Hedge Fund Vultures or Victims?
HandelontheLaw.com Staff Writer
Puerto Rico is in big financial trouble with hedge funds owning 24 – 50% of the territory’s debt, which is intimately connected with whatever isn’t nailed down in the territory.
As we mentioned in a previous article a “hedge fund” is a way of pooling investments that dynamically uses numerous strategies domestically and globally to generate high investment returns. It is somewhat similar to a mutual fund in that it pools assets and is professionally managed; however, it is more of a mutual fund for the very rich.
Some hedge funds are called “vultures,” buying distressed debts for fractions of their face values from governments in trouble, and then reaping big rewards by successfully pressing for repayment at face value plus interest. Vulture hedge funds have bought up distressed debt in Greece, Argentina, Puerto Rico and Detroit, Michigan because the practice is so lucrative. An explanation of the hedge fund process in Puerto Rico is accessible on YouTube: https://www.youtube.com/watch?v=j68t1sYk-1o
Puerto Rico, which is constitutionally unable to file for protection in bankruptcy, would have to destroy the balance of its economy in order to pay the hedge funds owning its distressed debt. Consequently, the territory’s governor is begging for U. S. Congressional help to crawl out from under this problem by, for example, being allowed to file for bankruptcy protection. Thus far, Congress seems unmoved.
How did Puerto Rico find itself in this situation in the first place? Effective in 1976, 26 U.S. Code §936 gave tax exemption to U. S. manufacturing on Puerto Rico. With the help of that tax exemption, Puerto Rico grew economically for 28 of 29 years. In 1996, the Republican-led Congress and Democratic President Bill Clinton agreed to have §936 phased out over a 10-year period. In 2005 (the last year of the phase out) and afterward, Puerto Rico’s economy has shrunk for 8 out of 10 years, reducing its gross national product by 10%.
Heavily in debt, Puerto Rico began linking bonds to almost every source of revenue available to the territory. It sold and sold and sold bonds to keep operating, eventually increasing its debt from $25 billion in 2000 to $73 billion today, which is more than 100% of the territory’s GNP.
By late 2012, Puerto Rican debt was being downgraded and some bonds were trading for as little as 30 cents on the dollar, with as high as 11% interest rates. That was when the hedge fund “vultures” swooped in and began buying up Puerto Rican debt at dramatically discounted rates. Now, with Puerto Rico’s inability to file for protection in bankruptcy, it appears that the territory’s bones will be picked clean to make a high profit for the hedge funds.
It appears that the one thing that would save Puerto Rico’s economy and transform hedge fund “vultures” to victims is the Congress’ enactment of legislation allowing Puerto Rico’s municipalities and public corporations to file for protection in Chapter 9 bankruptcy.
Obviously, the hedge funds vehemently oppose legislation giving Chapter 9 bankruptcy access to Puerto Rico and as of late 2015, most of Congress seems unmoved by Puerto Rico’s requests for help.
By Kathy Catanzarite
Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.
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