06-08/puerto-rico-cofina-investors-get-half-sales-tax-in-proposed-
deal.
142 Eva Lloréns Vélez, “GO-COFINA Bondholder Sides Head for Shootout,” Caribbean Business, July 13, 2018.
143 Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA), COFINA Fiscal Plan, p. 5, September 7,
2018, http://www.aafaf.pr.gov/assets/cofina-fiscal-plan-090718.pdf.
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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 2018.144

Figure 3. COFINA Holdings of Senior COFINA Bondholders Coalition

Source: 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
Dayen, “We Can Finally Identify One of the Largest Holders of Puerto Rican Debt,” Intercept, October 3, 2017,
https://theintercept.com/2017/10/03/we-can-finally-identify-one-of-the-largest-holders-of-puerto-rican-debt/.

144 Act 257-2018, enacted December 18, 2018. See Price Waterhouse Coopers, “Puerto Rico Adopts Significant
Amendments to its Income Tax Code,” January 2019, https://www.pwc.com/us/en/services/tax/library/insights/puerto-
rico-significant-amendments-to-income-tax-code.html.
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The Oversight Board announced a deal with major COFINA creditors in August 2018.145 Once
the Puerto Rican government enacted conforming legislation,146 the Oversight Board certified a
revised COFINA fiscal plan.147 On October 18, 2018, the Board filed a disclosure statement that
detailed the proposed restructuring of COFINA debt.148 On November 27, 2018, the Title III court
approved149 a revised disclosure statement,150 clearing the way for a vote among classes of
COFINA bondholders for approval.151 The UCC, representing the interests of Commonwealth
creditors, conditionally approved the agreement in early November 2018 after having complained
about the settlement.152
Many junior COFINA bondholders contended the settlement was unfair. Some alleged that key
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
the detriment of junior COFINA bondholders.153 Small investors also complained about $332
million in consummation costs awarded to major investors involved in negotiations.154 Several
small 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, 2021.155 In a separate case, that court
upheld on March 2, 2021, the dismissal of claims of Puerto Rico credit unions—called
cooperativas—who contended they were pressured to buy COFINA junior bonds.156

145 FOMB, “Oversight Board Reaches Deal with COFINA Bondholders: Proposed COFINA Bondholders Agreement
to Save Puerto Rico over $17 Billion,” August 8, 2018, https://drive.google.com/file/d/
1xGS5aCydodTTGhhCtk3OhHLFD6I_Qnny/view.
146 Act 241 of 2018, November 15, 2018, http://www.lexjuris.com/lexlex/Leyes2018/lexl2018241a.htm.
147 FOMB, Unanimous Written Consent Certifying COFINA’s Fiscal Plan, October 19, 2018, https://drive.google.com/
file/d/1KL0LsMGXtOaNPJ8YPKMpJCCs37uKZT9C/view.
148 FOMB, Disclosure Statement for the Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax Financing
Corporation, Case No. 17-BK-3284 (LTS), October 18, 2018, https://cases.primeclerk.com/puertorico/Home-
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.
149 In re CPR and In re COFINA, Order Approving Disclosure Statement, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTAwMTE5&id2=0.
150 FOMB, Disclosure Statement for the Amended Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax
Financing Corporation, Case No. 17-BK-3284 (LTS), 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
Amended Title III Plan of Adjustment, November 26, 2018, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OTAwMDAw&id2=0.
151 A memorandum, which congressional clients may request, describes the structure of the new COFINA bond issue.
152 Robert Slavin, “COFINA Deal Takes Step Forward with Proposed Settlement,” Bond Buyer, November 6, 2018.
153 Eva Lloréns Vélez, “‘Bonistas’ Tout COFINA Deal Impact on Local Capital,” Caribbean Business, October 22,
2018, https://caribbeanbusiness.com/bonistas-tout-cofina-deal-impact-on-local-capital/.
154 A list of the Consummation Cost Parties is presented as Term Sheet Exhibit B (p. 367) of the second amended
disclosure statement of November 26, 2018. The Consummation Cost provision is at pp. 362-364.
155 For a summary of a hearing on four related appeals contesting the COFINA settlement, see Robert Slavin,
“COFINA $17.6B Deal Attacked in Appeals Court,” Bond Buyer, August 3, 2020. One of the judges who heard
arguments in August 2020, Juan R. Torruella, died in October 2020. In re Fin. Oversight & Mgmt. Bd. for Puerto Rico,
987 F.3d 173 (1st Cir. 2021), http://media.ca1.uscourts.gov/pdf.opinions/19-1181P-01A.pdf.
156 Cooperativa de Ahorro y Credito v. Fin. Oversight & Mgmt. Bd. (In re Fin. Oversight & Mgmt. Bd.), 989 F.3d 123
(1st Cir. 2021), http://media.ca1.uscourts.gov/pdf.opinions/19-1391P-01A.pdf.
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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
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,
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
a particularly devastating setback, costing the local government billions of dollars in
reduced debt and recouped revenue over the coming decades.157
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
recovery for holders of either Commonwealth claims or COFINA’s Existing Securities.158
Court Approves Restructuring and Bond Exchange in February 2019
On February 4, 2019, as noted above, Judge Swain approved the COFINA settlement and
confirmed its restructuring plan,159 marking one of the largest municipal bond restructurings in
U.S. history and thus resolving the GO-COFINA dispute.160 On February 12, 2019, old COFINA
debt with a par value of $17.6 billion was exchanged for $12 billion in new COFINA bonds,
which were divided into several current-interest-bearing bonds (CIBs; i.e., normal bonds) and
capital appreciation bonds (CABs), for which balloon payments would be due in future decades,
the last ones ending in 2058.161
Concerns over COFINA Settlement and Ethical Conflicts
Some investment firms reported significant gains from holdings of Puerto Rican public debt and
in particular, COFINA bonds.162 A group of hedge funds, which acquired COFINA bonds at

