Creditors Still Jockeying for Position
By: Philipe Schoene Roura and Luis J. Valentín
While action on Capitol Hill continues to pick up steam over Puerto Rico’s fiscal crisis, the Alejandro García Padilla administration is putting the final touches on a revised voluntary debt-restructuring proposal about to be presented to creditors.
But as one Puerto Rico bondholder adviser put it, there is perhaps a “perverse initiative to not reach a deal” with creditors at this moment—if the administration wants Congress to meet their demands. Any voluntary agreement at this stage would run counter to the government’s efforts on Capitol Hill, he added.
For the past few weeks, advisers for all sides have been discussing the debt-restructuring offer the administration put forth last month. Counterproposals have been delivered by some of the affected creditor groups under the government’s proposal, which covers roughly $49 billion of Puerto Rico debt, including general obligations (GOs) and the Sales Tax Financing Corp. (Cofina by its Spanish acronym).
With each group fighting tooth and nail to protect their respective claims, the commonwealth is reportedly looking to incorporate some of their feedback in the new proposal. Nevertheless, it is highly likely that reductions to principal across credits, or haircuts, and the priority list established under the government’s existing proposal—with GOs on top, followed by Cofina and so on with the rest of the affected credit claims—would remain.
However, uncertainty over Capitol Hill action continues to loom large and many believe that absent certainty over the Republican-controlled Congress’ final say, talks between creditors and commonwealth advisers could be a pro-forma exercise.
Meanwhile, the clock continues to tick amid a $2.5 billion debt-service wall beginning May 2, with $422 million owed by the financially battered Government Development Bank (GDB), followed by more than $1.5 billion due on July 1 that includes roughly $780 million in GOs.
What’s more, the commonwealth finds itself running out of time to reach a deal with creditors on the summer debt payments—for which it has already warned there is not enough cash to meet in full—to avoid a cascade of defaults and stay of courts.
Under the government’s existing proposal, holders of about $49 billion of debt would exchange their paper for two new types of securities, one of which, the so-called “growth bonds,” would only be paid if Puerto Rico demonstrates long-term economic growth. These bonds essentially reflect initial haircuts, which would hover around 45%, depending on the credit.
Not surprisingly, growth bonds are one of the proposal’s elements that creditor groups are not very happy about, a Wall Street source with knowledge of the negotiations recently told Caribbean Business. As expected, creditors seek to shield their credits as much as possible from haircuts.
For instance, a group of Cofina senior bondholders, accounting for about $3.5 billion of Cofina’s $17 billion debt, made a counteroffer providing as much as $2 billion in short-term liquidity relief through lower debt service and a more flexible structure. But instead of taking a haircut, the proposal stretches maturities on existing bonds. It also affects subordinate Cofina bondholders, who will be repaid after the senior bonds, although a liquidity facility would be established for them to cash out.
After presenting their proposal to the point man for Puerto Rico’s restructuring brigades, Jim Millstein, a former U.S. Treasury chief restructuring officer, the Cofina group is on the record saying that it is open to accommodating aspects of the commonwealth’s offer. Still, protecting the Cofina structure is of the utmost importance for them—and that means not taking away its pledged property, a portion of the island’s sales & use tax that goes directly to pay Cofina debt service.
Nevertheless, the commonwealth still faces a steep road to achieve a voluntary deal with creditors, particularly within a complex web of competing interests among creditors, with no mechanism to bring everyone to the negotiation table.
“The biggest challenge with the [commonwealth’s] proposal is that there is no mechanism to require participation,” said one creditor lobbyist on the Hill, who chose to remain anonymous. “[It] is all voluntary and to the extent that they rely on voluntary participation in an offer that is not all that attractive for creditors, it is going to be very hard for them to get traction leading up to [the summer].”
During a recent presentation to investors in Florida, Puerto Rico’s restructuring team talked about what they were asking of Washington, D.C.—to provide them with the necessary tools to restructure its debt and bind holdout creditors.
One such tool to ensure broad participation in any restructuring deal is the use of a mechanism akin to collective-action clauses (CACs). This would allow for any deal reached with a majority of creditors to become binding on holdouts, or minority creditors, which is precisely the reason the idea is picking up traction within the debt-restructuring discussion in Congress.
Perhaps analysts need only to look at the fine print in the Cofina bonds for a glimpse at the shape of deals to come. The Cofina senior bondholders group’s recent counterproposal foreshadows the potential to bring holdouts into the fold, by using mechanisms built into existing Cofina bond covenants that bind minority creditors, with a lower participation threshold than usual for CACs.
Yet, even if that is the case with Cofina, the commonwealth still faces significant challenges across its other credit claims to bring holdouts onboard any comprehensive restructuring deal, and continue to lobby Congress to incorporate tools akin to CACs when drafting legislation.
“For anyone to say that he or she knows the details—no one knows. Even those who are drafting it don’t know,” former Gov. Luis Fortuño recently told Caribbean Business about how potential legislation from the Republican-led Congress would look.
Expectations have centered on House Speaker Paul Ryan’s (R-Wis.) pledge to act on the Puerto Rico matter by March 31. While some GOP members have reaffirmed Ryan’s call for action and are already working on draft legislation, it is still unclear what exactly Congress would do at the end of the day.
“My belief is that Speaker Ryan is truly committed to getting something out—pretty soon. The circumstances have evolved and changed in the last year and a half, in the sense that just a restructuring mechanism will not do it,” Fortuño noted.
So far, the García Padilla administration and U.S. Treasury seek a broad, tailored debt-restructuring regime. Moreover, Treasury says strong fiscal oversight that respects Puerto Rico’s self-governance is also needed. What’s more, a two-pronged restructuring process, with an initial mediation phase, facilitated by short-term financing and a stay on litigation, is being proposed. If no deal were successfully reached with a majority of creditors, the process would move to court. If a deal is reached, the proposed structure would allow binding holdouts.
Resident Commissioner Pedro Pierluisi recently told Caribbean Business that Congress was looking into a federal fiscal-control board that could also have a role in the commonwealth’s debt restructuring, adding that it would oversee and mediate in the process. “It is the same as a CAC, but through a board, achieving an agreement reached with the majority, and then going to court to make it binding,” he said.
For his part, Fortuño believes Congress’ response will comprise various elements, including “some kind of board. The devil is in the details as to how much control. The less transparency Puerto Rico shows, the more control the board will exert.”
“Secondly, I believe there is going to be some sort of restructuring mechanism…[but] I cannot tell you whether it is one or the other…. And thirdly, there is something that is going to deal with economic development or assistance to Puerto Rico—not handouts,” he added.
In all, the former governor believes it would be “a three-legged stool.”