Puerto Rico Government Puts Forth Debt-Restructuring Plan
Creditors Call Effort Into Question
With the Puerto Rico debt-crisis saga in crescendo, several developments on different fronts took place this week, as the commonwealth continues to grapple with a fiscal crunch that slowly but surely keeps taking a toll on the island’s economy and 3.5 million residents.
As anticipated by Caribbean Business Online (Jan. 29), the Puerto Rico government made public on Monday its revised debt-restructuring plan—a voluntary exchange offer to creditors that would reduce the commonwealth’s debt by roughly $22 billion while providing debt-service relief during the next few years, according to a government statement.
After presenting creditors’ representatives on Friday with their latest proposal, advisers for all sides were expected to continue talks through this week, Government Development Bank (GDB) President & Chairwoman Melba Acosta told Caribbean Business on Monday. She added that meetings were mainly focused on addressing concerns and questions from creditors about the government’s plans to restructure its debt and achieve economic growth.
While Gov. Alejandro García Padilla’s fiscal team views the debt-exchange plan as “fair, balanced and reflective of the commonwealth’s actual capacity to pay our creditors over the long term,” it did not take long for some creditors to deem the offer as less than hopeful. For instance, Nader Tavakoli—president & CEO of Ambac, a municipal bond insurer with exposure to $9.8 billion in Puerto Rico debt’s net principal and interest—said, “We do not view this proposal as a serious effort.”
The government’s plan represents a huge haircut for creditors—averaging about 50%—according to several media outlets.
While La Fortaleza is aware of some of the negative feedback by creditors that has been highlighted in several press reports, the administration would rather wait for a counterproposal, Public Affairs Secretary Jesús Manuel Ortiz told the press earlier this week.
What’s more, Tavakoli added, “It is difficult to engage in discussions since Puerto Rico refuses to share basic information.” For its part, La Fortaleza says its intent has always been to have the most financial information publicly available. Yet, it could take Puerto Rico at least until the end of March to release its audited financial statements for fiscal year 2014, Treasury Secretary Juan Zaragoza told Caribbean Business.
Two new bonds on the table
In November, officials unveiled the “superbond” plan, whereby bondholders would exchange their existing commonwealth paper for a new, more solid security that would take into consideration the legal priority of each type of Puerto Rico debt. However, a recent update to the administration’s long-term Fiscal & Economic Growth Plan (FEGP)—portraying a gloomier fiscal and economic future for the island—prompted a revision to the commonwealth’s first proposal.
Based on the previous superbond offer, the administration is now asking creditors to 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.
In all, the administration seeks to exchange $49.2 billion worth of debt for $26.5 billion of commonwealth-guaranteed base bonds and $22.7 billion in growth bonds. “By sharing in the island’s economic recovery, creditors would have the opportunity to recover the principal amount of their investments,” stated the administration’s fiscal team.
Still, timing “is of the essence,” according to the government. To the extent that if a deal cannot be reached by May 1, when $422.8 million in GDB debt is due, “and creditors do not consensually agree to a means of resolving the May 1 GDB payment, the commonwealth may be forced to declare a moratorium,” the proposal reads.
The plan also calls for local legislative action and high participation levels from creditors in the exchange. In addition, it assumes the federal government maintains current levels of support to the island. Failure to achieve these benchmarks would prompt a revision in the terms of the offer, including creditor recoveries.
Meanwhile, the mechanism would “reflect, and seek to respect, the constitutional priorities” of each type of credit. For instance, general-obligation (GOs) bondholders would receive payments on their base bonds before exchanging with Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders, who then would be followed by the remaining exchanging creditors.
Targeted issuers include GOs, Cofina and the GDB, as well as the Highways & Transportation; Infrastructure Financing; Public Buildings; and Convention Center District authorities. Excluded issuers include the Electric Power; Aqueduct & Sewer; and Housing Finance authorities; and Municipal Financing Corp., as well as the Children’s Trust.
Statutory liens and pledges on certain revenue streams would back the base bonds, including the 4.5% share of the sales & use tax that currently goes to pay Cofina debt, and roughly $325 million annually in petroleum-products tax revenues, also known as <I>la crudita</I>.
With debt-service relief during the next few years, Puerto Rico would be able to fully implement the FEGP and ensure “essential services to its citizens, repay stretched suppliers and taxpayers, rebuild depleted cash resources and properly fund the retirement system,” the proposal states.
Interest payments on base bonds would begin in January 2018, scaling up to the fixed 5% rate by fiscal 2021, when principal payments kick in. Meanwhile, payments, if any, on the so-called growth bonds would begin in the 10th year after the exchange offer materializes.
Calls for federal action
On Capitol Hill, the administration continues to urge for congressional action, particularly related to access to a debt-restructuring regime such as Chapter 9 of the U.S. Bankruptcy Code. Commonwealth officials strongly believe federal legislation is needed to avoid additional defaults and achieve access to a restructuring mechanism that could
facilitate talks with its creditors.
A day before presenting creditors with the latest exchange proposal, the governor stated it will be “extremely challenging to reach a resolution with multiple issuers without access to a legal [debt-restructuring] framework.”
House Speaker Paul Ryan (R-Wis.) has pledged to come up with a solution to the Puerto Rico issue before the end of March, a deadline that could be met, according to Rep. Rob Bishop (R-Utah), chair of the House Natural Resources Committee. One of the latter’s subcommittees discussed earlier this week the potential establishment of a federal fiscal-control board for the commonwealth.
Allowing Puerto Rico to access any type of debt-restructuring mechanism would most likely come at the cost of enhanced federal oversight from Congress.
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