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Puerto Rico fiscal board: Plan would cut central gov’t debt by 60%

By on September 27, 2019

Proposes plan of adjustment to reduce debt service from $4.2B to $1.5B

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico announced that after negotiations with creditors, the proposed plan of adjustment it filed Friday in court reduces the commonwealth’s $35 billion in liabilities—bonds and other claims—by more than 60%, to $12 billion.

The announcement was made an hour before the congressionally established panel held its 17th public meeting, at the Puerto Rico Convention Center.

The plan, combined with the debt restructuring of the Sales Tax Financing Corp. (Cofina by its Spanish acronym), reduces the “maximum annual amount” of government net-tax supported debt service from $4.2 billion to $1.5 billion. As a result, the island’s debt service drops from $82 billion to $44 billion over a 30-year period, “ensuring long-term sustainability,” the board said.

See the Plan of Adjustment filing here.

The plan “provides a framework to reduce the island’s debt to sustainable levels and provides a path to exit bankruptcy,” the board said, adding that its negotiations involved claims against the Public Buildings Authority (PBA) and the Employee Retirement System (ERS), including more than $50 billion in pension liabilities.

As a measure of the significance of Friday’s announcement, in other previous debt negotiations, the board had achieved cuts that only averaged 35% to 40%.

Combined with the restructuring of Cofina debt earlier this year, the plan reduces the commonwealth’s annual debt service to just under 9% of own-source revenues, down from nearly 30% of government revenues before the enactment of the Puerto Rico Oversight, Management and Economic Stability (Promesa), according to the board that the law established.

Agreements were reached with the Official Committee of Retired Employees of the Government of Puerto Rico (COR), the Lawful Constitutional Debt Coalition (LCDC) and QTCB Noteholder Group (QTCB) representing certain general obligation (GO) bondholders, and the Public Servants United of Puerto Rico (SPU)/AFSCME Council 95, who the board said “have come together understanding the financial situation on the island and support the Plan as a compromise to achieve stability for Puerto Rico.”

The board said that the press release announcing the proposal, which was issued an hour before the Friday hearing, is “neither an offer to restructure, purchase, or sell debt of any kind, nor a solicitation of votes to accept or to reject the proposed Plan of Adjustment.”

At the same time it filed the proposed plan of adjustment, the board filed a proposed disclosure statement for the court to consider. If approved, the debtors will request creditors to accept the proposed plan of adjustment.

“Today we have taken a big step to put bankruptcy behind us and start to envision what Puerto Rico’s future looks like under fiscal stability and economic sustainability,” Chairman José Carrión said in the release. “Three years after Congress passed PROMESA and two years after the most severe Hurricane in more than 100 years hit Puerto Rico, after more than a decade of economic decline and fiscal disarray, after tens of thousands of Puerto Ricans left their island to find prosperity elsewhere, we have now reached a turning point.”

“The Plan of Adjustment we proposed today begins our march out of bankruptcy. We are not there yet. We need court approval, and it will take time to get there. A Plan that has the support of certain bondholders, retirees and public employees is the best Plan to remove the cloud that has been hanging over Puerto Rico’s economy,” Carrión added.

An ‘important milestone’

The Official Retirees Committee (COR by its Spanish acronym) said in a release Friday that the presentation of the Plan of Adjustment is “an important step” for Puerto Rico government retirees, noting that it “provides certainty to the payment of pensions and benefits for retirees now and for years to come.”

The plan includes a term-sheet agreement between COR and the board that would avoid the worst pension cuts that had been pushed by the panel for most of the current 167,500 government pensioners while creating a reserve fund to ensure payments to future retirees. COR represents retirees from commonwealth agencies, teachers and the judiciary branch.

The nine-member COR—a committee named by a U.S. Justice Department trustee to represent retirees as creditors in Title III bankruptcy proceedings under Promesa—managed to get the board to back the 8.5% cut in monthly pensions of more than $1,200 a month, instead of the 25% cut it originally proposed.

The agreement exempts 61% of current pensioners—about 102,000 retirees—from any cuts to benefits, in contrast to only 25% under the board’s plan. It also establishes a mechanism to restore benefits, partially or totally, if the government’s fiscal performance exceeds expectations. 

The agreement, moreover, includes the creation of a pension reserve fund, whose finances would be managed by a non-government investment council, to ensure future payments to pensioners in the event the commonwealth fails to make pay-as-you-go allotments. The fund would be overseen by an independent, retiree-elected pension board, which would also ensure that the terms of the agreement are fulfilled.

