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Articles Tagged with Puerto Rico Debt Crisis

On Friday, February 15, the First Circuit Court of Appeals issued its ruling on Judge Laura Swain’s prior decision that had affirmed the PROMESA Board as constitutional.                           
In a surprise finding, the Court of Appeals overruled Judge Swain, finding that the PROMESA Board members were not appropriately appointed. 

The issue in dispute is whether the members of the PROMESA Board are required to receive the consent of the U.S. Senate.  In particular, under PROMESA, President Obama appointed the seven members of the PROMESA Board by using a list of board members the U.S. Congress recommended.  At the time, since all stakeholders appeared to have been given a vote in the appointment process, there was little objection to the PROMESA Board members.  Then, in May 2017, the PROMESA Board placed Puerto Rico in a bankruptcy-like proceeding under Title III of the Act.  Prior to the enactment of PROMESA, many investors – both retail and institutional – had relied on the fact that Puerto Rico could not file for Title 9 bankruptcy as insurance against ever receiving anything less than the par value of their bonds from Puerto Rico.  PROMESA, with its Title III bankruptcy-like process, changed that insurance policy for many investors.

U.S. District Judge Laura Taylor Swain has approved a plan to restructure nearly $18 billion of Puerto Rico’s Sales Tax Financing Corp. (COFINA) debt. Judge Swain, who is based in New York but oversees Puerto Rico’s bankruptcy-like proceedings, said the Court believes that the COFINA plan is essential to the island’s financial recovery efforts.

The approval from Judge Swain required a two-step process. First, she had to determine whether the settlement agreement between COFINA bondholders and the Commonwealth was fair and reasonable. The agreement effectively provides a 53.65%/46.35% allocation of Puerto Rico’s Sales and Use Tax (“SUT”) revenue between COFINA and the Commonwealth, respectively. Judge Swain determined that the settlement “was a fair and reasonable settlement and compromise of the Commonwealth-COFINA Dispute given the substantial risks of litigation ….”

In total, Puerto Rico owes over $70 billion to bondholders and other creditors, as well as another $50 billion in unfunded pension obligations. The territory has been attempting to restructure this $120 billion of liabilities since it filed for bankruptcy-like protection in May of 2017.

A former UBS (UBS) banking official is claiming that Wall Street banks like his previous employer played a key role in the Puerto Rico economic crisis that has left the U.S. territory more than $70 billion in debt and mired in bankruptcy-like proceedings. The ex-UBS official, Carlos Capacete, was interviewed as part of a joint NPR and FRONTLINE probe.  Capacete worked for UBS Puerto Rico (UBS-PR) for over a quarter of a century and was the head of the biggest UBS branch on the island in Hato Rey.  At one point, Capacete oversaw $3 billion in client assets. Capacete left UBS in 2014 shortly after the crash in Puerto Rico bonds.

Prior to the market crash, Puerto Rico bonds and closed-end bond funds were highly profitable sales products for UBS and other banks on the island. While trying to prevent a government shutdown a number of years back, the U.S. territory started to borrow to pay for yearly government costs. This added $48 billion of debt in 14 years, reports PBS and FRONTLINE.

The Puerto Rico Debt Crisis Only Increased as Banks Made More Money 

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