Since Gov. Alejandro Garcia Padilla’s announcement last week that the commonwealth’s $72 billion in bond debt is “unpayable,” concerns about a default have escalated.
Though bondholders were able to come to a deal to avoid a default on a $415 million debt payment, it’s only a temporary solution. Investors and the commonwealth must come to a final agreement on restructuring electric-utility Prepa’s debt.
Puerto Rico has called on Congress and asked for municipal bankruptcy. Municipal bankruptcy is currently available only to U.S. states and cities (municipal entities).
Congress has yet to act, but if Puerto Rico gets its way and is able to file for bankruptcy, bondholders could lose interest payments.
It is believed that Puerto Rico will be unlikely to be able pay back its debts even without bankruptcy.
According to Morningstar, there are more than 52% of U.S. municipal bond funds with interests in Puerto Rico. Funds that are not diversified and have the most exposure to Puerto Rican bonds are at risk of failing in the market.
Broker dealers are required to perform adequate due diligence on any investment they recommend and to ensure that all recommendations are suitable for the investor. Firms that fail to do so, may be held responsible for any losses in a FINRA arbitration claim.
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