Co-ops Propose Entry Point to Debt Restructuring
SAN JUAN – A group of the largest and most active cooperatives and credit unions on the island are proposing a “point of entry” debt-restructuring mechanism based on the price at which each bondholder acquired their respective Puerto Rico bonds.
“Recognizing the speculative interests of some investors, and to encourage their participation, the ‘Entry Point’ exchange offer could include a profit margin above the entry price, never exceeding par, or face value. The exchange would seek to match the shortest tenure of the new bonds to those investors that acquired the bonds at the lowest price. Conversely, investors who acquired their bonds at par would be offered bonds of a longer term,” reads a document submitted Feb. 25, to the House Natural Resources Committee by corporate law firm Sosa Lloréns & Cruz Neris on behalf of its clients.
The credit unions highlighted specific advantages of their proposal such as bolstering the commonwealth, the credibility and market reputation of the island, and allowing the government to achieve debt relief in an area where such relief “causes no harm,” the unrealized profits between the discounted entry price of commonwealth bonds and their corresponding par value.
The group admits this strategy “could certainly face pushback from investors seeking to profit from the seniority and rights granted to the different investor classes.” Nevertheless, they argue that such efforts will be at a handicap trying to prove that a higher value was paid to par-value buyers, who would receive longer-term bonds.
This proposal seems to be seeking a dual purpose: provide an organized restructuring of the debt, and provide some support to state-chartered credit unions, which constitute one of Puerto Rico’s main institutional investors of commonwealth bonds.
Credit unions and co-ops in Puerto Rico could very well be the largest institutional bondholders on the island because they do not trade this kind of note regularly. A financial analysis of the credit unions confirms that while their different components are fiscally healthy, their biggest risk derives from the government’s fiscal situation.
“The risks posed to credit unions by their holdings of commonwealth debt stem from the fiscal difficulties of the government and not from the credit union’s lending activities,” the document says.