[Editorial] Wheel of Fortune
wo years into the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), Puerto Rico’s debt-restructuring game is looking more like the TV game show “Wheel of Fortune” than “Let’s Make a Deal.” The former puts more of a premium on words; the latter on slick risk. And to be honest, at this stage of the game, words and their significance matter in the thorny restructuring of Puerto Rico’s $70 billion debt load.
Take, for example, the word “agreement,” defined in Webster’s Unabridged dictionary as: 1. An arrangement regarding a method of action; a covenant. 2. Law a. A properly executed and legally binding contract. b. The writing or document embodying this contract. When you add the word “preliminary” to agreement, or the postscript “in principle,” what you have is “no agreement yet.”
In debt restructuring—where you have the factions of securitization fighting for priority over creditors with constitutional guarantees in a Cofina-GO conflict looking more like the Balkans at their divisive worst—words sway and influence consensus. Thus, every time a “deal” is announced, stock prices rally and competing creditors take aim to shoot it down.
The most recent press release issued by the Financial Oversight & Management Board (FOMB)—under the headline “Oversight Board Reaches Deal With Cofina Bondholders,” with an even more impressive subhead, “Proposed Cofina Bondholders Agreement to save Puerto Rico Over $17 Billion,” is a perfect example of a term sheet that is not yet an agreement. Sounds wonderful in principle, but don’t break out into a chorus of “We Are the World” just yet. For what is touted as an “Agreement” is truly a “Settlement in Principle,” a term sheet that outlines the proposed deal.
To be certain, the term sheet for the Sales Tax Financing Corp. (known as Cofina) is an important step, because it outlines what is palatable among Cofina Seniors and Subs as pertains to their portion of a Sales & Use Tax (IVU by its Spanish acronym) split. Importantly, the FOMB and the government of Puerto Rico are reportedly on board with the terms. But in Promesa’s debt game, the gauntlet is long and lined with snipers.
The proposed deal reportedly provides “for more than a 32 percent reduction in Cofina debt, gives Puerto Rico about $17.5 billion in debt-service savings, avoids additional costly and time-consuming litigation, enables local retail bondholders in Puerto Rico to receive significant recovery, and provides flexibility to the commonwealth in managing future debt refinancing, while avoiding the liquidity-based borrowings that contributed to the current crisis.”
The settlement in principle is like Mother’s Day—who could oppose something like that. Well, there is a group of hedge funds out there—namely holding General-Obligation (GO) debt, who would gladly throw a monkey wrench into the ointment of these negotiations because they hold their credits to be sacred and have a complaint pending over Cofina’s legality.
Back to the Balkans; think of this as Serbs and Croats breaking bread together, with the thorny issue of Kosovo’s independence still pending. There is still some legal sledding ahead. At this writing, the agents for the GO bondholders and Cofina creditors are yet to strike “the deal” that is the Gordian knot in this complex restructuring equation. Be that as it may, sources at the negotiating table let on that the terms in this settlement will likely be in a final document with t’s crossed and i’s dotted in the coming weeks with the hope that Judge Laura Taylor Swain will rule on the Plan of Adjustment by year’s end. Perhaps that is a bit optimistic given the glacial pace at which the Title III process moves.
If the deal, as it is now structured, is certified by “Titi” Laura, Senior Cofina creditors would be looking at 93 percent recovery while Cofina Subs would be getting 56 percent recovery. Those levels of recovery have some critics crying foul because they see too little pain when much deeper cuts are bound to come for unsecured creditors. Fairness is in the eye of the bondholder and the truth is eclectic.
So, it behooves us to call things by their name—call the Cofina deal a term sheet that lays the foundation for a deal. Hopefully, it passes muster and a deal comes down the pike—thus putting money in the hands of a group of creditors and a broke government—rather than continuing to throw cash into the till of billables at New York firms making a killing under what Detroit Emergency Manager Kevyn Orr once called the “Lawyer Relief Act.”