Board may submit plan of adjustment for Puerto Rico GOs by late April

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The Puerto Rico Oversight Board may submit a plan of adjustment for Puerto Rico’s central government debt by late April, outlining the level of repayment for as much as $19 billion of bonds that have been in bankruptcy since 2017.

The board’s chief debt restructuring lawyer, Martin Bienenstock, said the plan might be ready by the end of next month at Wednesday’s Title III bankruptcy hearing in New York City.

After the hearing a board spokesperson told The Bond Buyer the board was continuing to negotiate with creditor groups and hoped to file a plan of adjustment that could be confirmed by the end of the calendar year.

The Oversight Board has indicated bond holders may get less than 25 cents on the dollar on average as its fiscal plans take shape. Word of the plan of adjustment for the Commonwealth's bonds come after a restructuring of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds gave recoveries of 56 cents to subordinate holders and 93 cents for investors in senior bonds.

The plan would certainly cover Puerto Rico’s general obligation debt, which totaled $13.3 billion in February 2017. It would probably also cover the debt of the Public Building Authority, Public Finance Corp., Convention Center District Authority, and Industrial Development Company. These four entities owed a total of $5.9 billion as of February 2017.

At Wednesday’s hearing the Unsecured Creditors Committee's lead attorney, Luc Despins, said he was very concerned by Bienenstock’s statement because Despins’ committee hasn’t been involved in creating the plan and hasn’t been given any input on it.

Despins said his committee has complained to the board about not being included in the negotiations for a Puerto Rico Electric Power Authority plan of adjustment. The board reached a preliminary deal on PREPA bond restructuring in July 2018.

Bienenstock responded to Despins by saying that the board has communicated with his committee more than with any other group. However, he said that in his experience of Chapter 11 bankruptcy unsecured creditors aren’t involved in negotiations over secured debt.

Puerto Rico Title III bankruptcy judge Laura Taylor Swain said Despins should discuss this issue with board attorneys after the hearing. If he didn’t get a resolution he wanted, he was free to file a motion with his legal argument, she said.

Earlier in the hearing Mark Stancil, lead attorney for the Ad Hoc Group of GO Holders, said that his group would challenge selective attacks on certain creditor holdings.

The board has filed a legal challenge to the three Puerto Rico GO bonds sold in 2012 and 2014. On Tuesday the Unsecured Creditors Committee filed a legal challenge to all of the Employment Retirement System bonds, which had $3.2 billion outstanding as of February 2017.

Stancil also said that if the board tried to support a plan of adjustment that is structurally unconfirmable, his group would challenge it.

If the board seeks to try to attack the legality of particular bonds, there could be years of costly litigation, Stancil said. On the other hand, if the board managed to get the local government to adopt certain reforms there would be more money for paying bonds in the “out-years.”

“Out-years” was probably a reference to fiscal years 2026 or 2033 and beyond. Starting around 2026 the current approved fiscal plan projects there will be declining surplus available for paying debt. By 2033 the board projects that there will no longer be a surplus and in the following years it is projecting deficits.

Bienenstock said the board had a fiduciary duty to address “valid infirmities” in certain bond claims. As for Stancil’s suggestion that the board get the local government to pass certain structural reforms to improve the island’s economy, Bienenstock said he was unaware of tools the board had to induce the government to pass them. He said he was open to the GO group’s suggestions on the topic.

Despins complained that there has been discussions with the board of setting up an Alternative Dispute Resolution system to handle bondholder claims for 16 months but that achieving this was still months away.

Board attorney Brian Rosen said the board would talk to Despins about his concerns on this matter.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Industrial Development Co Puerto Rico Infrastructure Financial Authority Puerto Rico Public Finance Corporation Puerto Rico Public Buildings Authority Puerto Rico