Puerto Rico to Respect Bondholders' Protections in Restructuring

Puerto Rico said it will take into account the constitutional priority given to general-obligation bonds when it restructures $72 billion of debt, a step that could leave owners of the securities facing smaller losses than other investors.

The statement was included in a document released late Thursday by the Government Development Bank that outlined for the first time how it plans to approach the restructuring of its various securities. While officials of the commonwealth had previously said they would seek to persuade investors to voluntarily exchange bonds, they hadn’t said how investors’ legal protections would be taken into consideration.

The Development Bank’s document didn’t specify the size of the loss investors may be asked to take, or which securities may be affected. However, it said the “transaction will be structured to take into account the priorities of the debt that creditors hold.”

Puerto Rico has $13 billion of general-obligation debt outstanding, which the island’s constitution stipulates must be repaid first. Other securities are backed by specific revenues and lack that protection.

Puerto Rico’s government and its advisers said on Sept. 9 that a proposal to pare the commonwealth’s debt would be released in a few weeks. The government plans to start meeting with investors by mid-October to begin negotiations.

Puerto Rico has already initiated talks with advisers to bondholders of Government Development Bank debt, seeking to potentially exchange those obligations for new securities. About $336 million of GDB debt matures Dec. 1.

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