Sunday, September 22, 2019

Puerto Rico fiscal board reaches agreement to restructure nearly half of island’s debt

By on June 17, 2019

Fiscal board member David Skeel and Christian Sobrino, the governor’s representative to the board and head of the island’s Fiscal Agency and Financial Advisory Authority (CB file)

Gov’t assures it will not support any plan that cuts pensions; Assured calls deal unconstitutional

SAN JUAN — The agreement that Puerto Rico’s Financial Oversight and Management Board announced Sunday to restructure $35 billion in debt and non-debt claims of commonwealth and Public Buildings Authority creditors, includes some $6 billion the panel is trying to invalidate.

It also includes about $1 billion in bonded debt issued in 2011 whose validity the Unsecured Creditors Committee is challenging because it violates constitutional limits.

The agreement will reduce the amount of outstanding commonwealth-related bonds to less than $12 billion, a reduction of more than 60%. The commonwealth’s debt service, including principal and interest over the next 30 years, would be cut by about half, to $21 billion from $43 billion.

The board’s Special Claims Committee and the Official Committee of Unsecured Creditors (UCC) in January objected to more than $6 billion of Puerto Rico’s bonded debt, arguing it was in “clear violation” of the commonwealth’s constitutional debt limits and had to be declared null and void. The board is also trying to have Public Buildings Authority (PBA) debt declared unsecured. Separately, unsecured creditors are trying to invalidate 2011 debt but the board did not join that effort.

The agreement, however, in an appendix included a list of PBA bond series and general obligation (GO) bond series, the latter of which included bonded debt issued in 2012 and 2014.

The board’s executive director, Natalie Jaresko, said the deal includes 2012 and 2014 debt but not just yet.

“We announced this agreement yesterday [Sunday] and now that it’s public, we hope to continue to talk with more creditors along the way. We did this with Prepa [tPuerto Rico Electric Power Authority],” she said in reference to the recent restructuring support agreement negotiated with about 40% of the utility’s bondholders. Syncora, the monoline bond insurer, has joined the agreement.

A board document states that while the challenged 2012 and 2014 GOs are subject to ongoing litigation, the plan provides a plan to settle outstanding litigation. The 2012/2014 holders have the option to litigate for pari, or equal, recovery with pre-2012 bonds, called vintage, or settle at certain levels. The 2012 GOs, which total $2.7 billion, can settle at 45% or be litigated for pari vintage recovery. The 2014 GO bondholders, which have a claim of some $3.6 billion, can settle at 35% or litigate for pari-vintage recovery. Holders of some $700 million in 2012 PBA bonds settle at 23% with net GO claim treated as 2012 GO. Vintage PBA bonds, which total about $3.9 billion can settle at 73% of the recovery.

If bondholders of 2012 and 2014 GO bonds opt to litigate and lose, they get nothing.

The Ad Hoc Group of General Obligation Bondholders, however, said that five months have passed since the board challenged the bonds issued in 2012 and 2014 without progress toward resolving the substance of that ligitation and has “exploited the overhang” to negotiate the planned support agreement.

The board expects to file a plan of adjustment in court under the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) Title III within the next 30 days and hopes to emerge from Title III in early 2020.

Nonetheless, the head of the island’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), Christian Sobrino, said the government will not support any proposed plan support agreement (PSA) that is based on the recently enacted fiscal plan, which calls for pension cuts.

“We will not promote any legislation or executive order or any other administrative agreement required of the government that directly or indirectly supports a plan of adjustment that cuts pensions,” he said in a statement. Jaresko replied that she believes the planned support deal does not require legislation and that it depends on the nature of the structured bonds.

According to the board, the agreement is an acknowledgment by parties with claims against Puerto Rico that the island’s financial situation requires a “meaningful reduction” in its debt burden to a sustainable level and is an important element of a plan of adjustment that would allow it to emerge from bankruptcy early next year.

