Why Moody's Is More Optimistic than the Puerto Rico Oversight Board

Ted Hampton

Puerto Rico bond recoveries may be better than projected by the Oversight Board in the fiscal plan it approved March 13, according to Moody's Investors Service's specialist in the debt.

In an interview with The Bond Buyer, Moody's chief Puerto Rico analyst, Ted Hampton, said there were three reasons why bond recoveries may be higher than the 23% to 24% that the board has included in its plan for the next nine fiscal years.

"This plan is important, but it won't be the last word on bondholder recoveries," said Hampton, a vice president at Moody's. "What bondholders ultimately get back will reflect resources projected to be available over the life of the debt, not just during the next 10 years. Also, assessments of Puerto Rico's repayment capacity overall will vary based on economic, revenue, and spending assumptions, and those inputs could change substantially before the dust settles on Puerto Rico's debt restructuring.

"In a judicial debt restructuring, PROMESA requires the court to make sure the restructuring is in the best interests of creditors, and to compare expected bondholder recoveries under the plan to what they would have received based solely on Puerto Rico's legal and constitutional provisions," Hampton said.

The plan may just be an "opening offer" to bondholders, Hampton said. In Detroit's bankruptcy, the initial settlement for bonds was low. Only after the involvement of outside parties through the so-called "Grand Bargain" did holders of unlimited tax general obligation bonds manage to negotiate a 74% recovery.

Second, debt restructuring is likely to wind up in U.S. District Court in Title III of the Puerto Rico Oversight, Management and Economic Stability Act, Hampton said. The debt stack is too complicated and there are too many varied creditors to be successfully negotiated under Title VI of the act. There is also too little time in which to negotiate. PROMESA specifies the board has to reach agreements with creditors, send debt talks into Title III by May 1, or face a slew of lawsuits after that date, which is the limit of the stay on lawsuits.

If management of the debt cuts gets handed to a judge, normally he or she would have to work within the general confines of the fiscal plan's allotment for debt service. Section 303 of PROMESA bars the judge from interfering with the government powers or revenues of Puerto Rico's government without the board's consent. However, Hampton said the board may grant the judge the right to manage these things and the judge may choose to do so in a way that increases bondholder payments.

Finally, the board's approved fiscal plan only covers debt payments in the next nine fiscal years. Much of the covered debt has maturities well beyond fiscal year 2026. It is possible that recoveries in that more distant period will be better, Hampton said.

Currently, Moody's anticipates recoveries for general obligation, Public Buildings Authority, Puerto Rico Sales Tax Financing Corp. (COFINA) Senior, and Puerto Rico Industrial Development Co. bonds at 65% to 80%. It projects recoveries at 35% to 60% for the COFINA subordinate, Highways and Transportation Authority, Government Development Bank, Employees Retirement System, Infrastructure Financing Authority, University of Puerto Rico, and Convention Center District Authority bonds.

The agency expects the Public Finance Corporation's bonds to provide a recovery of less than 35%.

It is good that the board has done what PROMESA has said it should do and has done it within PROMESA's time guidelines, Hampton said.

However, the board's projections of economic growth are "notably more pessimistic" than Gov. Ricardo Rossell-'s projected in his fiscal plan, Hampton and other Moody's analysts wrote in a Moody's piece released Wednesday. The bleaker economic expectations are a "negative credit development for bondholders," according to the report.

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