On Wednesday, Puerto Rico’s Governor declared that the commonwealth would seek protection under Title III, a court-supervised bankruptcy-like restructuring process. The restructuring of Puerto Rico’s $70 billion in outstanding debt would be the largest in the history of the U.S. municipal bond market and will have widespread implications in the equity and bond markets, as well as with bond debt insurers.
The filing comes after several lawsuits were filed on Tuesday after a stay on litigation expired as the commonwealth failed to reach a restructuring agreement with its bondholders. The stay allowed for negotiations between Puerto Rico and its bondholders as mandated by The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, which was enacted into law on June 30, 2016, the day before the island defaulted on nearly $1 billion of principal and interest owed to its creditors — including holders of the island’s general obligation bonds, which carry a constitutional guarantee on payment.
Leading the creditors’ efforts is Ambac, one of the largest insurers of debt issued by Puerto Rico. In addition to opposing Puerto Rico’s entitlement to bankruptcy protection, Ambac seeks a legal declaration that the commonwealth’s fiscal plan is unconstitutional. Analysts from trading firm BTIG, Mark Palmer and Giuliano Bologna, told CNBC that they believe Ambac’s “lawsuits represent the beginning of the municipal bond insurers’ pushback against Puerto Rico’s efforts to force its creditors to accept severe haircuts, and we would not be surprised to see similar litigation filed by Assured Guaranty and MBIA in the coming days.” (MBIA, Inc. provides services including financial guarantee insurance.)