MIAMI, Florida On Tuesday, a federal judge approved Puerto Rico’s exit from bankruptcy under the largest public-sector debt restructuring plan in US history, nearly five years after the financially beleaguered territory claimed it couldn’t pay its creditors.
Hurricanes Irma and Maria, a series of earthquakes, and the coronavirus epidemic have only exacerbated Puerto Rico’s economic woes since it declared bankruptcy.
The restructuring proposal will cut the government of Puerto Rico’s debt, which totals $33 billion, by nearly 80%, to $7.4 billion. In addition, the agreement will save the government approximately $50 billion in debt payments.
Puerto Rico will also begin repaying creditors, albeit at a reduced rate, something it has not done in years. In 2015, the government announced that it would be unable to repay its debts.
Is it true that Puerto Rico bonds pay interest?
Spain occupied Puerto Rico beginning in 1493, when Christopher Columbus arrived on the island. Puerto Rico was ceded to the United States after the end of the SpanishAmerican War in 1898. The US then refused to pay the colony’s creditors, claiming they were owed a dreadful amount.
Before 1898, the people of Puerto Rico had Spanish citizenship; after 1898, the people of Puerto Rico did not have either independent nor colonial citizenship. President William McKinley signed the Foraker Act in April 1900, allowing only the House of Representatives of Puerto Rico to be elected by popular vote. Puerto Rico was characterized as an unincorporated “territory appurtenant and belonging to the United States, but not a part of the United States under the revenue clauses of the Constitution” in the Insular Cases, a series of Supreme Court decisions from the early 1900s.
Although legally defined as a commonwealth or protectorate, Juan R. Torruella considered Puerto Rico’s relationship with the United States to be colonial because the US Federal Government has ultimate economic and political decision-making authority and Puerto Rican citizens do not have full constitutional rights. Puerto Rico is subject to US legislation due to its political position. One of these laws is the Jones-Shafroth Act, which exempts interest payments from bonds issued by the government of Puerto Rico and its subdivisions from federal, state, and municipal income taxes (the so-called “triple tax exemption”), regardless of the bondholder’s location. Puerto Rican bonds were appealing to municipal bond investors because of this right. Because of this, Puerto Rico was able to issue bonds that were always attractive to municipal investors, regardless of the state of the island’s finances. As a result, Puerto Rico began issuing debt to cover its expenses, a practice that it has continued since 1973. The island also started issuing debt to pay off earlier debt, as well as refinancing older debt with low interest rates with debt with higher interest rates.
Puerto Rico was officially prohibited from declaring bankruptcy under Chapter 9 of Title 11 of the United States Code by Congress in 1984. Congress withdrew the tax credits between 1996 and 2006, resulting in the loss of 80,000 employment on the island and caused its population to drop and economy to contract in all but one year since the Great Recession began. Because Puerto Rico’s constitution stipulates that “all available resources” must first be used to pay the Commonwealth’s general obligation bonds, the Commonwealth began issuing Puerto Rico Sales Tax Revenue Bonds in 2006 to circumvent the constitution’s restrictions by being paid directly into a separate urgent interest fund. The sales tax has been raised to 11%. In 1958, the last property tax assessment was completed. Between February 4 and 11, 2014, three bond credit rating agencies downgraded Puerto Rico’s bonds to non-investment grade (commonly known as “junk status” or speculative-grade) when the island’s outstanding debt reached $71 billion, roughly equal to 68 percent of GDP. Bond acceleration clauses were activated as a result of the downgrading, requiring Puerto Rico to repay some debt instruments in months rather than years. Investors were fearful that Puerto Rico might default on its debt at some point. Puerto Rico’s ability to issue bonds in the future would be harmed if it defaulted. Puerto Rico now claims that it will be unable to maintain current operations unless dramatic actions are taken, which could result in public upheaval. Protests against the austerity measures have already taken place. Puerto Rico’s present debt problem is the result of these events, as well as a succession of governmental financial deficits and a recession.
Is Puerto Rico bond interest taxable?
No, federal law precludes any state from taxing interest on any obligation issued by the Governments of Puerto Rico – 48 U.S.C. 745.
What are some of the drawbacks of bond funds?
