Puerto Rico released from bankruptcy, had tens of billions in debt

Puerto Rico received approval on Tuesday to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, freeing up money to spend as the U.S. territory confronts other economic problems.

The court ruling approved a write-down of $30.5 billion in public debt accrued in the economic distress that led it to bankruptcy in 2017. Puerto Rico owed its creditors $74 billion when it was placed under court protection by a federal oversight board. 

Judge Laura Taylor Swain addressed critics by saying the negotiated deal enjoys “broad but not universal support” among affected creditors and will preserve Puerto Rico as a “viable public entity.”

Swain added that her ruling “does not foreclose further investigation, whether through regulatory, law enforcement, or civil litigation channels, into the origins of Puerto Rico’s debt crisis,” leaving the door open for future investigations and audits into how the huge debt was built up.

Big investors like BlackRock and Silver Point Capital backed the plan, which pushed the value of some core government bonds up. The benchmark general obligation bond rose to more than 90 cents on the dollar, compared to 21 cents on the dollar in 2017 after Hurricane Maria.

The restructuring is a victory for the oversight board appointed to fix Puerto Rico’s finances, which has walked a fine line managing the expectations of the territory’s creditors, lawmakers, and residents. The decision frees up cash to put toward the fiscal problems that led Puerto Rico to bankruptcy in the first place, like high joblessness and unsustainable borrowing.

One concession made by the board was to back off demands to cut pensions for the island’s 167,000 retired teachers, judges and bureaucrats, which remain fully intact in the final deal. The retirees, consisting of 5% of the island’s population, were the largest creditor group in the bankruptcy.

In exchange, current government employees were stopped from accumulating any more pension benefits and switched to less generous 401(k)-style programs.

Other municipal borrowers that have shed debt via court-supervised bankruptcies are Detroit, Mi; Jefferson County, AL; Orange County, CA; and the California cities of Stockton, San Bernadino, and Vallejo.