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Debt-Restructuring Talks in a Holding Pattern

By on June 23, 2016

With just a week left before more than $1.5 billion in debt-service payments hit, negotiations between the Puerto Rico government and certain creditor groups remain in a holding pattern, failing to reach an agreement on how to restructure some $50 billion of the island’s $70 billion public debt.

One source told Caribbean Business it is still unclear whether advisers for the Alejandro García Padilla administration and creditor groups will resume talks ahead of the July 1 debt payments, and if they would do so on a non-public basis.

Early this week, the government stated it had been recently negotiating with groups representing creditors holding Sales Tax Financing Corp. (Cofina by its Spanish acronym) senior and subordinate, and general-obligation (GO) bonds. These groups had entered into short-term nondisclosure agreements (NDAs) to discuss the administration’s latest debt-restructuring offer, which was presented on June 14, according to the fortaleza2

Yet, after going back and forth with several counterproposals, the two sides failed to strike a deal over terms, “and they are no longer continuing discussions on a non-public basis with respect to the [government’s] proposal or any counterproposals,” the statement reads.

Creditor groups negotiating under NDAs cannot trade the Puerto Rico bonds they own, as they are sharing confidential information not available to the market. This limitation usually sparks mixed reactions among creditors, depending on how active a trader is.
Passage of the Puerto Rico Oversight Management & Economic Stability Act (Promesa) by the U.S. House of Representatives prompted a slight rally on sluggish commonwealth bond prices. Sources told this newspaper this would have resulted in some negotiating creditors wanting to exit the NDAs’ confines so as not to miss out on the occasion.

After all, not all creditors within each group think the same way, one source added. As for prospects of securing a lifeline maneuver that could avert or minimize a default come July 1, sources added there is still a large group of creditors that truly want to continue negotiations.

Other sources said it is becoming steeper for the administration to secure a deal that could avoid a significant default on July 1, particularly on the more than $750 million owed in GOs. Officials continue to state there is not enough cash to meet the payments in full, while the island stands ready to default as needed, in a bid to protect essential government services.

Meanwhile, various creditor groups, including GOs, are challenging the García Padilla administration’s debt moratorium law, which has been its last-resort measure in anticipation of a potential default on its debt obligations.

Latest offered terms

Following the end of the nondisclosure period, details about the proposals discussed by advisers of the Puerto Rico government and certain creditor groups were released.

Among the latest changes to the commonwealth’s offer are that while the government insists on a broad debt-restructuring deal, it is no longer tied to doing so with the “superbond”—the financing structure through which they first proposed to undertake the restructuring. The government’s latest offer also eliminates the use of capital appreciation bonds.

Alejandro Garcia Padilla2

Gov. Alejandro García Padilla

When compared to its previous proposal, the commonwealth is also increasing interest payments by $1 billion within the first four years, and it does not call for any new money. Instead, Cofina creditors are being asked to allow the administration to use its pledged revenues for the first half of fiscal year 2017, which begins July 1, to support the government’s cash needs.

It keeps the five-year holiday on principal payments, and the 15% target of government revenue that would go to cover debt service each year, or roughly $1.85 billion beginning in 2021, which would slightly increase to about $2 billion through 2071. The commonwealth would pay $631 million in fiscal 2017, $1.1 billion in fiscal 2018, $1.3 billion in fiscal 2019 and $1.7 billion in fiscal 2020.
Some believe Puerto Rico advisers are being too conservative in estimating how much money the government will make and the economic recovery the island will attain in the future—both of which affect the calculations of this figure.

However, sources say the U.S. Treasury has been emphatic in stressing the need for this to be a one-shot deal. The U.S. government would not want to go back to the drawing board a few years later, because of an overly ambitious restructuring deal that could put the island back in the same spot in which it finds itself today.

As for reductions to principal, commonwealth advisers are now offering GOs and Cofina senior creditors recovery rates hovering at 80%, while Cofina subordinates would get 60%.

In their counter, while agreeing with some of the terms offered by the government, the GOs group called for higher recovery rates, resuming monthly set-asides for the payment of GO debt, and other provisions that seek to cement their top position among Puerto Rico’s credit hierarchy.

For its part, the Cofina senior bonds group agreed with keeping first priority on the assets pledged to it, while “smoothing” its share of the island’s sales-tax revenue to help the government tackle its short-term liquidity needs, subject to further discussion. Yet, it also called for higher recovery rates and other concessions to close down a deal with the government over the restructuring of the sales tax-backed paper.

In their offers, all sides agreed that to the extent Promesa is passed by the U.S. Congress, the plan would be implemented through Title VI (collective action) or Title III (court-ordered process).

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