- Bond funds, often known as debt funds, are mutual funds that invest in fixed-income assets. Bond funds are divided into five categories: investment-grade, high-yield, municipal, international and global, and multisector.
- Bond funds have several advantages, including the potential to diversify an investor’s portfolio, professional portfolio management, and a consistent stream of income.
- Bond funds have a number of drawbacks, including higher management fees, tax bill unpredictability, and exposure to interest rate swings.
How much debt does Puerto Rico have?
SAN JUAN, PRINCIPALITY OF PUERTO RICO Puerto Rico’s nearly five-year bankruptcy struggle has come to an end as a federal judge signed a deal on Tuesday that reduces the US territory’s public debt load as part of a restructuring and allows the government to begin repaying creditors.
The deal, which is the largest municipal debt restructuring in US history, was authorized after arduous bargaining, contentious hearings, and numerous delays while the island recovers from fatal hurricanes, earthquakes, and a pandemic that exacerbated its economic plight.
“There has never been a public restructuring like this anyplace in America or the world,” David Skeel, chairman of a federal control board formed to monitor Puerto Rico’s finances, said of the plan.
He pointed out that there are no bankruptcy provisions for countries or US states like the one handed to Puerto Rico.
“This was an astoundingly difficult, huge, and important bankruptcy,” Skeel said, noting that the island’s debt was three times that of Detroit.
The government of Puerto Rico claimed in 2015 that it could not afford to pay its $70 billion public debt, which had accrued over decades of mismanagement, corruption, and excessive borrowing. In addition, it owed more than $50 billion in public pension obligations. A year after the United States Congress established the financial monitoring and management board for Puerto Rico, it filed for the largest municipal bankruptcy in US history in 2017.
Is it a good time to go to Puerto Rico right now?
The optimum time to visit Puerto Rico is between mid-April and mid-June, just after the hectic winter season and before the rainy summer season. The weather in the spring is likewise very comfortable, with temperatures scarcely escaping the mid-80s on most days. Winter brings the island’s greatest weather, which is partially why it’s the busiest and most expensive season to visit, but with proper planning, you may get a good deal during those months as well. You may also plan a fun and inexpensive trip during the fall, when hotels can be found for as little as $80 per night. Keep in mind that visiting in the fall exposes you to the affects of Atlantic hurricane season.
When did the bonds of Puerto Rico default?
Puerto Rico first defaulted on its general obligation bonds in July 2016, when it failed to pay creditors about $1 billion, and it hasn’t made any payments since.
“It is a very positive development for Puerto Rico that a cross section of large bondholders has worked with the Oversight Board to develop a consensual restructuring agreement that will expedite the Commonwealth’s exit from bankruptcy, respect the lawful priority of valid public debt, and help restore capital markets access,” said Susheel Kirpalani, an attorney from Quinn Emanuel Urquhart & Sullivan who represents bondholders in the Lawful Constitutional Deficit Resolution.
According to public disclosures, hedge funds GoldenTree Asset Management, Monarch Alternative Capital, Whitebox Advisors, and Taconic Capital possess nearly $1.4 billion in constitutionally backed debt.
According to a person familiar with the settlement agreement, the proposal, which took about three months to negotiate, is expected to be lodged with the court within 30 days, with bondholders anticipating final approval by early 2020.
The Puerto Rican government issued a statement rejecting the agreement, citing the administration’s strong opposition to pension changes, which are included in the updated budgetary plan on which the restructuring agreement is based.
In a statement, Christian Sobrino Vega, the CEO and president of the Puerto Rico Fiscal Agency and Financial Advisory Authority, said, “Not one word of the PSA (Plan Support Agreement) is considered acceptable to AAFAF.” The Spanish acronym for the agency’s name is AAFAF.
“And we can firmly state that no legislation, executive action, or other administrative approval required from the Puerto Rico government will be taken to implement an agreement that directly or indirectly supports a Plan of Adjustment that decreases payments to our retirees,” Sobrino Vega said.
After being appointed in 2017 to monitor the $73 billion reorganization, which is the largest in the history of the US municipal bond market, the island’s oversight board has made some progress in 2019.
