Puerto Rico To Pursue Debt Exchange Even If Allowed to Restructure

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WASHINGTON – Representatives for Puerto Rico on Friday said the cash-strapped commonwealth plans to pursue its recently proposed debt exchange with holders of tax-supported debt even if it eventually gets access to bankruptcy or some other type of restructuring process.

"This is the deal we're prepared to do and we're trying very hard to get done," said Jim Millstein, who, along with his firm Millstein & Co., has been advising Puerto Rico as it deals with about $70 billion in debt.

"The legal structure would help us enforce the deal, help us make it binding on all creditors, but we wouldn't change the [deal's] economics," he added. "This is a sensible plan in our view and brings debt service to a revenue level that is manageable."

The commonwealth has repeatedly asked Congress to provide it or its authorities with restructuring capabilities, like those under Chapter 9 bankruptcy. But Democrats and Republicans have been unable to agree on this issue. A bill sponsored by Rep. Sean Duffy, R-Wis., that would make Chapter 9 bankruptcy protections for authorities contingent on the imposition of a federal oversight authority is the only current bill that joins Democrats' calls for bankruptcy protection and Republicans' request on an oversight authority.

Millstein said the restructuring in that bill would be useful for some of the Puerto Rico's entities, but that the entire territory will need Chapter 9 protections for the situation to be fully addressed.

Millstein spoke at a briefing here held to update congressional staff and the press on the commonwealth's financial situation. Melba Acosta Febo, president of Puerto Rico's Government Development Bank, and Richard Cooper, a partner with the law firm Cleary Gottlieb Steen & Hamilton in New York, joined Millstein as the representatives for Puerto Rico at the briefing.

The restructuring plan, which Puerto Rico announced last week, asks creditors holding $49.2 billion of tax-supported debt to exchange it for $26.5 billion of new mandatorily payable Base Bonds and $22.7 billion of Growth Bonds. There would be no interest payments on the Base Bonds until fiscal year 2018 and no principal payments until fiscal year 2021.

The Growth Bonds would only be payable if the commonwealth surpasses conservative revenue growth projections through real economic growth, Millstein said. The first payments on the Growth Bonds, if they can be made, would begin in the tenth year after the close of the exchange offer. If Puerto Rico sees growth in line with the projected growth of the United States over the next 30 years, the creditors would be able to recover the full amount of their principal investments. Annual payments on the Growth Bonds would be capped at 15% of the commonwealth's revenue.

Puerto Rico's debt service-to-revenue ratio on tax-supported debt would fall to about 15% under the plan compared to its current 36% level. The highest state ratio is Hawaii's 13%. This is a good comparison, Millstein said, because like Puerto Rico most of the Hawaii's government services happen at the state level instead of at the municipal level.

The deal, which some analysts said did not even give a starting point for restructuring discussions, could only move forward if creditors participate in very high numbers and the federal government maintains at least its current percentage levels of programmatic support for the commonwealth.

Acosta Febo said she and other commonwealth officials have had more conversations with creditors after last week's meeting when the idea was proposed. Most of the subsequent discussions have been to help creditors better understand the numbers in the deal, she added. Millstein said the plan lays out a broad allocation of how much each class of creditor would get but will rely on the creditors having discussions with the commonwealth and amongst themselves to find an equitable way to allocate the debt.

The commonwealth has also been trying to finalize a separate deal with creditors for about $9 billion of Puerto Rico Electric Power Authority debt. A previously missed deadline for Puerto Rico's lawmakers to pass legislation required under the deal has been extended to Feb. 16.

Moody's Investors Service said Friday that the extension of negotiations "suggest a consensual debt restructuring is still possible." However, it warns that the deal with PREPA still faces additional obstacles like getting enough creditors to sign on to the deal.

The negotiations with creditors for tax-supported and PREPA debt are increasingly important to the commonwealth as Puerto Rico officials have said that without solutions from those negotiations or congressional action, the territory will default on its next major round of bond payments due July 1.

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