The Puerto Rico government filed for Title III bankruptcy protection on May 3 after multiple debt restructuring proposals were rejected by municipal bond creditors. Under last June's PROMESA legislation, which was specifically drafted to facilitate the remediation of Puerto Rico's debt crisis, the creditors were prohibited from bringing legal action against the Commonwealth until the night of May 1. The filing of Title III appeared to have caught some market participants off guard and officially makes the over $70 billion filing the largest bankruptcy of a US municipality (the city of Detroit, Michigan was previously the largest municipal bankruptcy with almost $20 billion in debt).

The island's debt problems were largely due to fiscal mismanagement on the spending side, which were compounded by Federal minimum wage laws, the financial crisis, Zika virus outbreaks starting in 2016, and the mass exodus of workers to the mainland in search of employment. The commonwealth's ability to increase tax revenue through stimulating the economy will likely be one of many key areas of focus during the bankruptcy proceedings.

According to data from the Government Development Bank for Puerto Rico, the services industry made up 12.9% of the island's GDP in 2015 (the last year the island reported.) It is also important to note that almost 35% of the island was employed in by the services industry in 2016, with a large portion of them working in tourism and hospitality. Given that approximately a third of tourists enter the island on cruise ships, their traffic could provide an indicator of the health of that industry on the island.

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Chris Fenske, Director, Head of Fixed Income Pricing Research
Tel:+1 212 205 7142
chris.fenske@markit.com

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.