Puerto Rico Rides Muni-Bond Rally to Bankruptcy Deal
By Andrew Scurria
Puerto Rico moved closer to resolving the largest municipal-debt
default in U.S. history after creditors owed roughly $11.7 billion
backed a settlement framework, the most Wall Street support yet
amassed for a restructuring of the territory's core public
The proposed settlement released Tuesday would reduce roughly
$18.8 billion in general obligation debt to roughly $7.4 billion,
lowering interest payments to bondholders to levels that Puerto
Rico's financial supervisors believes it can support after years of
population loss and economic decline.
Some bonds covered by the deal have gained value in recent
months, buoyed by fixed-income investors' appetite for
high-yielding municipal debt and expectations that Puerto Rico's
court-supervised bankruptcy is nearing its end. The agreement marks
the culmination of months of private talks between finance
officials and creditors to assess the long-term damage to Puerto
Rico's economy stemming from Covid-19.
Investment firms that participate would exchange their claims
for a mix of cash, restructured bonds and tradable securities known
as contingent value instruments that only pay out if sales-tax
collections exceed certain projections.
A sustained rally in high-yield municipal bonds, including
Puerto Rico's, helped to ease the deal, according to bondholders
and advisers involved in negotiations. Yield-hungry investors have
been drawn to risky municipal bonds in part due to the U.S. Federal
Reserve's commitment to ultralow rates.
Also fueling the rally are expectations that federal support for
Puerto Rico will increase with the White House and both houses of
Congress under Democratic control, according to analysts and
The stronger the market demand for Puerto Rico bonds, the less
restructured debt needs to be issued to compensate bondholders, and
the stronger the incentive for them to sign on to a settlement.
Any restructuring requires approval from the federal judge
overseeing Puerto Rico's bankruptcy case and still faces obstacles,
including objections by Gov. Pedro Pierluisi and other elected
leaders to reducing pension benefits of public employees.
The agreement was finalized under the financial oversight board
that has been supervising Puerto Rico's finances since the
territory defaulted on its general obligation debt. Former
President Donald Trump in his final months in office made seven
appointments to the oversight board, a combination of his own
selections and holdovers appointed by his predecessor, Barack
If approved, the deal would curtail the legal battles that have
raged since Puerto Rico filed for bankruptcy in 2017, costing
taxpayers in the territory more than $858 million in fees and
expenses for lawyers, bankers and other professionals as of last
month. Some rulings stemming from that litigation have undermined
longtime assumptions among investors about the safety of some types
of municipal bonds.
Puerto Rico's bankruptcy came after years of heavy borrowing and
service cutbacks that affected everything from schools to
electricity service and pushed many residents, who are U.S.
citizens, to depart for the mainland, sapping the tax base and
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
February 23, 2021 08:19 ET (13:19 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.