157 Arthur J. González, “Lawful Restructuring Compromises Are Key to Puerto Rico’s Future,” Morning Consult,
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.
158 Jaresko Declaration, In re: COFINA, §§9, 67, January 12, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OTAxNzgz&id2=0.
159 Memorandum Opinion and Order Approving Settlement between Commonwealth of Puerto Rico and Puerto Rico
Sales Tax Financing Corporation, U.S. District Court for the District of Puerto Rico, Case 17-03283, February 4, 2019,
https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAzMDUx&id2=0.
160 The confirmation involved one filing on the Commonwealth of Puerto Rico (CPR) docket (17-03283) and two
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 Tax Financing Corporation, U.S. District
Court for the District of Puerto Rico, Case 17-03283, February 4, 2019, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OTAzMDUx&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 3rd Amended Title III
Plan Of Adjustment of Puerto Rico Sales Tax Financing Corporation, U.S. District Court for the District of Puerto
Rico, February 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAzMjM4&id2=0. Also
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=OTAzMjI0&id2=0.
161 Robert Slavin, “COFINA Swaps Out Bonds in Biggest U.S. Muni Restructuring,” Bond Buyer, February 12, 2019.
Seven sets of CABs mature in years ranging from 2024 through 2051. The largest balloon payments are scheduled for
2046 ($1.1 billion) and 2051 ($640 million).
162 Michelle Celarier, “Puerto Rican Bonds Power Hedge Fund Whitebox Advisors’ 2018 Gains: The Bonds Were a
Bright Spot for Whitebox and Other Hedge Funds in an Otherwise Dismal Year,” Institutional Investor, January 29,
2019. Also see Michelle Celarier, “Tilden Park is Having a Big Year: Josh Birnbaum’s Firm is Up Double Digits on the
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distressed prices and then spearheaded creditor negotiations, reportedly made “hundreds of
millions of dollars” in profits.163 Some smaller-scale bondholders complained that the exchange
was mishandled and that their interests were not protected in negotiations, from which they were
excluded.164 For instance, rounding protocols, according to some, disadvantaged investors with
smaller holdings and advantaged those who held major positions.165 Judge Swain dismissed
objections that small holders were excluded from mediation, stating that individual investors were
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
proposals resulting from mediation and other negotiations.166
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
Board, posed conflicts of interest that were not properly disclosed.167 The Board commissioned a
review that asserted that McKinsey’s investments posed no conflict, although they “could create
the appearance of a potential conflict.”168 The following day, McKinsey paid $15 million to settle
claims that it failed to disclose conflicts of interest in 14 other bankruptcy cases.169 In November
2021, the Securities and Exchange Commission (SEC) levied a $19 million fine on MIO Partners,
a subsidiary of McKinsey.170

