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Moody’s Weighs in on Commonwealth Debt-Exchange Plan

By on February 11, 2016

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It will be hard for creditors to accept Puerto Rico’s debt-exchange proposal to restructure some $49 billion in debt, credit-rating agency Moody’s Investors Service said in a report published last Friday.

Some of the difficulties mentioned include the complexity of the debt and the limited time left for negotiations—only three months. The Moody’s report also highlighted that the debt reduction proposed by the government, which totals $23 billion, exceeds what bondholders lost when the city of Detroit filed for bankruptcy, some $1.6 billion.

However, Moody’s also acknowledged that the proposal to cut back the debt by $23 billion is consistent with the credit-rating agency’s estimates on the government’s long-term repayment capacity, and that the implementation of Chapter 9 or a federal fiscal-control board would improve forward-looking perspectives regarding debt recovery.

The commonwealth government has threatened to impose a moratorium on their debt if creditors do not reach an agreement with them before the debt-payment deadline May 11. The Government Development Bank has to pay $422 million by May and $1.3 billion by July.

Last week, the Alejandro García Padilla administration unveiled its revised voluntary restructuring offer, whereby creditors would exchange their existing bonds for two new types of security: a “base bond,” with a 5% interest rate and a 35-year maturity; and a “growth bond,” payable only if government revenues exceed expectations as a result of economic growth.

Of note is that while the proposal includes a $23 billion reduction to principal, investors would have the opportunity to recover losses with growth bonds. In all, $49.2 billion worth of tax-supported debt would be exchanged for $26.5 billion in commonwealth-guaranteed base bonds and $22.7 billion in growth bonds.

Moody’s pointed out that general-obligation (GO) bondholders are the most reluctant about the debt-exchange proposal in the absence of either Chapter 9 of the U.S. Bankruptcy Code or another federally supported restructuring regime for Puerto Rico. On the contrary, if Chapter 9 or a fiscal-control board is allowed, it would facilitate the restructuring process and prevent minority investment groups from being left out of negotiations to obtain more conditions that are favorable.

The commonwealth’s proposal says it would “reflect, and seek to respect, constitutional priorities” of each type of debt, with GOs on top of that list, followed by the Sales Tax Financing Corp. and then the rest of the debt.

CB Online Reporter Luis Valentín contributed to this story.

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