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Oversight Board: Agreement in Principle on $7 Billion of Debt Reached

By on February 10, 2021

Puerto Rico fiscal board Chairman David Skeel (CB file)

Requests Extension to File Plan of Adjustment

SAN JUAN — Puerto Rico’s Financial Oversight and Management Board (FOMB) announced Wednesday that it reached an agreement in principle with several creditor groups to lower the commonwealth’s debt to “sustainable” levels and requested of U.S. District Court Judge Laura Taylor Swain a one-month extension of the deadline to file an amended plan of adjustment.

“Puerto Rico needs to put the debt restructuring behind it as soon as reasonably possible with an agreement that will be sustainable for Puerto Rico,” FOMB Chairman David Skeel said in a press release. “What we achieved at this point is a realistic proposal that will open a path to recovery from bankruptcy, and we informed the U.S. District Court for the District of Puerto Rico of our agreement.” 

Skeel said that the goal of the oversight board is to file a “consensual plan of adjustment for the Commonwealth of Puerto Rico that includes as many creditors as possible.” 

While Judge Swain had given the FOMB until Wednesday to file an amended plan of adjustment or a term sheet of the plan to settle some $35 billion in commonwealth general obligation (GO) debt, the fiscal panel also filed a request to extend the deadline to March 8.

“With the support of the court-appointed mediation team, we requested that the court grant more time to continue the mediation process, set down the agreed terms in a plan support agreement, and extend support for the agreement across a broad spectrum of creditor groups for a fair and affordable plan of adjustment that will enable Puerto Rico’s economy to grow and the people of Puerto Rico to prosper,” FOMB Executive Director Natalie Jaresko said in a statement. 

The board said it reached the agreement with creditors holding about $7 billion in GO and Public Building Authority (PBA) bonds, adding that the fiscal panel will make the terms of the agreement “available in short order to allow other parties to join.”

This agreement in principle builds on the plan support agreements already reached with the Official Retirees Committee (COR by its Spanish acronym) and certain unions, the FOMB said in the release, stressing that it continues to “reach a consensual plan of adjustment with as many parties as possible, including the Creditors’ Committee, unions, Employee Retirement System (ERS) bondholders, and bond insurers.”

“[T]he mediation process again proved successful with creditors holding substantial amounts of GO and PBA bonds having committed to support a plan of adjustment. Based upon the execution of joinder agreements to the Existing PSA, the Oversight Board anticipates that holders of over fifty percent (50 percent) of outstanding Commonwealth funded indebtedness will have stated their support for a plan of adjustment,” the FOMB said in an urgent motion filed in court Wednesday.

Later in the day, Judge Swain responded to the motion, ordering the parties to file responses to the motion by Friday, Feb. 12, at 5 p.m. The board has until Feb. 16 at 5 p.m. to reply.

The court document added: “However, the Oversight Board believes that an extension of the deadlines set forth in the Scheduling Orders to March 8, 2021 to file the Informative Motion and a proposed plan of adjustment will allow the Mediation Team to schedule and conduct additional sessions with parties in interest, and the Oversight Board to further mediation discussions and increase the foundational support (across a broad spectrum of creditor claims) for a plan of adjustment.”

In February, the FOMB had filed a plan of adjustment to restructure approximately $35 billion of debt and other claims against the commonwealth government, PBA, and ERS. In response to the Covid-19 pandemic, the board asked the court to put the plan on hold to assess the long-term effect of the pandemic on Puerto Rico. The fiscal panel and creditors resumed their mediation last summer. 

In a statement issued after the FOMB announcement, Gov. Pedro Pierluisi seemed pleased with the developments, affirming that although the details of the agreement in principle cannot be disclosed, given that the parties were still in the mediation process, he said the government believes that the economic terms of the agreement in principle “are feasible.” 

The governor said the board asked Judge Swain, who oversees the commonwealth’s debt restructuring process under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), for an extension to present an amended plan of adjustment that conforms to the agreement in principle that the entity has reached with the group of creditors.

However, Pierluisi stressed that the FOMB was informed that the government of Puerto Rico will not support a plan of adjustment that “contains cuts or adjustments to our pensioners.”

“We urge the Board to present an Adjustment Plan that does not contain cuts to pensions and that only reflects the economic terms of the agreement in principle. That way, we can move together to complete this restructuring process,” the governor added. “The Government will continue to actively participate in the mediation process in order to ensure the best interests of the people of Puerto Rico.”

Meanwhile, the senior public policy analyst at government watchdog Espacios Abiertos, Daniel Santamaría Ots, said the board’s new proposal for paying the public debt is unsustainable because his data establish that, even if the projected savings are achieved with the implementation of structural reforms, Puerto Rico would run out of cash in 2029.

The economist indicated that initially, the board’s proposal in October for a debt payment of $1.05 billion to $1.1 billion and an initial cash payment of $5.98 billion, “albeit unsustainable,” could seem like relief amid a scenario in which Puerto Rico was out of a restructuring process that involved between $3 billion and $3.5 billion annually, according to an Espacios Abiertos press release. However, the analyst added, the “situation is aggravated because since 2017, $2.3 billion annually have been allocated to PayGo [pay-as-you-go] pensions and an additional payment with government properties is added as required by the insurer Ambac Assurance Corp.”

The new proposal would entail annual payments of $1.15 billion to $1.3 billion from the central government plus the Sales Tax Financing Corp. (Cofina by its Spanish acronym) payment for 20 years, until 2041, and annual Cofina payments of $991 million between 2042 and 2058. 

“With the new payment of $2.3 billion per year in pensions (‘PayGo’), the General Fund is left in a situation of stress similar to the period before the restructuring,” Santamaría said.

The analyst said the new proposal would represent a cut to the principal of the debt that would oscillate between 55 percent and 58 percent, much lower than the one proposed in October, which was between 66 percent and 69 percent.

“If the base scenario of the proposed modification of the fiscal adjustment of the debt proposed in October 2020 by the Board, resulted in an adjusted primary fiscal deficit accumulated over 10 years: minus-$3.568 billion (accumulated cash deficit in 10 years of minus-$1.109 billion starting in 2029), we must ask ourselves how Puerto Rico is going to pay its debt with the even more accommodating current proposal?” the economist cautioned.

Santamaría stressed that this scenario is based on optimistic projections of the savings with the structural reforms—nearly $8.98 billion in 10 years—and the conservative projections of the contraction of the economy due to the austerity measures proposed by the board.

“The fundamental question here is: What will happen if these projections are not met? What essential budget services are they planning to cut to pay a clearly unsustainable debt?” Santamaría questioned.

He said that for fiscal year 2022, the board is proposing a cut of $23.5 million more than in the certified general fund budget in fiscal year 2021.

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