Back of a Deal for its Puerto Rico Bonds,” Institutional Investor, November 29, 2018,
https://www.institutionalinvestor.com/article/b1c1175xfxk6t1/Tilden-Park-is-Having-a-Big-Year.
163 Andrew Scurria, “Hedge Funds Bask in Puerto Rico Bond Deal: Bondholders Offering Debt Relief in $18 Billion
Renegotiation Gain Substantial Profits,” Wall Street Journal, 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
Bondholders Coalition.
164 Peter Hein, Response to Request by FOMB, In re COFINA, June 4, 2019, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTEzMzcw&id2=0.
165 Michelle Kaske, “Puerto Rico Bondholders Fume for Being Shortchanged in Swap,” Bloomberg, February 22, 2019,
https://www.bloomberg.com/news/articles/2019-02-22/puerto-rico-investors-fume-as-debt-swap-leaves-some-
shortchanged.
166 In re: CPR, Omnibus hearing, March 4, 2020, pp. 213-214, https://cases.primeclerk.com/puertorico/Home-
DownloadPDF?id1=OTYwMTE1&id2=0.
167 Michelle Celarier, “The Story McKinsey Didn’t Want Written,” Institutional Investor, July 8, 2019,
https://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, “McKinsey Advises Puerto
Rico on Debt. It May Profit on the Outcome,” New York Times, September 26, 2018.
168 In re: CPR, Informative Motion Regarding Publication and Filing of Final Investigative Report: McKinsey & Co.,
February 18, 2019, https://drive.google.com/file/d/1avv872k0XNonEiN9x0UzNUCUYDtYkqOd/view?usp=drivesdk.
169 In re: Westmoreland et al., Mediated Settlement Term Sheet between the U.S. Trustee Program and the McKinsey
Entities, U.S. Bankruptcy Court, Southern District of Texas, Houston Division, February 19, 2019,
https://www.justice.gov/opa/press-release/file/1133251/download. Also see Peter Wells, “McKinsey Agrees to $15M
Settlement over Bankruptcy Disclosures,” Financial Times, February 19, 2019.
170 The SEC found that “in January and February of 2017, MIO was directly invested in the municipal bonds of Puerto
Rico at the same time McKinsey was providing restructuring advice to the Puerto Rico Financial Oversight &
Management Board (“FOMB”), the entity charged with spearheading Puerto Rico’s financial turnaround. During this
time frame, the Investments Committee, which included active McKinsey partners with access to McKinsey Client
MNPI, was empowered under the Investments Committee Charter to oversee MIO’s direct investments, including
MIO’s sale of nearly $1 million worth of Puerto Rican bonds. Further, in addition to MIO’s direct investments in
Puerto Rico, through at least June 2017, MIO was also invested in Puerto Rico’s debt via its SMAs [separately
managed accounts] and other third-party managed funds.” In re MIO Partners, SEC Admin. Proc. 3-20656, at p. 3,
November 19, 2021, https://www.sec.gov/litigation/admin/2021/ia-5912.pdf.
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Board Pivots to GO Restructuring in 2019
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
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.
On January 14, 2019, the Oversight Board, in conjunction with its special claims committee and
the UCC, challenged the validity of $6 billion (at par value) of GO bonds issued after 2011—
referred to as “late vintage GO”—such as the $3.5 billion 2014 issue placed with hedge funds,
allegedly issued in violation of a constitutional debt limitation.171 In May 2019, the Oversight
Board and the UCC filed over 250 avoidance action suits172 and sued bankers involved in the
2014 GO bond issue.173 Avoidance actions allow a trustee to challenge transactions involving
debtors before the filing of a bankruptcy petition.174
The Board did not explain why it chose to challenge GO bonds backed by a constitutional
guarantee, but did not challenge 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
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
dedicated revenue pledges with perfected liens.”175 A coalition of bond insurers and bondholders
filed a motion defending the validity of the GO bonds on March 21, 2019.176
2020: Oversight Board, Hedge Funds Negotiate Over GO Bonds
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
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
labor groups.177

171 Urgent Motion of the FOMB, Case 17-BK-3283 (LTS), January 14, 2019, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTAyMjAz&id2=0. The 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
15% of revenues. The motion also contended that the guaranteed debt of the Public Building Authority (PBA) and the
PBA leases to CPR agencies constituted a scheme to avoid the 15% limit. Those claims were pulled back after
negotiations with creditors.
172 Abner Dennis, “Puerto Rico’s Debt Battles: The Oversight Board Goes on a Suing Spree,” Little Sis webpage, June
5, 2019, https://news.littlesis.org/2019/06/05/puerto-ricos-debt-battles-the-oversight-board-goes-on-a-suing-spree/. The
Board acted through a Special Claims Committee. See “Commonwealth of Puerto Rico Avoidance Actions,”
https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index.
173 In Re: CPR, Complaint, May 5, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
OTExMTY2&id2=0.
174 John D. Ayer, Michael Bernstein, and Jonathan Friedland, “Overview of Avoidance Actions,” American Bankruptcy
Institute Journal, March 2004.
175 Axios Advisors Managing Partner Triet Nguyen quoted in Robert Slavin, “COFINA Money Likely to Flow Soon,”
Bond Buyer, February 5, 2019.
176 Robert Slavin, “Puerto Rico Investors Move to Defend Legality of Bonds,” Bond Buyer, March 21, 2019; PBA
Funds’, Assured’s, And QTCB Noteholder Group’s Rule 12(C) Motion for Judgment on the Pleadings, Case 18-00149-
LTS, March 21, 2019, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTA3NDEx&id2=0.
177 LCDC comprises Aristeia Capital, Farmstead Capital, FCO Advisors, GoldenTree, Marble Ridge Capital, Monarch
Alternative Capital, Taconic Capital, and Whitebox Advisors. See Oversight Board, Amended Disclosure Statement,
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The Oversight Board released an amended PSA on February 9, 2020, claiming to have the
backing of holders of $10 billion in GO and Public Building Authority bonds,178 followed by a
draft disclosure statement on February 28, 2020.179 The Oversight Board claimed that holders of
58% of outstanding GO and PBA debt had signed onto the PSA.180 The new PSA offered slightly
better terms for holders of GO and guaranteed debt, but worse terms for junior bonds.181 Future
debt service would fall from levels that fluctuate around $3 billion to $1.5 billion per year.
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,
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
(COVID-19) pandemic.182 The Board has filed regular status reports on its activities relevant to
that case and on effects of the pandemic.183 The Board, in its December 2020 report, stated that
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 allegations of insider trading by coalitions of
hedge funds involved in GO restructuring mediation and negotiations. On the same date, the UCC
called 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
and credit pledge and PBA bonds that carried a CPR guarantee, distinctions that potentially
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)
standards.184
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—
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.185 That analysis also pointed to

