Puerto Rico's government development bank has hired Jim Millstein, who oversaw the U.S. rescue of American International Group. Lawyers at Cleary Gottlieb Steen & Hamilton, which has advised Greece and Argentina, teamed with Proskauer Rose's Martin Bienenstock, the bankruptcy expert who helped structure the auto bankruptcies of 2009, to write the bulk of the new bankruptcy law.
MBIA and Assured Guaranty, bond insurers with more than $10 billion in combined exposure to Puerto Rico, are being represented by financial advisers with workout expertise at The Blackstone Group and Houlihan Lokey, respectively. The three have a combined exposure of $2.4 billion to PREPA, according to Moodys Investors Service.
Others involved include law firms Weil, Gotshal & Manges, which took Lehman Brothers through bankruptcy, Debevoise & Plimpton, which was involved with American Airlines' Chapter 11, and Cadwalader, Wickersham & Taft, which has been involved in Detroit's bankruptcy.
The restructuring efforts follow a decade during which an index of the island's economic activity has fallen by 18 percent and the number of employed people has fallen by 11 percent.
The government runs chronic budget deficits and has a weak track record for collecting everything from sales and corporate income taxes to power and water bills. To plug the gap, the government and its agencies have turned repeatedly to the $3.7 trillion U.S. municipal bond market, eventually amassing a collective debt of $72.6 billion.
Padilla, who took office in January 2013, has been aggressive in addressing the island's fiscal crisis, raising taxes, reforming public pensions and slashing spending.
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But his move to push through the restructuring law last month shocked investors. Prices on PREPA bonds and those issued by its sister corporations plunged, with some PREPA debt falling by nearly 50 percent in a matter of days.
Credit ratings agencies, which had already cut most Puerto Rico bonds to below-investment grade earlier in the year, slashed them deeper into junk territory, saying the law raised questions about the administration's commitment to honoring its debts.
The upshot has been a shift in ownership of Puerto Rico bonds away from risk-averse investors to hedge funds who are accustomed to uncovering ways to profit from bonds trading at deeply discounted levels.
"There's no way any traditional investor is buying at 40 cents on the dollar," said David Tawil of Maglan Capital, a distressed debt hedge fund.