On May 3, 2017, Puerto Rico filed for a form of bankruptcy protection pursuant to a federal law passed in 2016 known as Promesa. This law allows for Puerto Rico to facilitate a debt restructuring process in court that is akin to U.S. bankruptcy protection. This marks the first time in our nation’s history that a U.S. state or territory has taken such extreme fiscal measures. As it stands, Puerto Rico owes approximately $123 billion in debt and pension obligations, a huge figure that dwarfs the $18 billion bankruptcy filed by the city of Detroit in late 2013.
While some of the investors in Puerto Rico debt include sophisticated banks and hedge funds (many sophisticated investors did not start aggressively snapping up Puerto Rico debt until 2014, when many bonds were already trading at a deep discount), numerous retail investors were solicited by their broker or investment advisor to purchase Puerto Rico bonds due to their tax free nature and hefty yields. While the lure of triple tax exempt income (income on Puerto Rico bonds is exempt from federal, state, and local taxes) helped firms like UBS, Merrill Lynch, Morgan Stanley and Santander in their sales pitch to prospective retail investors, often Mom and Pop investors were left unaware and uninformed as to the significant risks associated with investing in Puerto Rico bonds.