Meet Aurelius Vulture Fund: Argentina, Detroit, and now Puerto Rico Its Intended Victims

Panic is spreading in Wall Street, particularly among municipal-bond-holding mutual funds, as depression-wracked Puerto Rico verges on the brink of default on its public debt, which totals $73 billion. Backed by hedge funds and “buyers of distressed debt” (i.e., vulture funds), Puerto Rico’s Democratic Governor Alejandro Garcia Padilla pushed through debt- restructuring, i.e., bail-in, legislation which would force traditional municipal bond holders to take a “haircut,” while protecting the vulture funds that purchased distressed general-obligation bonds and other categories of debt which can’t be restructured under the new law.

One of the vultures backing the Puerto Rican restructuring/ bail-in law is Aurelius Capital Management, also part of the attempted bond-holder looting of Argentina, and, as well, one of the leading hedge funds buying into the Detroit debt/swap, with nearly $200 million of distressed Detroit debt purchased so far. At the center of the Puerto Rican default panic are the island’s highway, water, and power authorities, and particularly the Puerto Rico Electric Power Authority (PREPA), whose bonds have fallen to 40 cents on the dollar or less. After threatening to default on July 1, PERPA then reached an agreement with creditors to postpone payments until July 31. At that point, it will have to decide whether to be the first public agency to use the new bail-in law; press accounts describe nervous investors expecting a break in the situation by mid-August.

Meanwhile, vulture funds such as Aurelius are lurking on the sidelines, buying up distressed debt while watching the general-obligation bonds rally, since they aren’t subject to the bail-in law. Meanwhile in Detroit, city manager Kevin Orr is trying to squeeze out $90 million by forcing payments from residents whose water has been shut off. The total target population is large, about 40,000 residences. 8,000 were cut off in June, and 1,700 more in July, before this was suspended by the Detroit Water and Sewerage Dept. But the department is using the 15-day suspension to identify shut-off users who have turned their own water back on, and get sizeable fines imposed on them, still targeting the $90 million. This is not much more than the $65 million Detroit still has to pay UBS and Bank of America on its interest rate swap.
Residents of Detroit, Would You Like To Be Hanged or Shot?

Fearing even worse “offers” under the bankruptcy plan imposed on Detroit, general municipal retirees have voted to accept 4.5-percent cuts to their pension payments, as well as an end to all cost-of-living raises. Retired firefighters and police officers would see no cuts in their monthly pensions checks, but could expect smaller-than-expected cost-of-living raises.The vote totals were announced late last night, according to the New York Times. Among retired and active firefighters and police who chose to cast votes, 82 percent voted in favor of the plan. And among general workers and retirees, 73 percent voted in favor. About 15,600 workers and retirees opted to vote from among about 32,000 who could have.

Additionally, two days ago, after protests, international outcries, and United Nations intervention, Detroit Water and Sewage Department announced that it is suspending its practice of shutting off water to people who are behind on their water bills. The moratorium is to last a mere 15 days, starting July 21. Recently, the department has been shutting off access to water at a 3,000-household-a-week clip. It’s estimated that about half of the city’s remaining population cannot afford the $70/month water bill, which is about double the national average.

The Detroit News reports that the department’s decision came on the same day that a group of Detroit residents filed a lawsuit in the city’s bankruptcy case, asking U.S. Bankruptcy Judge Steven Rhodes to restore water service to residential customers. The residents, backed by a coalition of activist and community groups, allege that the city is violating constitutional rights and contractual rights by shutting off water for those who owe back payments.

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