As the struggling island nation of Puerto Rico grapples with its near $70 billion in debt, with most major investors participating in repayment negotiations, there is one distressed debt hedge fund notably absent from any talks that includes compromise considerations. With each of Puerto Rico’s 3.5 million residents individually representing $2 million each in debt obligations, what happens in Puerto Rico could also have bearing on the future of debt-ridden U.S. jurisdictions as well.
Puerto Rico is one of many U.S.-based governments that has borrowed more money than can logically be repaid
Aurelius Capital Management’s founder of the $4.5 billion distressed debt niche player, is a former bankruptcy lawyer and a Paul Singer protégée. Along with Singer’s Elliott Management, Aurelius engaged in strong arm tactics during its protracted battle with Argentina, claiming the country’s financial leaders engineered “fraud.” Argentina’s leaders were confronted around the world by aggressive debt collectors who used tactics that appeared to generally embarrass or intimidate the target. In fact, it was Brodsky who was reportedly the more aggressive force behind what opponents called the “vulture hedge funds” who purchased debt after repayment negotiations had concluded only to demand payment in full.
Now comes Puerto Rico where Aurelius, working without the involvement of Singer and Elliott Management this time, is reported to own a “big chunk” of Puerto Rico’s $12 billion in general obligation debt. His hedge fund is demanding nothing less than payment in full, which could help his fund’s struggling performance, which is down 3 percent year to date, according to a New York Post report by Michelle Celarier.
Brodsky’s tough stance and the legal battles ahead point to benchmark, a transition point that not only impacts residents of Puerto Rico but residents of any governmental jurisdiction that has taken on unsustainable debt loads, including the United States and its many regional governments. If Brodsky and his apparent “take no prisoners” and “negotiate no settlements” approach wins the day, ultimately a precedent could be set, resulting in taxpayers in any troubled region inside or outside the U.S. ultimately shouldering all of the burden while the hedge funds and institutional investors who made ill-advised lending decisions shoulder no financial responsibility if Aurelius and Brodsky win the day.
Chart via S&P CapIQ
Puerto Rico has looming debt payment it says it cannot make, Moody’s says default likely, Brodsky unmoved
With a looming $267 million interest payment coming due December 1, Puerto Rico says it cannot afford to make the payment and Moody’s Investor Service is saying that a default is likely. As other institutional investors meet with the government to negotiate a compromise where all parties to the bad investment share in the loss, it is Brodsky who is “digging in his heels and refusing to compromise,” a source close to the situation was quoted in the Post as saying.
Aurelius’ hardened, accept no compromise position is credited for the break-up of the so-called Ad Hoc Group of Puerto Rican creditors. The group dismantled after many of institutional players deduced that demanding full payment was going to fail, according to the Post report. “It’s one thing to have a claim, and it’s another thing to expect to get that,” a hedge fund manager was quoted as saying regarding Aurelius’ “take- no-prisoners attitude.”
As a new bankruptcy bill that encourages a negotiated settlement is being considered in Congress, one that hedge fund lobby groups have staunchly opposed, the impact of the decision could be felt in the future by much more than than just the residents of Puerto Rico. With well-known fiscal problems in Detroit, Chicago, California and New York looming, many across the nation might be interested in watching how Puerto Rico plays out.
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