February 9, 2019, p. 11, https://drive.google.com/file/d/1_JApEw_dGRQCpgAVo0SaffZrVuap6WqQ/view. Golden
Tree, Taconic, and Whitebox were major members of the Senior COFINA Bondholders Coalition.
178 Oversight Board, Plan Support Agreement, February 9, 2019, p. 8.
179 Oversight Board, Disclosure Statement for the Amended Title III Joint Plan of Adjustment of the CPR, et al.,
February 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTQ0OTAy&id2=0.
180 In re: CPR, Omnibus hearing, March 4, 2020, p. 18, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?
id1=OTYwMTE1&id2=0.
181 Brad W. Setser, “What Exactly is in the New Agreement Between Puerto Rico’s Board and its Creditors?” Council
on Foreign Relations Blog Post, February 11, 2020, https://www.cfr.org/blog/what-exactly-new-agreement-between-
puerto-ricos-board-and-its-creditors.
182 In re: CPR, Order, March 27, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
OTQ5Nzg0&id2=0.
183 Oversight Board, Status Report, May 1, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
OTU3MjM0&id2=0. Also see Oversight Board, Status Report, December 4, 2020, https://cases.primeclerk.com/
puertorico/Home-DownloadPDF?id1=OTk2MDI5&id2=0.
184 Order Further Amending Case Management Procedures, U.S. District Court for the District of Puerto Rico, Case
17 BK 3283-LTS, June 8, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTU5OTU2&id2=
0.
185 Abner Dennis, “21 Vulture Funds Stalking Puerto Rico’s Central Government: Legal Challenges, Investments,
Insider Trading,” 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/.
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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
during restricted periods or traded on nonpublic information.186
Calls for Investigations of Alleged Insider Trading
In June 2020, Oversight Board Executive Director Natalie Jaresko testified that she was aware of
insider trading allegations, but considered those a matter for law enforcement.187 On August 5,
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
securities dealings.188 Resident Commissioner Jenniffer González asked the U.S. Securities and
Exchange Commission to consider whether securities laws were violated.
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 allegations.189
On the same day, a bond insurer, National Public Finance, asked the Title III Court to investigate
insider trading and related allegations.190 Both requests were declined. The Oversight Board
demurred on an investigation, but pledged to contact the U.S. Department of Justice, explaining
that
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
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 potentially
expansive and expensive investigation.191
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
the Bankruptcy Code that is incorporated into Title III explicitly authorizes this Court to initiate
an independent investigation along the lines of the investigation sought by National in its
Motion.”192 Moreover, Judge Swain found that “National ha[d] not proffered evidence sufficient
to support a reasonable inference that any participant in the Mediation has traded on inside

186 Robert Slavin, “Puerto Rico Board, Investment Funds Reject Court Investigation of Insider Trading,” Bond Buyer,
October 15, 2020. Also see Reply of LCDC, In re: CPR, October 15, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTg1NzM2&id2=0. Trading 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.
Nejat Seyhun, “Defining ‘Material, Nonpublic’: What Should Constitute Illegal Insider Information?” Fordham
Journal of Corporate & Financial Law, vol. XXI, 2016, pp. 327-378.
187 Testimony of Oversight Board Executive Director Natalie Jaresko, in U.S. Congress, House Committee on Natural
Resources, PROMESA Implementation During the Coronavirus Pandemic, 116th Cong., 2nd sess., June 11, 2020, Serial
116–35, p. 97.
188 N.Y. Gen. Bus. Law §§352, 352-c.
189 Letter of Chair Grijalva to Oversight Board Executive Director Natalie Jaresko, October 21, 2020,
https://naturalresources.house.gov/download/grijalva-house-letter-to-fomb-on-insider-trading-investigation-october-21-
2020.
190 National Public Finance Guarantee, Motion, In re: CPR, October 5, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTg1NzM2&id2=0.
191 Oversight Board, letter to Chairman Raul Grijalva, October 27, 2020, https://drive.google.com/file/d/10mffHf-R-
VOUfATYZtRSWOO1GqZWDMQC/view.
192 In re: CPR, Order, October 28, 2020, https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=
OTg2Mjgz&id2=0.
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information to the detriment of counterparties or the bond market, much less to the detriment of
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
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
series of earthquakes hit the southwest of Puerto Rico in early 2020, further disrupting operations.
Second, allegations that hedge funds involved in negotiations had traded bonds using nonpublic
information prompted Judge Swain to order more detailed disclosures, which in turn has
prompted further litigation. Third, former Resident Commissioner Pedro Pierluisi Urrutia was
inaugurated as governor in January 2021. Changes in the governor’s office have typically led to
major staffing changes in island agencies and public corporations.193 Fourth, some of the original
Oversight Board members have stepped down and the process of appointing new members or
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
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.194 The Biden Administration has
released some of those recovery funds.195
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
appointed member, Justin Peterson, left the online meeting, blocking a vote to modify the plan.196
Oversight Board Announces Revised GO PSA in February 2021
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
amended plan of adjustment that the Oversight Board intends to propose for confirmation” by
February 10, 2021, which would cover GO debt, as well as debts of the Public Building
Authority.197 On that date, the Oversight Board announced that it had reached an agreement in
principle with several major bondholders. Two weeks later it released the proposed amended plan

