Thursday's HOT MIC

Thursday's HOT MIC

The bankruptcy proceedings for Puerto Rico are going forward slowly, and as this Bloomberg article points out, because of the unique circumstances, nobody knows what's coming next.

Simply put, the bankrupt island can’t pay everything it owes, so creditors are taking aim at each other as they squabble over who will get what’s left. But the debt’s size and the tangled process invented to rescue Puerto Rico mean there’s no established rule book to shape what comes next.

Holders of general-obligation debt have declared their right to be paid first, owners of sales-tax bonds are squabbling with one another over who deserves priority, and they’re all up against the commonwealth’s leaders, who want the cash for essential services. Amid this melee, Puerto Rico’s federal overseers will have to choose between paying U.S. hedge funds everything they’re owed or keeping schools, water and electricity running.

“There just isn’t enough money,” said Matt Fabian, a partner with Municipal Market Analytics Inc. in Concord, Massachusetts, who foresees a chaotic brew of lawsuits, federal interventions and politics. “Nobody has any idea what’s going to happen.”

All told, Puerto Rico has about $74 billion in debt and $49 billion in pension liabilities. Hedge funds holding $1.4 billion of general-obligation bonds, including Aurelius Capital Management and Monarch Alternative Capital, have already sued to get overdue principal and interest. On the other side, owners of $17 billion in sales-tax bonds, including Tilden Park Capital Management and GoldenTree Asset Management, have entered the fray. They’ll meet for the first time in court on May 17 in San Juan.

This is not going to end well for anyone - the hedge funds, other debt holders, and the people and government of Puerto Rico. People have been fleeing the island for years -- usually the most productive and industrious citizens. Of course, this exacerbates the economic problems of the island and compounds the difficulties for the Puerto Rican government to get out from under its debt obligations and emerge fully able to stand on its own.

You can be sure that before it's all said and done, the Puerto Rican government will make a formal request to Washington for some kind of bailout. Both President Trump and the GOP Congress have indicated they will not go that route, although the feds could offer other help that might alleviate some of the pain.

Suffice it to say that the largest bankruptcy in U.S. is not going to be easy.