Bonistas del Patio: Approve Bill to Stem Losses to P.R. Bondholders
SAN JUAN – Arguing there is “nothing balanced” about Puerto Rico’s Fiscal Plan, which cuts the average $3.3 billion annual debt service by 76% for the next 10 years, Bonistas del Patio wants Gov. Ricardo Rosselló and lawmakers to make good on legislation that mitigates losses for local bondholders.
A full draft of the legislation, consisting of a tax grant that could mitigate 50% of realized losses by local bondholders for use in five years, was already submitted to lawmakers and La Fortaleza.
Jorge Irizarry, a former president of the local bondholders’ group, and Rafael Rojo, the group’s current president, also urged the Financial Oversight & Management Board to amend the Fiscal Plan and turn around and recapitalize the Government Development Bank, whose bonds are the second most widely held by local bondholders. The two made their remarks during an interview with Caribbean Business in which they presented their analysis of the Fiscal Plan that the oversight board approved in March.
The Fiscal Plan, they said, on average only allocates $787 million per year for debt coverage, which is a significant cut from the estimated $3.3 billion average that is needed for debt-service payments. Sales Tax Financing Corp. bonds alone require $861 million per year for debt service, general-obligation bonds about $1.026 billion and the rest of the bonds about $1.45 billion in debt service.
As a result, bondholders would get significant haircuts.
The Fiscal Plan’s approach for balancing the budget calls for an 8% increase in revenues, mostly through taxes on local residents, including 60,000 local bondholders, while government reductions would represent about 12%.
After slashing 75% of the island’s nearly $70 billion debt, Rojo said the government plans to raise expenses by 9% in years five to 10 of the Fiscal Plan. “The government even ends up with more government expenses, so we are backpedaling to where we started,” he said. According to their analysis, if expenses were to remain constant, the government could have $800 million in new funds per year to pay debt service.
However, what bothers Bonistas del Patio most is that the Fiscal Plan cuts debt but provides funding for nonessential services, such as $6 billion for a budget cushion and $4 billion in undefined capital projects.
“There is nothing balanced about that approach. We are losing an opportunity,” Rojo said. “I don’t think this will put Puerto Rico in a position to return to the markets.”
Irizarry said the proposed debt cushion, which is about $600 million per year, is a signal that “we may not comply with the plan. It is there in case we do not comply.” He said such discretionary variables present an opportunity for the government to comply with its debt service to bondholders.
The plan also does not take into account that the government may not lose Affordable Care Act funds, according to the group.
While they argued that the Fiscal Plan is a positive step, Rojo and Irizarry also insisted the plan needs to be amended because it will be very difficult for bondholders to willingly negotiate and restructure their debt with the government when only $787 million in debt service is assigned for this process.
Fighting against Title III
“This is going to push everything to Title III [of the federal Promesa law, meaning a bankruptcy process] and that is not what we want,” Irizarry said. Under a bankruptcy process, he added, there is a chance bondholders may get more money than what is now proposed.
Because local bondholders, which include the island’s credit union sector and retirees, are the most financially vulnerable. Bonistas del Patio said under Promesa, the government could provide menu options using Section 601 on voluntary agreements with the same credit, as long as everyone is given the same consideration and no one is being discriminated against. “We have studied this point extensively,” Irizarry said.
They urged the government to make good on promises for legislation that would help local bondholders. The draft of the bill calls for 50% of realized losses to be mitigated through a tax grant that is eligible for use beginning in five years, over the next five years, at 20% a year.
Bondholders who are willing to invest 100% of their realized loss in the local economy would be eligible for a 100% tax grant, thus the bill could be a boost to the economy. The credit on losses may also be used to pay debts that the creditor may have with any agency or municipality. These tax grants would be negotiable and transferable.
The bill also states that to avoid heavy discounts on those who are most vulnerable, such as retirees, the selling of grants to corporations must be redeemable by the government within the eligible amounts per year.
Rojo assured Caribbean Business that the oversight board appears to sympathize with the bill. They said they met with the board’s executive director, Natalie Jaresko, “who was in hearing mode.”