193 José Alvarado Vega, “Pierluisi, Delgado Win Puerto Rico Primaries,” Caribbean Business, August 17, 2020,
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.
194 See CRS Report R46609, The Status of Puerto Rico’s Recovery and Ongoing Challenges Following Hurricanes
Irma and María: FEMA, SBA, and HUD Assistance, coordinated by Elizabeth M. Webster.
195 José A. Delgado Robles, “White House Approves $3.7 Billion to Repair PRASA: With the Newly Approved Funds,
the Federal Government has Promised More than $67.7 Billion for the Island’s Recovery and Reconstruction,
However, Only a Third of the Money has Arrived,” El Nuevo Día, January 6, 2021, https://www.elnuevodia.com/
english/news/story/white-house-approves-37-billion-to-repair-prasa/.
196 Robert Slavin, “Puerto Rico Board Member Exercises Exit Veto,” Bond Buyer, October 30, 2020. Peterson is
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 Trump Picks Justin
Peterson as New Oversight Board Member: The President Announces his Intention to Appoint a Partner of a
Controversial Firm Representing Bondholders,” El Nuevo Día, October 8, 2020, https://www.elnuevodia.com/english/
news/story/donald-trump-picks-justin-peterson-as-new-oversight-board-member/.
197 In re: CPR, Order on Joint Motion of PSA Creditors, October 29, 2020, https://cases.primeclerk.com/puertorico/
Home-DownloadPDF?id1=OTg2NDIy&id2=0.
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support agreement (PSA), which it filed with the Title III court on March 8, 2021.198 Table 1
compares terms of the February 2021 PSA with those of a plan discussed by the Oversight Board
in October 2020.
Although the total recovery value of the GO settlement proposed in February 2021 would have
been higher than the plan outlined by the Board in October 2020,199 it would have been well
below that of the plan of adjustment filed in February 2020 ($15.2 billion) or the creditors’
counterproposal of August 2020 ($15.3 billion), in part reflecting effects of the COVID-19
pandemic.200
Table 1. Comparison of February 2021 PSA and October 2020 Board Proposal
Dollar amounts in millions
February 2021
October 2020
Item
PSA
PSA
Difference
Cash GO
$7,024a
$5,984
$1,040
Cash PBA
$1,073
b
—
Annual fixed payment GO & COFINA Sr
$1,150
$1,050
$100
Time period
25 years
20 years
5 years
GO bond issue
$6,683
$4,980
$1,703
Capital Appreciation Bond issue
$730; rises to
$1066
$0
$730
Annual Maximum on CVI
from $200 to $400
$50
from $150 to $350
Cumulative Maximum on CVI
$3,500
$1,000
$2,500
Time period for CVI
22 years
20 years
2 years
Source: CRS analysis of CPR PSAs, Espacios Abiertos, Oversight Board, Plan of Adjustment Discussion, pp. 51-57,
October 30, 2020, https://drive.google.com/file/d/1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view.
Notes: CAB capital appreciation bonds are no-coupon bonds with balloon payments near maturity. Contingent
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.
b. PBA terms not included in October Board proposal.
If the terms of that PSA were implemented, existing bonds covered by the agreement would have
been exchanged for cash, new GO bonds, capital appreciation bonds (with interest only payable
in future years), and contingent valuation instruments (CVIs) that would have paid creditors extra

198 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. Also see
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
Broad Spectrum of Creditors,” press release, February 10, 2021, https://drive.google.com/file/d/
149MrGro7s_q6W5tc8QoxLpwRo8NArnYR/view. Also see Oversight Board, Amended Plan Support Agreement,
February 23, 2021, https://drive.google.com/file/d/15zWXi83c0EOI8Pzw2uS_lYGgxRbugBsV/view.
199 Espacios Abiertos, “Nueva Propuesta del Pago de la Deuda Deja a Puerto Rico sin Dinero en Efectivo en Ocho
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-
ocho-anos/.
200 See Oversight Board, Plan of Adjustment Discussion, p. 53, October 30, 2020, https://drive.google.com/file/d/
1UDwg3-wMpsRhUdDbkpGS-wuZsoWte38d/view.
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amounts if the island’s economic growth exceeded Oversight Board projections. The mix of new
assets received would have differed 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.201
Certain creditor groups were to receive “consummation cost” payments in cash.202 Those
recovery rates were well above what market prices indicated were expected recovery rates for
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
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.”203 The
plan also included reductions of 2%-3% in some pension payments above certain thresholds,
which the Board contended would protect most pensioners from those reductions.204 Pension
reductions, creditor concerns, and macroeconomic uncertainties, among other considerations,
have spurred opposition to the Board’s plan.205
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
retirees.206
Further Negotiations with Bond Insurers and Other Creditors
On April 12, 2021, the Oversight Board announced an agreement in principle with two bond
insurers, Assured Guaranty and National Public Finance Guarantee, regarding convention center
and Highway and Transportation Authority bonds.207 A plan support agreement announced on
May 5, 2021, involved treatment of the CPR clawback of revenues from certain public
corporations.208 In mid-July 2021, the Board reached agreement with the Unsecured Creditors
Coalition (UCC), which (as noted above) played a major role in debt negotiations.209 Later that

