The U.S. Commonwealth of Puerto Rico will pay about $330 million of what it owes on general obligation bonds, while defaulting on bonds of approximately $37 million that are mostly owed to the Puerto Rico Infrastructure Financing Authority (Prifa) and the Public Finance Corp. Puerto Rico general obligation debt is constitutionally-guaranteed and some of the money to pay for that debt had been originally earmarked for bonds that do not have as strong of legal protections.
This has led to Financial Guaranty Insurance Co. and Ambac Financial Group Inc., which together insure over $860 million in Prifa bonds, sending a letter to Puerto Rico government officials. In the note, they called the redirecting of the funds illegal.
This is not the first time Puerto Rico has defaulted on bond payments owed. It missed payments last year and its government has already warned that further payments may be missed this year. The territory owes investors approximately $72 billion.
In December, the Puerto Rico Electric Power Authority (PREPA) arrived at a partial-default deal with bond insurers and creditors, reducing debt payments by almost 50% every year for the next five years. Creditors would take a 15% loss in exchange for stronger legal claims on the debt that is left. However, legislation still must be approved to finalize the arrangement.
Worries that creditors will sue has led to Puerto Rico asking the U.S. Congress to grant it bankruptcy protection so it can file for Chapter 9. One of the purposes of the latest bond payment plan is to delay these possible lawsuits while the territory buys more time to work out a deal with negotiators. And, while Democrats and the White House have asked Congress to pass legislation that would let the island restructure its debt, Republican lawmakers have thwarted those efforts. Now, many are expecting these creditor lawsuits in the coming days.
Over the last few years, our Puerto Rico municipal bond fraud lawyers have been working with investors seeking to recover their losses from investing in these securities, including proprietary bond funds, that were recommended to them by UBS Puerto Rico (UBS), Banco Santander, Banco Popular, and other brokerage firms. For many investors, they were unable to handle the risks involved in investing in these bonds and related bond funds to begin with, yet brokers at these firms continued to market the securities to local investors.
Some investors were even encouraged to borrow so that they could invest even more money-either via traditional borrowing like a home equity account, or a margin account. When Puerto Rico bonds started to fall in value in the latter half of 2013, many investors sustained catastrophic losses. Some older investors lost all of their retirement savings.
At Shepherd Smith Edwards and Kantas, LTD LLP, we are here to help investors with their Puerto Rico bond and bond fund claims. On the island and in the US, contact our securities fraud law firm today.
Puerto Rico to Make Most Crucial of Debt Payments Due Jan. 1, The Wall Street Journal, December 30, 2015