Wednesday, February 24, 2021

FOMB Hopes $18B GO-debt Deal Leads to Puerto Rico Exiting Bankruptcy by Year’s End

By on February 23, 2021

Fiscal board Executive Director Natalie Jaresko (Jaime Rivera/CB)

Still, Gov. Pierluisi Withholds Support Due to Planned Pension Cuts

SAN JUAN – Puerto Rico’s Financial Oversight and Management Board (FOMB) said Tuesday that it was hopeful the commonwealth could exit bankruptcy by year’s end after announcing a new plan support agreement (PSA) with holders of $18.8 billion out of a total $35 billion in general obligation (GO) and Public Buildings Authority (PBA) debt, even though Gov. Pedro Pierluisi warned that he would not support a deal that includes an agreed cut to public pensions.

The new PSA reduces the approximately $18.8 billion of GO and GO-guaranteed liabilities by 61 percent, to $7.4 billion, resulting in an extra $2.7 billion in a principal debt cut compared to the agreement reached in February 2020. The deal reduces GO debt service payments by $4.7 billion, as well as cutting the maximum annual debt service by 22%, to $1.15 billion, relative to last year’s PSA.

Puerto Rico fiscal board member David Skeel (CB file)

“This is a fair, sustainable and consensual agreement that will reduce Puerto Rico’s debt as far as legally possible to both reduce the debt and have a confirmable plan that can be approved by the court,” Chairman David Skeel said during a virtual press conference about the details of the agreement reached Monday night.

He said the deal includes creditors holding about $7 billion in GO and PBA bonds that reached an agreement in principle with the oversight board two weeks ago.

“This agreement is finalizing the terms that were tentative two weeks ago,” Skeel said. 

“We believe it could set Puerto Rico on the path to end bankruptcy and finally begin its true recovery. As a result of the pandemic, the reality is Puerto Rico can’t afford as much today as it could a year ago,” the chairman told reporters. “This agreement further lowers Puerto Rico’s risk, its total debt and annual debt payments.”

The new annual debt service payment would be 73% lower than the annual $4.2 billion the commonwealth government paid to bondholders before requesting Title III bankruptcy protection in May 2017 under the federal Puerto Rico Oversight, Management and Economic Stability Act (Promesa). 

Total debt debt service payments would be cut by 62%, from $90.4 billion under the original contractual debt agreements before Promesa to $34.1 billion under the new debt restructuring agreement, including principal and interest from Puerto Rico Sales Tax Financing Corp. (Cofina) bonds.

Moreover, the deal includes a contingent value instrument (CVI) that pays an additional amount to bondholders if Puerto Rico’s economy outperforms the projections in the FOMB-certified May 2020 commonwealth fiscal plan. The CVI relies on collections of 5.5% of the commonwealth’s 11.5% sales and use tax (SUT, or IVU by its Spanish acronym) pledged to Cofina that exceed estimates. The creditors who are a party to the agreement would receive 45% of the increment above the amount projected, subject to annual and lifetime caps.

GO and PBA bondholders would receive $7.4 billion in new bonds and $7 billion in cash. Skeel said this cash payment and the CVI contributed to the sharp reduction in debt.

The $7 billion in cash “is a down payment that lifts considerable weight off the next generation of Puerto Ricans,” the chairman said. “And by including the CVI, we were able to lower Puerto Rico’s debt even further in these uncertain times. If Puerto Rico does really well in the coming years, the creditors will get paid, and if it does not, the creditors won’t get paid under the CVI.”

Skeel said the agreement will be presented as part of the plan of adjustment (POA) the fiscal panel is due to file in court by the March 8 deadline set by U.S. District Court Judge Laura Taylor Swain, who oversees Promesa issues. He thanked federal bankruptcy judges Barbara Houser and Roberta Colton for a successful mediation effort between the FOMB and creditors.

The chairman said the GO and PBA deal now has the support of 60% of bondholders. He said that for court approval the deal must be submitted to a vote in which two-thirds of participating bondholders vote in favor in each class of bonds.

After the plan is filed in court, a disclosure statement hearing will be held to provide bondholders with details in the deal needed to understand what they are voting for, the FOMB chair said.