201 Robert Slavin, “Puerto Rico Reaches Deal with Debt Holders with 14% Less Repayment,” Bond Buyer, February
23, 2021.
202 See Article VI of the February 23, 2021, plan support agreement.
203 David Skeel, “Oversight Board: Right Deal for Puerto Rico Rests on Four Principles,” Bond Buyer, February 8,
2021.
204 Oversight Board, Lowering Puerto Rico’s Debt to Sustainable Levels: Plan Support Agreement with Bondholders,
February 26, 2021, p. 6, https://drive.google.com/file/d/1wTLXvJRu2GI38DRcpOWuVHX2OvTwvAVo/view.
205 Robert Slavin, “Puerto Rico Debt Restructuring Faces Several Obstacles,” Bond Buyer, March 5, 2021.
206 Justine Coleman, “Puerto Rico Debt Restructure Plan Threatens Public Pensions,” The Hill, March 9, 2021,
https://thehill.com/homenews/state-watch/542318-puerto-rico-debt-restructure-plan-threatens-public-pensions.
207 Oversight Board, “Agreement in Principle Summary: HTA, CCDA, and Clawback Claims,” April 12, 2021,
https://drive.google.com/file/d/1ZOE9M4oqBlFNyhgrbFpN71NW8b6-f4Pa/view. Also see Robert Slavin, “Bond
Insurers Solidify Their Support for Puerto Rico Deals,” Bond Buyer, May 6, 2021, https://www.bondbuyer.com/news/
bond-insurers-solidify-their-support-for-puerto-rico-deals.
208 Oversight Board, “Oversight Board Completes Agreement with Assured Guaranty and National Public Finance
Guarantee Corp.: Settles Asserted Clawback Claims Against the Commonwealth and Establishes Framework for a
HTA Title III Plan of Adjustment,” press release, May 5, 2021, https://drive.google.com/file/d/
1HKvFLiAG5Wv3c3xrkGakvnC0sqI_f8Y-/view. The plan support agreement is available at https://drive.google.com/
file/d/1BqBUrjTk_xjtg1wEhOdnv3ul4WfUorld/view.
209 Lynne Funk, “PR Board Reaches Key Agreements with Insurers, Bondholders,” Bond Buyer, July 14, 2021,
https://www.bondbuyer.com/news/pr-board-reaches-key-agreements-with-insurers-bondholders.
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month, the two remaining bond insurers reached an agreement with the Board on their claims,
which include bonds backed by rum taxes.210
As more creditors signed onto plan support agreements, the Title III court took additional steps to
advance the process of restructuring of CPR and related debts. On May 11, 2021, the Title III
court scheduled hearings in July 2021 to assess the adequacy of the proposed disclosure statement
describing terms of the plan.211 On August 2, 2021, the court approved a disclosure statement and
scheduled hearings on confirmation of the plan.212 An approval vote was also set with an October
4, 2021, deadline for return of ballots. The plan was approved by 47 out of 61 creditor classes,
including 90% of the bondholder classes.213
On October 26, 2021, the Puerto Rican legislature approved legislation to issue new bonds,214
albeit after the island’s senate balked at passing the measure.215 The measure was enacted after
parties agreed to further negotiations over provisions concerning public pensions and funding for
the University of Puerto Rico.216
Judge Swain held eight days of hearings on the confirmation of the plan of adjustment in
November 2021.217 Each day was structured to consider specific issues and hear from
representatives for major creditor groups, the Oversight Board, some members of the public, and
a few individual creditors.218 On January 18, 2022, Judge Swain confirmed the plan, clearing the

