Thursday, February 20, 2020

Puerto Rico Gov Rejects Deal that Would Reduce $35 billion in debt by 70%

By on February 10, 2020

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico announced late Sunday that it reached an agreement with certain Puerto Rico bondholders on a framework for a Plan of Adjustment to resolve $35 billion of debt and non-debt claims.

The agreement would reduce the commonwealth’s debt service—including principal and interest from Sales Tax Financing Corp. (Cofina by its Spanish acronym) senior lien bonds by 56%, to $39.7 billion from $90.4 billion.

However, Gov. Wanda Vázquez Garced rejected the deal, saying that “although the agreement contains certain positive aspects, such as a substantial cut in the total debt,” after “carefully analyzing the terms of this new agreement and in view of the fact that the Fiscal Oversight Board refused to improve the treatment of pensioners therein, my government has determined not to join said new agreement according to current terms. Again, my position during this process has been that if bondholders receive better treatment in a new agreement, pensioners must also receive better treatment. This is a matter of basic justice.”

The new agreement reduces the island’s debt service by an additional $5 billion compared with the previous plan support agreement reached by the board and “a smaller group of bondholders last year,” the board stressed in its press release. “Under the new agreement, Puerto Rico would completely resolve its legacy debt in 20 years, 10 years sooner than under the previous agreement,” the fiscal panel added.

As explained by the board, the agreement reduces $35 billion of debt and other liabilities by 70%, or $24 billion, to less than $11 billion, an additional $1 billion reduction relative to the previous agreement. Holders of $8 billion of bonds support the agreement, including Puerto Rican credit unions and traditional municipal investors. “This support increases the Oversight Board’s ability to move forward towards exiting bankruptcy this year. The previous agreement was terminated,” the release reads.

“The new and more favorable agreement is a win for Puerto Rico,” Chairman José Carrión said.

“The new agreement is another step forward for Puerto Rico, one that gets the island much closer to ending bankruptcy and to the beginning of a true economic recovery,” board Executive Director Natalie Jaresko added. “Bankruptcy is holding Puerto Rico back. We need to resolve it and with this agreement, Puerto Rico will resolve it faster, protecting the pensions of retirees and the government services the people of Puerto Rico need and deserve as specified in the Oversight Board’s certified Fiscal Plan and budget.”

“The new agreement provides a 29% average reduction for general obligation (GO) bondholders and a 23% average reduction for holders of Puerto Rico Public Buildings Authority (PBA) bonds. Commonwealth creditors would receive $10.7 billion in new debt, half in GO bonds and half in COFINA Junior Lien bonds, as well as $3.8 billion in cash.

“The new agreement, which was approved by the majority of the members of the Oversight Board, reduces the Commonwealth’s maximum annual debt service payable in any future year, including COFINA Senior Lien bonds, by more than 70%, from $4.2 billion annually to a sustainable level of below $1.5 billion a year.

“The Oversight Board agreed to settle its challenge of $6 billion of bonds that the Oversight Board contends exceeded the Commonwealth debt limit. The settlement allows the Oversight Board to eliminate the risk of a costly and time-consuming legal battle. The Oversight Board will continue to challenge other bond issuances, including bonds issued by the Employee Retirement System, as well as seek recovery of fees earned by the banks, law firms and other parties earned when they helped issue bonds in excess of Puerto Rico’s constitutional debt limit,” the board assured in its release.

The Lawful Constitutional Debt Coalition (LCDC), which includes major holders of Puerto Rico’s GO and Public Buildings Authority (PBA) bonds, said in a separate press release that the “compromise, which builds upon the proposed September 2019 plan of adjustment (“POA”) anchored by the LCDC and other creditors, enjoys substantially broader support.”

“This agreement among a cross-section of major creditors and the Oversight Board represents a significant step forward for Puerto Rico on its path to exiting bankruptcy on sound financial footing. In addition to reducing the Commonwealth’s outstanding debt by approximately $24 billion, the Settlement shortens the timeline for debt repayment by ten years and places a cap on annual debt service, which will keep payments at or below 9.16% of government revenues. This deal also does not touch federal funds or monies going to pensioners and mitigates the risk of protracted litigation that could have cost the Commonwealth hundreds of millions of dollars per year in restructuring-related expenses.

“It is important to highlight that creditors with long-term investments and interests in Puerto Rico have been willing to make meaningful compromises that will ultimately help restore capital formation and ignite economic activity on the island. Under the terms of the agreement, GO and PBA creditors will accept material haircuts that average 30%. These concessions anchor the consensual restructuring of more than $35 billion in outstanding debt and set the stage for Puerto Rico to experience the type of economic revitalization that other municipal issuers such as Detroit realized following their bankruptcies,” LCDC’s financial adviser, Matt Rodrigue of Miller Buckfire & Co., was quoted as saying in the release.

“Pensioners, as I indicated in September, have already made sacrifices in the past. However, while bondholders receive new legal protections in this new agreement, pensioners receive no improvement. Faced with this scenario, I cannot support this new agreement,” Gov. Vázquez said. “My government will continue insisting with the Board in order to improve the agreement in favor of the pensioners, as well as in all those areas that are for the benefit of the People.”

The following is a summary published in the release of the key terms provided under the Settlement include:

  • The Commonwealth’s outstanding bond debt will be reduced from approximately $35 billion to approximately $11 billion, resulting in a total reduction of approximately $24 billion;
  • The timeline for debt repayment will be reduced by ten years compared with the prior POA; Commonwealth retains last ten years of cash flow totaling $4.8 billion;
  • Creates a cap on all payments for tax-supported debt of 9.16% of Puerto Rico’s government revenues;
  • Provides for average haircuts for GO and PBA bondholders of approximately 30%;
  • Does not interfere with the level of government expenditures for essential services or pensions;
  • Leaves approximately $15 billion in cash for the Commonwealth and its entities.

Access the board’s Plan Support Agreement Presentation: Download

Access the Plan Support Agreement filing Download

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