The Case For Wiping Out Puerto Rico’s Debt, by Tom Sanzillo

Except for the those Puerto Rican creditors who had insurance on their loans, at most creditors will receive is 10 to 20 cents on the dollar. Tom Sanzillo argues that for Puerto Rico to recover and rebuild from recent hurricanes, its debt must be wiped out. From Sanzillo at valuewalk.com:

President Trump, who knows a thing or two about bankruptcy, says Puerto Rico’s public debt should be wiped out. We agree.

The commonwealth owes bondholders somewhere on the order of $70 billion, with most of that debt tied to general-obligation bonds, revenue bonds and bonds issued by the Puerto Rico Electric Power Authority (PREPA).

Ahead of the wide devastation wrought by Hurricanes Irma and Maria, we were of the view that the commonwealth could manage perhaps 20 to 30 percent of its general-obligation and revenue-bond debt and that PREPA could pay off perhaps 30 percent of its debt.

Now, as the island and its economy reel from the carnage of the hurricanes, we see the only viable way forward as a zeroing-out of the bonds in question and an immediate cessation of interest payments. Puerto Rico’s badly-crippled economy must rebuild, and the only way for that to happen is for legacy governmental debt to be handled in a way that won’t impair the restoration of markets and physical development.

This is a necessary remedy that will affect three sets of bondholders.

First, the large investment houses like Franklin Templeton, Oppenheimer, Citi and JP Morgan, which own large chunks of bonds. These investment houses, however, have vast and diverse holdings in the trillions of dollars that are hedged against just about every eventuality.

Second, a host of hedge funds that bought into the Puerto Rico bond market at a discount. These hedge funds have made extraordinary gains on this debt by way of interest-rate payments on the face value of the discounted bonds.

Third, small investors who live in Puerto Rico and elsewhere who stand to suffer the most. These investors have no hedges against these losses, and (unlike hedge funds) have not reaped extraordinary gains on Puerto Rican debt.

The way out of this is not pretty but there is ample precedent.

To continue reading: The Case For Wiping Out Puerto Rico’s Debt

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One response to “The Case For Wiping Out Puerto Rico’s Debt, by Tom Sanzillo

  1. The author could have been a ghost writer for Al Capp’s Lil Abner. The USA Dogpatch sends shmoos and other freebies to Puerto Rico. And the fierce regulations to be implemented and enforced. How about jail time for the current and past criminals that got Puerto Rico into DEBT. Won’t happen. And the fraudsters in charge of and implementing this new plan know they also will be home free.

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