Puerto Rico files for bankruptcy protection under special law

Creditors, meanwhile, are likely to dispute whether Puerto Rico has met the legal requirements to invoke Title III when the board spent less than a month negotiating to restructure a complex pile of competing bond claims, people familiar with the matter said.

Investors had bought the bonds in the belief that Puerto Rico, like US states, would not be allowed to fail and the debt would be protected.

Puerto Rico's financial oversight board filed a debt restructuring petition in federal court Wednesday, the day after several creditors sued over bond defaults, reports Reuters.

The situation now heads to federal court, where the struggle between Puerto Rico and its disgruntled creditors will be decided.

Gov. Ricardo Rossello triggered a bankruptcy-like process by declaring Puerto Rico could not agree to big cuts in spending and new taxes demanded by bondholders.

The outcome of the case could have implications for financially troubled US cities or states.

Today, Title III may be all that stands between order and the kind of economic chaos suffered by the people of Germany during the Weimar period following World War I. Understandably, investors who are affected by the crisis are greatly concerned about what will happen next. Meanwhile, the process to restructure the debt in court will continue, said Elias Sanchez, the governor's representative to the board. Roughly $12 billion of the island's $73 billion was insured.

Bankruptcy may not immediately change the day-to-day lives of Puerto Rico's people, 45 percent of whom live in poverty, but it may lead to future cuts in pensions and worker benefits, and possibly a reduction in health and education services. The New York Times reports that the filing includes $74 billion in debt and $49 billion in pension obligations. As of September 30, Puerto Rico and its various bond issuing authorities had missed almost $1.5 billion in debt service payments.

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A federal district court judge will now be in charge of the restructuring.

Some expect creditors to challenge the filing, arguing the board did not meet requirements under PROMESA to conduct good faith negotiations out of court.

"The economy of Puerto Rico will be put on hold for years", said Andrew Rosenberg, adviser to the Ad Hoc Group of Puerto Rico General Obligation Bondholders.

The bankruptcy-like motion is the largest public debt restructuring process in American history, dwarfing Detroit's $18 billion to $20 billion 2013 bankruptcy.

The case will not be formally called bankruptcy, since Puerto Rico is barred from using Chapter 9 proceedings used by insolvent local governments in the US. Puerto Rico is barred from a traditional municipal bankruptcy protection under Chapter 9 of the USA code.

The U.S. territory's restructuring could ultimately set a precedent for the U.S. municipal bond market, although it's unclear whether it will regain immediate access, said Matt Freund, co-CIO and head of fixed income strategies at asset manager Calamos Investments.

They cite as evidence a law signed by Rossello on Saturday that would give the government authority to redirect sales tax revenue into Puerto Rico's general fund as part of a debt restructuring.

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