“If it looks like we have a confirmable plan, then the court will schedule a confirmation hearing to hear any objections and determine if the plan meets all of the legal requirements,” he said. “That’s why we say this could be confirmed by the fall of this year.”

End in Sight?

Calling the new PSA “a significant milestone in Puerto Rico’s road to recovery,” FOMB Executive Director Natalie Jaresko said the deal would reduce the annual payments to creditors to 8 cents of every dollar the commonwealth government collects. She said that without the Promesa debt restructuring, 30 cents of every dollar in taxes and fees the government collects from the people of Puerto Rico would go to creditors.

“Taken together with the debt policy legislated by the government last year that restricts incremental debt issuance to avoid the mistakes of the past, this agreement establishes sustainable debt levels, allows Puerto Rico to focus on structural reforms and growth, and provides the government the budgetary ability to provide the services people need and deserve,” Jaresko said, stressing that the new agreement’s cash and debt consideration to bondholders provides a 27% average reduction for GO bondholders and a 21% average reduction for PBA bondholders, in addition to reducing their claims by many years’ worth of interest payments.

“All of this puts Puerto Rico on a path to renewed market access,” she added, noting that after the new POA is filed in March, the court will hold hearings on the plan that could result in changes. 

“We hope the court will confirm the plan sometime in the fall of this year so Puerto Rico can exit bankruptcy before the end of this calendar year,” the FOMB executive director told reporters. “This agreement with creditors will not kick the can down the road. The oversight board negotiated for a sustainable debt payment that will prevent another default. This agreement will be part of a once-and-done plan of adjustment. This agreement incorporates the effect of the pandemic and natural disasters that preceded it, and the recession. Puerto Rico can afford less today than a year ago, thus resulting in the renegotiations that resulted in this agreement.”

The fiscal panel is still in negotiations with three groups of creditors—the Employees Retirement System, the unsecured creditors and creditors with monoline clawback claims, Jaresko said, declining to give details of the progress of these talks due to “mediation confidentiality.”

Gov. Pedro Pierluisi (Courtesy)

Pierluisi Objects

However, even before the deal is considered by Judge Swain, it already faces opposition from Gov. Pierluisi, who in a press release said that while the agreement is a positive development, the administration would not support a plan that includes an agreement between the Official Retirees Committee (COR by its Spanish acronym) and the oversight board for an 8.5 percent cut to government pensions exceeding $1,500 a month, which would affect 25% of retired public workers. 

Jaresko said the current deal with COR would be filed with the POA on March 8.

“The Adjustment Plan should not further affect our pensioners; therefore, although I support the economic terms of the agreement between the FOMB and the Group of Creditors, the Government of Puerto Rico will not be subscribing to the PSA announced today,” Pierluisi said in the statement, noting that the administration, through the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), participated in the debt negotiations, and was “emphatic in that any PSA to be implemented through a POA that includes a cut to the pensions of public servants will not have our support.”

“Unfortunately, the Board has not yet abandoned the pension cuts included in the February 2020 Adjustment Plan. Therefore, the Government of Puerto Rico has informed the Board and the Group of Creditors that it will not be part of the announced PSA today,” the governor affirmed. “I am sure that the Court presided over by Federal Judge Laura Taylor Swain can approve an Adjustment Plan that does not contain a cut in pensions because it is not necessary for the success of the transaction, and I will make it clear to the honorable court.”

Still, Jaresko told reporters that she was “hopeful that over time people will understand that this is likely to be the most fair and confirmable resolution to exit bankruptcy. She stressed that more than 70% of pensions would face no cuts, and that most teachers and police officers are under the $1,500 threshold. She added that the board also would set aside a pension reserve trust given that it projects budget deficits in upcoming years, and that money in the trust could not be used to help the government make ends meet.

“The remaining pensions would be what people here would call Cadillac pensions,” she said. “We believe that a reduction in pensions is important from the fair treatment argument in the court…. By setting aside monies in the pension reserve trust, we are ensuring that they have a pension, even in the years when we are projecting deficits. The reserve is funding to ensure PayGo in those years is fully paid, so that no one comes back [and cuts benefits] to make ends meet.”

Read this week’s Swain’s World.