210 See PRIFA Related Plan Support Agreement, July 27, 2021, https://emma.msrb.org/P21480536-P21147944-
P21561617.pdf. The agreement would provide cash equivalent to 10% of the value of bonds issued by the Puerto Rico
Infrastructure Financing Authority (PRIFA) that are held by Ambac and National Guarantee, along with some
contingent value securities. For more information on the cover over of rum taxes, see CRS Report R41028, The Rum
Excise Tax Cover-Over: Legislative History and Current Issues, by Steven Maguire.
211 Laura Taylor 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=
MTAxMjI3OA==&id2=0.
212 Laura Taylor Swain, U.S. District Judge, “Order Approving Disclosure Statement,” August 2, 2021,
https://cases.primeclerk.com//puertorico/Home-DownloadPDF?id1=MTAyOTMyOQ==&id2=0.
213 Robert Slavin, “Most Puerto Rico Classes OK Plan of Adjustment, But Issues Remain,” Bond Buyer, November 5,
2021, https://www.bondbuyer.com/news/most-puerto-rico-classes-ok-plan-of-adjustment-but-issues-remain.
214 Act 53-2021 (PC 1003), enacted October 26, 2021, https://sutra.oslpr.org/osl/esutra/Prontuario.aspx?rid=139840.
Also see Keila López Alicea and Javier Colón Dávila, “La Cámara y el Senado Aprueban el Proyecto 1003 que
Habilita el Plan de Ajuste de la Deuda,” (House and Senate Approve PC 1003 to Enable Plan of Adjustment), El Nuevo
Día, October 26, 2021, https://www.elnuevodia.com/noticias/legislatura/notas/la-camara-y-el-senado-aprueban-el-
proyecto-1003-que-habilita-el-plan-de-ajuste-de-la-deuda/.
215 Maria Chutchian, “Puerto Rico Debt Restructuring at Risk Amid Uncertainty Over Key Bill,” Reuters, October 25,
2021, https://www.reuters.com/legal/transactional/puerto-rico-debt-restructuring-risk-amid-uncertainty-over-key-bill-
2021-10-25/.
216 Proceedings before Laura Taylor Swain, U.S. District Judge, October 25, 2021, https://cases.ra.kroll.com/puertorico/
Home-DownloadPDF?id1=MTA2MDUwNA==&id2=-1. Also see Yaritza Rivera Clemente, “El Senador Gregorio
Matías: Voto Decisivo en la Aprobación del Proyecto de la Cámara 1003,” (Senator Gregorio Matías: Decisive Vote in
the Approval of PC 1003), El Vocero, October 27, 2021, https://www.elvocero.com/gobierno/el-senador-gregorio-mat-
as-voto-decisivo-en-la-aprobaci-n-del-proyecto-de-la/article_dc80d4a4-372c-11ec-bdb7-c7910dae3e48.html.
217 Laura Taylor Swain, U.S. District Judge, “Order Amending Confirmation Hearing Procedures,” October 28, 2021,
https://www.prd.uscourts.gov/promesa/sites/promesa/files/documents/9/18877.pdf. Robert Slavin, “Puerto Rico
Bankruptcy Judge Gives DOJ Until February to File Comments,” Bond Buyer, November 23, 2021,
https://www.bondbuyer.com/news/puerto-rico-bankruptcy-judge-gives-doj-until-february-to-file-comments. Maria
Chutchian, “Puerto Rico Bankruptcy Nears End as Debt Plan Goes Up for Approval,” Reuters, November 9, 2021,
https://www.reuters.com/legal/transactional/puerto-rico-bankruptcy-nears-end-debt-plan-goes-up-approval-2021-11-
08/.
218 Transcripts of each day of the CPR confirmation hearings can be found at https://cases.ra.kroll.com/puertorico/
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way for an exchange of new bonds for old. The confirmed plan preempted dozens of Puerto
Rican laws and Article VI of the Puerto Rico Constitution, dismissed litigation related to
clawback claims and pension bonds, and restructured public pension systems. Older public
employees were transferred from a defined benefit system to a defined contribution system, while
younger workers were slated to join the U.S. Social Security system. Puerto Rico policymakers
had opposed reducing pension benefits, while the Oversight Board noted that existing pension
funds lacked assets to pay those benefits. The plan preserves pension benefit levels to retirees
receiving $1,500 per month or less.
A Puerto Rican teachers’ association appealed the confirmation of the CPR plan. The 1st Circuit
Court of Appeals declined to stay consummation of the plan,219 but heard arguments on the case
on March 9, 2022.220 The doctrine of equitable mootness complicates efforts to reverse provisions
of a consummated debt restructuring.221
Apparently Conflicting Claims on Recovery Rates
The Board claimed that creditors would recover on average 69% of their claims, although for
some creditor classes the reductions in bond values were as low as 10%.222 In February 2022,
Governor Pedro Pierluisi Urrutia testified that the plan will reduce the central government’s debt
from $34 billion to $7.4 billion, a 78% reduction. A third-party estimate,223 however, put recovery
rates for older GO bonds at 95% and at 83% for 2014 GO bonds sold to hedge funds.224 Bond
prices, as shown in the next section, largely align with that estimate.
The divergence between claims of drastic reductions in debt levels and more modest reductions
implied by the high recovery rates noted above appears to result from other features of the debt
restructuring. Many creditor classes received cash payouts, long-term bonds with balloon-
payment features (capital appreciation bonds; CABs), consummation cash payments used to help
reach various agreements, and contingent valuation instruments (CVIs) tied to the island’s
economic growth, which raise recovery rates. Moreover, new bonds carry interest rates higher
than most other municipal bonds. Investors may note that after the termination of the Oversight
Board, Puerto Rico would again lack a clear path to access federal bankruptcy processes.
Market Perspectives on Debt Restructuring
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 sections. Figure 4 shows
bond prices as a percentage of par from 2013 through February 2022 for selected issues of GO

Home-DocketInfo. Docket numbers for the transcripts are: 19146, 19149, 19165, 19198, 19280, 19304, 19363, 19364.
219 Rick Archer, “Puerto Rican Teachers Say Pension Changes Go Too Far,” Law360, March 22, 2022,
https://www.law360.com/articles/1475990.
220 FOMB v Federacion de Maestros de Puerto Rico, 1st Circ., case 22-1080, https://www.ca1.uscourts.gov/oralargs/
22-1080_20220309.
221 Jones-Day, “Should Equitable Mootness Bar Appeals Only of Chapter 11 Plan Confirmation Orders?” newsletter,
May 2021, https://www.jonesday.com/en/insights/2021/05/should-equitable-mootness-bar-appeals-only-of-chapter-11-
plan-confirmation-orders.
222 PRIFA Related Plan Support Agreement, July 27, 2021, https://emma.msrb.org/P21480536-P21147944-
P21561617.pdf. The agreement would provide cash equivalent to 10% of the value of bonds issued by the Puerto Rico
Infrastructure Financing Authority (PRIFA) that are held by Ambac and National Guarantee, along with some
contingent value securities.
223 Private correspondence with Cate Long. Details available to congressional clients upon request.
224 See section above “Last GO Bonds Sold Directly to Hedge Funds in March 2014.”
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bonds; COFINA bonds; and bonds of the three largest Puerto Rican public corporations: PREPA,
PRASA, and HTA.
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Figure 4. Price Trends for Selected Puerto Rico Bonds: January 2013-February 2022

