While there has been some press coverage of the recent attempts to annul some $6 billion of Puerto Rican general obligation bonds – essentially all such debt issued starting in 2012 onward – the move has not received much deep coverage. Yesterday I took some time to read the claims objection filed in the Commonwealth's article III case, and in this post I'm going to consider the arguments against the bonds' validity. In a further post, I will consider what is going on here from a strategic perspective.
The objection was jointly filed by the creditors' committee and the Financial Oversight and Management Board for Puerto Rico, but the Board only joined in one of the two main arguments that are put forth. (There is a third argument in the objection – about OID and unmatured interest under section 502 fo the Code – that I'm not going to talk about because its rather pedestrian by comparison).
In sum, the committee argues that GO bonds issued in 2012 and 2014 violated two provisions of Puerto Rico's constitution, and thus the bonds should be deemed void. The Board joins in the objection with regard to the first constitutional provision, but not the second. If successful, this objection would eliminate $6 billion of the $13 billion in GO bonds currently outstanding.
More details after the break.