This support agreement, together with the board’s agreements with the Official Committee of Retired Employees (COR by its Spanish acronym) and with unions regarding collective bargaining and retirement benefit agreements announced earlier this week to resolve the $55 billion in unfunded pension liabilities, as well as a deal to restructure about $17 billion of Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds, and an approved restructuring of $4 billion in Government Development Bank debt, seem to result in substantial headway in addressing the island’s more than $70 billion debt. The Puerto Rico Electric Power Authority has also reached a restructuring support agreement (RSA) for its about $8 billion debt.

“The support agreement with creditors and the agreement with COR and the unions are milestones for Puerto Rico on the path towards a future with sustainable debt payments, secure pensions, and fiscal stability,” board Chairman José Carrión said in the release. “A Commonwealth plan of adjustment will provide investors with confidence that Puerto Rico has turned the corner after its financial crisis.”

However, Sobrino stressed: “Not one word of the PSA is considered acceptable to AAFAF,” reiterating that “no legislation, executive action or other administrative approval required from the Government of Puerto Rico will be taken to implement an agreement that directly or indirectly supports a Plan of Adjustment that cuts payments to our retirees.”

The agreement would provide a greater than 60% average haircut for all $35 billion claims against the commonwealth, a 36% haircut for holders of general obligation bonds, and a 27% haircut for holders of Public Building Authority bonds guaranteed by the commonwealth.

The agreement, along with the Cofina RSA approved in February, would reduce the commonwealth’s annual debt service by more than 70%, from $4.2 billion annually to less than $1.5 billion a year.

“These were tough negotiations and we are confident we reached the best deal possible for Puerto Rico to move on from decades of incurring debt we could not afford,” Jaresko said.

In its release, the Lawful Constitutional Debt Coalition (LCDC), which includes holders of GO and PBA bondholders issued before March 2012, said the three months of negotiations with the board resulted in a PSA that establishes terms for the consensual restructuring of more than $18 billion in GO and PBA debt.

The coalition’s members, which include GoldenTree Asset Management, Monarch Alternative Capital, Whitebox Advisors and Taconic Capital signed the PSA. Other signatories include members of the ad hoc group of Qualified School Construction and Qualified Zone Academy bondholders.

Representing the LCDC, Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan LLP, said it was a very positive development for Puerto Rico that a large group of bondholders worked with the board to develop the consensual restructuring agreement.

“The PSA forged by major stakeholders includes approximately $8 billion in GO and PBA debt reduction while establishing a framework for reducing the Commonwealth’s total funded debt and general unsecured claims by $23 billion. The terms also create an efficient path for resolving disputes over the validity and priority of GO debt – one that will enable the Commonwealth to save hundreds of millions of dollars per year in restructuring-related expenses upon exiting bankruptcy,” he said.

Assured Guaranty, one of several bond insurers challenging the board’s constitutionality, does not support the PSA.

“It is premised on a number of terms that violate Puerto Rico law, its Constitution and PROMESA. These include, among others, an unprecedented and meritless attempt to invalidate certain lawfully issued general obligation bonds, acceptance of erroneous and misleading financial projections in the Oversight Board’s legally flawed fiscal plan, and artificial separation of similarly situated creditors into classes that would receive unequal treatment,” Assured said in a statement.

“This ‘deal,’ backed by barely 10% of Commonwealth guaranteed and GO creditors, who bought positions at prices substantially below par, failed to include the largest general obligation creditors who have supported Puerto Rico for decades, and is a disservice to the residents and long term stakeholders of the island,” the insurer said, adding it is “prepared, if necessary, to litigate this matter to the fullest extent to protect our rights, those of municipal bond investors, and the rule of law.”

A summary of the deal calls for the following:

—Participating bondholders will receive a combination of new bonds and cash;
—In aggregate, GO bondholders will receive a baseline recovery of approximately 64%;
—Ratable distributions for disputed bondholder claims will be placed in escrow;
—Authority to litigate or settle existing “late vintage litigation” will be transferred to a litigation trust post-confirmation, and;
—Litigation value of up to $1.4 billion will exist for the Commonwealth.

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