U.S. District Judge Laura Taylor Swain, who is supervising the unprecedented bankruptcy-like proceedings, authorized a plan in February to restructure approximately $17 billion in sales tax-backed bonds, dubbed COFINA for its Spanish name. Senior bondholders received 93 percent of their money back, while junior bondholders received 53 percent.
In addition, the court granted a debt restructure for the Government Development Bank worth roughly $4 billion.
A tentative arrangement for around $8 billion in debt issued by the island’s troubled electric power authority has also been reached. The monitoring board also announced a tentative agreement on Wednesday to restructure more than $50 billion in unfunded pension liabilities.
What triggered the financial catastrophe in Puerto Rico?
The debt issue in Puerto Rico has numerous causes. Investors in Puerto Rican municipal bonds, in particular, have benefited from preferential tax treatment for many years. This perk was taken advantage of by bond investors from all 50 states who purchased Puerto Rican bonds. When a government issues bonds, it is essentially lending money to bondholders with interest. Puerto Rico issued too much bond debt, owing in part to the tax benefit, and began relying on borrowed cash from bond issues to balance its budget.
Is Puerto Rico a poor country?
The World Bank classifies Puerto Rico’s economy as a high-income country, while the World Economic Forum ranks it as Latin America’s most competitive economy. Manufacturing, particularly pharmaceuticals, textiles, petrochemicals, and electronics, are the main drivers of Puerto Rico’s economy, followed by the service industry, particularly finance, insurance, real estate, and tourism. Puerto Rico’s geography and political status are both determining factors in its economic prosperity, owing to its small size as an island; its lack of natural resources used to produce raw materials, and thus its reliance on imports; and its relationship with the US federal government, which controls its foreign policies while imposing trade restrictions, particularly in the shipping industry.
On a macroeconomic level, Puerto Rico has been in a state of economic depression for 16 years, beginning in 2006 after a series of negative cash flows and the expiration of the US Internal Revenue Code’s section 936, which applied to Puerto Rico. This section was critical for the island’s economy because it established tax exemptions for U.S. corporations that settled in Puerto Rico and allowed its subsidiaries operating on the island to send earnings to the parent corporation at any time without having to pay federal tax on corporate income. Puerto Rico, on the other hand, has remarkably managed to keep inflation low during the last decade. Academically, the majority of Puerto Rico’s economic woes stem from federal regulations that have expired, been repealed, or no longer apply to the island; its inability to become self-sufficient and self-sustaining throughout history; its highly politicized public policy, which tends to change whenever a political party gains power; and its highly inefficient local government, which has amassed a public debt equal to 66 percent of its gross domestic product.
Puerto Rico has a lower poverty rate than the poorest state in the US, with 45 percent of the population living below the poverty line. When compared to the rest of Latin America, Puerto Rico has the highest GDP per capita. The Commonwealth has a tremendous bond debt that it can’t service, totaling $70 billion in early 2017, or $12,000 per capita, at a time when its unemployment rate (8.0 percent in October 2018) is more than double that of the mainland. During a decade-long recession, the debt had been rising. To avoid a bankruptcy-like procedure under PROMESA, Puerto Rico must establish restructuring agreements with creditors. More specifically, since 2016, Puerto Rico has been in an unusual situation: its economy has been overseen by a federal board that is handling finances and assisting in regaining access to capital markets.
The commonwealth has a modern infrastructure, a significant public sector, and an institutional framework governed by the regulations of US federal agencies, the majority of which are present and operating on the island. The United States, Ireland, and Japan are its key commercial partners, with the majority of its products coming from East Asia, primarily China, Hong Kong, and Taiwan. In 2016, new trading partners were added, with import trade with Puerto Rico beginning in Singapore, Switzerland, and South Korea. Puerto Rico’s global reliance on oil for transportation and electrical generation, as well as its reliance on food imports and raw materials, renders the island fragile and highly reactive to global economic and climate changes.
Are bonds issued by Puerto Rico tax-free in New York?
A municipal bond issued in New York, for example, will be free from New York state income tax. We won’t be able to go over examples involving each state because there are 50 states plus D.C. and territories like Puerto Rico, the US Virgin Islands, and Guam.