Monday, April 6, 2020

GO Bondholders Reportedly Reach Tentative Deal with Puerto Rico Fiscal Board

By on February 6, 2020

SAN JUAN — The Financial Oversight & Management Board (FOMB) reportedly has reached a tentative agreement with various holders of Puerto Rico general obligation (GO) bonds that involves making a higher payment to holders of more recently issued bonds whose validity had been questioned by the fiscal panel.

The Wall Street Journal reported Wednesday that the deal settles a dispute between holders of commonwealth GO bonds that were issued before 2012 and owners of GO bonds issued more recently. The agreement would end litigation involving $35 billion in central government debt and allow the board to press on with confirmation of the plan of adjustment the entity filed in U.S. District Court last year.

Spokespeople for both the FOMB and Puerto Rico’s Fiscal Agency & Financial Advisory Authority (Aafaf by its Spanish acronym) declined to comment.

The tentative deal reportedly is the culmination of a mediation process ordered by U.S. District Judge Laura Taylor Swain, who is overseeing debt restructuring cases under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), and which involve bonds totaling more than $18 billion in debt. The agreement, which requires court approval, is expected to be announced next week, according to the Wall Street Journal, which added that the parties are “still discussing some legal points of disagreement.”

Hedge funds including Monarch Alternative Capital LP, GoldenTree Asset Management LP and Whitebox Advisors LLC were part of a committee advocating for owners of the older, or legacy, bonds, while a group including Aurelius Capital Management LP and Autonomy Capital negotiated on behalf of investors in the newer bonds, the publication said.

The FOMB’s proposed plan of adjustment contemplated paying about 64 cents on the dollar for the older bonds, issued before 2012, and between 45 cents and 35 cents on the newer bonds issued in 2012 and thereafter.

However, the Wall Street Journal’s sources said that in the tentative deal, the FOMB agreed to a higher payment on the more recently issued bonds, though no details were provided.

The board has previously contested the validity of the newer debt, which has been challenged as unconstitutional as a result of a review by Kobre & Kim and others. The Kobre & Kim report concluded that many of the financial institutions that underwrote Puerto Rico bonds failed to carry out due diligence involving looking into the government’s ability to pay such debt.

The contested newer bond issues that reportedly are included in the tentative deal include:

  • GO Series 2012 A Bonds issued in the aggregate principal amount of $2.32 billion
  • GO Series 2012 B Bonds issued in the aggregate principal amount of $415.27 million
  • GO Series 2014 A Bonds issued in the aggregate principal amount of $3.5 billion

In fact, the price of the $3.5 billion bond issued in 2014 has climbed about 11 percent this year to around 70 cents on the dollar in recent days, its highest valuation since the bankruptcy case began in 2017, according to data from Electronic Municipal Market Access.

Economist Daniel Santamaría Ots, senior analyst with Espacios Abiertos (Open Spaces), a government watchdog, said he believes there is no coincidence between leaked news of the “alarming” tentative agreement and the higher prices for the contested bonds.

“These hedge funds, known disparagingly as vulture funds, not only speculate by buying cheap and selling expensive, but have a legal apparatus to litigate against the government to get the last cent out of such investments,” Santamaría said. “With this news, the market has been heating up. These bonds, which were worth 35 cents back in 2014, were trading at 70 cents on Wednesday.”

Santamaría said that contested Public Buildings Authority (PBA) bonds issued in 2012, which are also part of the negotiations, increased from 72 cents to 88 cents Wednesday. He said that the plan of adjustment’s pledged reduction in the commonwealth’s $35 billion in liabilities to $12 billion will not be reached if the reported tentative deal is confirmed.

The FOMB-pledged savings for Puerto Rican taxpayers in the GO bond negotiations could go the way of the pledged $17 billion in savings in the restructuring deal for the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) a year ago, which Santamaría said never materialized due to the overvaluation of the Cofina bonds as a result of overoptimistic projections of federal reconstruction aid and expected booming economic growth after hurricanes Irma and Maria in 2017. Such projections have been downgraded since, he said.

The Cofina deal, which involved the conversion of 171 old bond lines to 14 new bond lines, was closed with senior bonds priced at 93 cents and junior bonds priced at 54 cents, in contrast to the 30 cents, the old bonds traded before the hurricanes struck the island, Santamaría said. The commonwealth made its first $450 million payment last year to Cofina bondholders in the restructuring deal.

“This [GO deal] is the same that happened to Cofina. It is weighted in favor of certain bondholders and does not take into account Puerto Rico’s ability to pay its debt,” he told Caribbean Business, noting that the strategy involves offering holders of contested bond issues the choice of accepting a deal instead of going to court. “The board is negotiating this in a precipitous way to get the process done with.”

He added: “Puerto Rico is headed toward unsustainable payments of its debt. This happened with Cofina, and it seems that it will be repeated with the Puerto Rico Electric Power Authority restructuring support agreement and the central government bonds. Citizens will end up paying the consequences.”

Attorney Rolando Emmanuelli Jiménez, who represents the Irrigation & Electrical Workers Union (Utier by its Spanish acronym) in a federal lawsuit to invalidate FOMB decisions, said that “it is very worrisome” that the board is willing to pay more to bondholders for issues that “clearly” violated the commonwealth constitutional debt limit.

“When the 2014 bonds were issued, Puerto Rico was already bankrupt, yet the board is negotiating to pay more to these bondholders despite the dramatic economic crisis we are still suffering and without a revised fiscal plan,” he said.

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