Source: CRS calculations based on the Municipal Securities Rulemaking Board EMMA site: https://emma.msrb.org/.
Notes: All 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
Subordinated (74529JHN8), and COFINA Senior (74529JNX9). The first vertical grey line indicates the release of the August 2013 Barron’s article; the second is the
introduction of a local bankruptcy measure. COFINA bonds were exchanged for new bonds on February 12, 2019. Values interpolated between trade dates.
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Bond prices, according to finance theory, reveal market expectations of the probability of default
and recovery rates—that is, the value of what bondholders would receive after default and
restructuring.225 Once the prospect of default became a certainty, bond prices then reflected
market expectations of recovery rates. Appendix B presents data on bond prices and trading
volumes for a narrower time period. Appendix C lists key dates with links to key documents.
Bond prices have changed dramatically over the course of the debt restructuring process.226 Many
Puerto Rican bonds traded above par before mid-2013. All of these bond prices fell sharply in
2013, reacting to the Detroit bankruptcy filing and a business press article on Puerto Rico’s fiscal
distress.227 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 all 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
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 especially subordinate COFINA bonds.
The devastation left by Hurricanes Irma and María in September 2017 severely depressed almost
all Puerto Rico bond prices.228 GO bonds then traded at a quarter of par or less, while COFINA
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
appropriated disaster relief funds for Puerto Rico and other affected areas. Prices also responded
to Oversight Board proposals in April 2018 that combined calls for fiscal austerity with relatively
optimistic macroeconomic forecasts.
In January 2018, the Oversight Board called 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
issues until Hurricane María, reflecting the New York law provision. Some of the allegations of
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
narrowed after the Oversight Board announced an Amended Plan Support Agreement for the
CPR, ERS, and PBA in February 2020.
The relationship between bond prices and estimated recovery rates in the consummated COFINA
plan and the plan support agreements for restructuring GO and related debts has attracted some
attention. Several activists assert that the marked recovery of bond prices after some of those
prices reached extremely low levels in fall 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 could reflect a transfer of bond holdings to investors and funds more willing to
tolerate risk, or less adverse to litigation, or better informed about long-term prospects.

225 A risk-neutral investor would calculate a bond’s value as (1-α)*(present value of principal and interest payments) +
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.
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 Title III court.
226 More specific allegations of insider trading are discussed in a previous section.
227 Andrew Bary, “Troubling Winds: Puerto Rico’s Huge Debt Could Overwhelm Attempts to Revive its Economy,”
Barron’s, August 26, 2013.
228 PRASA, the water and sewer authority, was the exception, reflecting its comparatively stronger finances.
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Bond prices after confirmation of the CPR plan of adjustment in January 2022, as noted above,
suggest a market assessment that the plan delivered high recovery rates for many GO bonds. All
GO bonds shown in Figure 4 had prices near 90% of par in February 2022. The Highway and
Transportation Authority (HTA) shown in Figure 4 traded above par since spring 2021.
Negotiations over the restructuring of PREPA debt remain in progress. Market pricing data
suggest that investors anticipate a high recovery rate for PREPA bonds as well.
The shift in holdings from smaller bondholders to hedge funds acting within coalitions may also
play a role. Hedge funds, some contend, can serve to mitigate collection action challenges to
enforcing creditor interests facing dispersed investors.229 The leverage hedge funds can bring to
bear in complex negotiations may also result in dissimilar treatment for different classes of
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
debt service burden. Capacity to service public debt depends on growth in the tax base—largely
proxied by growth of the island’s economy—as well as the efficiency of tax administration and
the willingness to keep tax rates in proportion to expenditures. In other terms, debt service
capacity rests on a government’s ability to run primary surpluses; that is, having receipts running
sufficiently above non-debt-service outlays to meet debt service obligations. For each component
of debt service capacity—economic growth, tax administration, willingness to tax, and fiscal
constraint—reasons for both optimism and concern may exist.
Puerto Rico’s Economy Expected to Shrink
In recent decades economic growth in Puerto Rico has been uneven, if not stagnant.230 Recovery
from the 2017 Hurricanes Irma and María has been slow. Earthquakes in late 2019 and early
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 2020.231
The Board projects negligible economic growth over the next five years, as shown in Figure 5.232
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
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, will be
well below growth rates expected for the U.S. economy for the years 2021-2024, although it
would nearly match the projected U.S. growth rate in 2025.

229 Marcel Kahan and Edward Rock, “Hedge Fund Activism in the Enforcement of Bondholder Rights,” Northwestern
University Law Review, vol. 103, no. 1 (winter 2009), pp. 281-322. Those enhanced capacities to enforce bond
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.
230 See CRS Report R44095, Puerto Rico’s Current Fiscal Challenges, by D. Andrew Austin.
231 Oversight Board, Certified Fiscal Plan for Puerto Rico, April 23, 2021, ch. 4, https://drive.google.com/file/d/
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
shifting.
232 Testimony of Oversight Board Executive Director Natalie Jaresko, in U.S. Congress, House Natural Resources
Committee, 116th Cong., 2nd sess., hearing, PROMESA Implementation During the Coronavirus Pandemic, June 11,
2020, p. 10, https://www.govinfo.gov/content/pkg/CHRG-116hhrg40637/pdf/CHRG-116hhrg40637.pdf.
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