The agreement would be submitted next year to a vote by retirees affected by the board, after the federal court completes a review of the plan, which includes disclosure statement hearings and an appeals process, the COR leadership said in an interview with Caribbean Business earlier this week.

“The agreement between the COR and the FOMB is the culmination of two years of hard work and intense negotiations to protect as many retirees as possible from the cuts proposed by the FOMB, improve the treatment to the retirees that will be impacted, and give certainty to present and future pension payments,” COR Chairman Miguel J. Fabre Ramírez said in Friday’s release. “Our agreement is based on a deep analysis of the reality of pensioners in Puerto Rico, the fiscal crisis and the possibilities that were feasible under the process of bankruptcy.”

Meanwhile, Moody’s Investors Service, one of the main credit-rating companies, was cautious Friday about the proposal, noting that it asks “bondholders to take steep discounts and retirees to have their pensions cut.”

“Puerto Rico’s proposed plan of adjustment is an important milestone in its restructuring process, but unlikely to be the final say on recoveries,” Moody’s VP-Senior Analyst Genevieve Nolan told Caribbean Business. “Currently, pensioners’ losses are far less than bond creditors, as expected. The road to approval is long, and could result in changes to the current terms, similar to what played out in Detroit.”

In fact, Francisco Del Castillo, COR legal consultant, told Caribbean Business earlier this week that in the case of Detroit, five disclosure statements were approved as part of the bankruptcy court process before a final pension plan settlement was reached. 

Requests for comment were left with S&P, which also rates local bonds.


The board also published an independent analysis of Puerto Rico’s pension systems. The report by Ernst & Young evaluates the fiscal and economic impact of the pension cash flows, including the pension liabilities and funding strategy, sources of funding, existing benefits and their sustainability, and the system’s legal structure and operational arrangements.

The plan of adjustment “delivers meaningful reductions from bondholders, providing, on average, a more than 60% blended reduction in total Commonwealth liabilities. The Plan strengthens pensions by establishing an independent pension reserve trust to ensure PayGo benefits can be paid regardless of the economic or political situation. It includes an 8.5% pension reduction for retirees earning over $1,200 per month, so 60% of retirees would not face any cut,” the board explained.

The board recalled that in 2016, when it began its work, “Puerto Rico’s government and public corporations like PREPA [Puerto Rico Electric Power Authority] and COFINA had amassed more than $70 billion in debt they could not pay and owed Puerto Rican retirees over $50 billion in unfunded pension benefits. The Puerto Rico government alone had to spend almost $3 of every $10 in tax revenue just to service its debt.

Local retail bondholders “have the opportunity to receive taxable bonds with monthly interest payments,” the release reads.

“The Plan of Adjustment, together with the fiscal discipline PROMESA mandates and the significant structural reforms outlined in the Fiscal Plan that will enhance Puerto Rico’s quality of life and economic competitiveness, allow us to work towards stable and sustainable growth,” added the board’s executive director, Natalie Jaresko.

The plan restructures GO bonds; clawback claims against the commonwealth; PBA bonds; ERS bonds; general unsecured claims against the commonwealth, PBA and ERS; and the commonwealth’s pension liabilities. It includes the following specific recovery terms:

• A 36% reduction for holders of GO bonds issued before 2012 

• A 28% reduction for holders of PBA bonds issued before 2012 

• A 87% reduction for holders of ERS bonds 

The plan also “provides an option” for holders of bonds issued after 2011—debt that has been challenged as unconstitutional as a result of a review by Kobre & Kim and other professionals, the board said.

The settlement offer includes the following terms:

• A 55% to 65% reduction for holders of challenged GO bonds and commonwealth guaranteed claims

• A 42% reduction for holders of challenged PBA bonds 

“This settlement mechanism reduces litigation expenses for the Commonwealth and accelerates resolution of these claims,” the board assured.

The plan “builds on the Plan Support Agreement announced in June and negotiated with holders of approximately $3 billion in claims. As of the filing date, the Plan includes support from holders of approximately $4 billion in claims, representing 54% of claims from PBA bonds issued before 2012 and 22% of all GO and PBA claims, making the Plan Support Agreement effective,” the release reads. “As contemplated in the Plan Support Agreement, the Oversight Board approved and certified the filing of a voluntary petition under PROMESA’s Title III for PBA, to enable the restructuring of the PBA claims through the Plan.”

An audio recording of the hearing will be available on the board’s website,, following the hearing.

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