Puerto Rico Debt Crisis: Making Sense of the Debacle

By Bloomberg NewsBloomberg News

The breezy Caribbean island, best known by mainlanders as a vacation destination, filed for a record-setting bankruptcy on May 3. It’s hoping to reduce $123 billion in debt and pension obligations after years of economic decline and government borrowing to fill budget gaps. Affected will be dozens of hedge funds, bond insurers, mutual funds—and 3.5 million residents. They’ve struggled through a decade of recession and face years of economic uncertainty as the commonwealth tries to dig out from under.

Debt owed by Puerto Rico

Diversity of debt: What’s at stake

Puerto Rico owes bondholders $74 billion and current and retired government employees another $49 billion in pension benefits. The $74 billion is a web of securities sold by various agencies that promised to use everything from sales taxes to tolls to repay creditors. After the filing for bankruptcy protection, bondholders are fighting each other and the government over the revenues. Below are the commonwealth’s biggest slices of debt.

General Obligation

$17.8B
General obligation and commonwealth-guaranteed bonds are Puerto Rico's direct debt, repaid from its general fund.

COFINA

$17.6B
Bonds were issued by the Puerto Rico Sales Tax Financing Corp., known by its Spanish acronym Cofina.

PREPA

$9.0B
Prepa is Puerto Rico's Electric Power Authority. Its bonds are repaid from the agency's electricity-sales revenue.

Pension-related

$52.2B
The island owes current and future retirees $49 billion in pensions and $3.2 billion in retirement health benefits.

Other

$20.8B
Includes debt of the Government Development Bank, the water utility and highway agency, and the University of Puerto Rico.
$13.3B
General obligation bonds
$4.5B
Public Buildings Authority and other commonwealth-guaranteed debt
$7.7B
Senior
$9.9B
Junior
$8.3B
Prepa bonds
$0.7B
Prepa private loans
$49.0B
Pension Liabilities
$3.2B
Other Post-Employment Benefits
$4.6B
Aqueduct and Sewer Authority
$4.1B
Highways & Transportation Authority
$4.1B
Government Development Bank debt
$2.0B
Pensions Bonds
$1.8B
Rum bonds
$1.5B
Tobacco bonds
$1.2B
Public Finance Corp.
$0.5B
University of Puerto Rico
$0.6B
Municipal Finance Agency
$0.4B
Convention Center District Authority

Bondholders: Who owes whom

Hedge funds hold nearly one-third of the commonwealth’s $74 billion debt. They were lured to the debt by the bonds’ relatively high returns. Hedge fund investors include Aurelius Capital Management, Whitebox Funds and Avenue Capital Management. Oppenheimer Funds Inc., Franklin Advisers Inc. and Goldman Sachs Asset Management are the biggest holders among mutual funds.

Largest Bond Holders

General obligation bonds

$13.3B
Mutual Funds:
  • Oppenheimer
  • Franklin Templeton
  • Goldman Sachs
Hedge Funds:
  • Aurelius Capital Management
  • Autonomy Capital Jersey
  • FCO Advisors
  • KKR Prisma Associates
  • Monarch Alternative Capital
  • Pinehurst Partners
  • Senator Investment Group
  • Stone Lion Capital Partners

COFINA

$17.6B
Mutual Funds:
  • Franklin Templeton
  • Goldman Sachs
  • Oppenheimer
  • Lord Abbett
Hedge Funds:
  • Whitebox Advisors
  • Canyon Capital Advisors
  • Cyrus Capital Partners
  • Decagon Holdings
  • Merced Partners
  • Tilden Park Capital Management
  • Pandora Select Partners
  • Taconic Capital Advisors
  • Varde Management

PREPA

$9.0B
Mutual Funds:
  • Franklin Templeton
  • Oppenheimer
  • Goldman Sachs
Hedge Funds:
  • Angelo, Gordon & Co
  • Bluemountain Capital
  • Knighthead Capital Management
  • Marathon Asset Management
  • Solus Alternative Asset Management

Government Development Bank debt

$4.1B
Mutual Funds:
  • Local credit unions
  • Individual on-island holders
Hedge Funds:
  • Avenue Capital Management
  • Brigade Capital Management
  • Fir Tree Partners
  • Solus Alternative Asset Management

Debt-related lawsuits: Who’s suing whom

U.S. District Judge Laura Taylor Swain must untangle a knot of conflicting legal claims creditors have made against each other and various parts of Puerto Rico’s government. The disputes will determine how much each of the warring creditor groups collects. Here are some key legal disputes.

Current lawsuits

Debt-related lawsuits: Who’s suing whom

General Obligation bondholders vs. Cofina bondholders

In confidential mediation sessions, GO bondholders claim Puerto Rico’s constitution requires all sales-tax money be used to pay them instead of Cofina bondholders.

Debt-related lawsuits: Who’s suing whom

Creditors vs. government agencies

Hedge funds and bond insurers are competing for any cash the government collects, from rum taxes to vehicle fees to tolls.

Debt-related lawsuits: Who’s suing whom

Bond insurers vs. government agencies

Ambac Financial Group Inc., Assured Guaranty Municipal Corp. and MBIA's National Public Finance Guarantee Corp. allege that the island's 10-year fiscal plan is illegal.

Debt-related lawsuits: Who’s suing whom

Cofina bondholders vs. their bond trustee

Senior bondholders claim that trustee Bank of New York Mellon must pay them in full before junior holders get anything.

Debt-related lawsuits: Who’s suing whom

Pension bondholders vs. Government Employees Retirement System

Bondholders say the commonwealth is wrongly diverting cash away from the retirement system, which they say violates the bond contract.

Bond insurers: Who’s on the hook

Bond-insurance companies guarantee a portion of Puerto Rico’s debt in the event of a default. In bankruptcy, the law treats them just like creditors. The three biggest are Ambac Financial Group Inc., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp., a unit of MBIA Inc. Below are the amounts of principal and interest through maturity for which the insurers are responsible, as of June 30, 2017.

Amounts covered by major insurer and maturity of coverage, as of March 31, 2017

General Obligation

$17.8B
Ambac Financial GroupAmbac
$276.5 million$277M
2035
Assured Guaranty MunicipalAssured
$2.6 billion$2.6B
2041
National Public Finance GuaranteeNational
$1.2 billion$1.2B
2031
Syncora GuaranteeSyncora
$204.0 million$204M
2036

COFINA

$17.6B
Ambac Financial GroupAmbac
$7.4 billion$7.4B
2054
Assured Guaranty MunicipalAssured
$619.0 million$619M
2047
National Public Finance GuaranteeNational
$4.2 billion$4.2B
2046

PREPA

$9.0B
Assured Guaranty MunicipalAssured
$1.1 billion$1.1B
2036
National Public Finance GuaranteeNational
$1.8 billion$1.8B
2035
Syncora GuaranteeSyncora
$182.0 million$182M
2031

Other

$20.8B
Highways & Transportation Authority
Ambac Financial GroupAmbac
$845.0 million$845M
2042
Assured Guaranty MunicipalAssured
$2.3 billion$2.3B
2047
National Public Finance GuaranteeNational
$1.1 billion$1.1B
2042
Rum bonds
Ambac Financial GroupAmbac
$1.0 billion$1.0B
2044
Municipal Finance Agency
Assured Guaranty MunicipalAssured
$434.0 million$434M
2031
Convention Center District Authority
Ambac Financial GroupAmbac
$198.7 million$199M
2031
University of Puerto Rico
National Public Finance GuaranteeNational
$123.0 million$123M
2033