Many hurdles remain for Puerto Rico bond plan

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Gaining the support of government officials, overcoming the objections of those investors being offered 3% or less for their bonds, and getting the voting classes arranged by bond vintage are just some of the obstacles that the Puerto Rico Oversight Board faces in getting its proposed debt restructuring plan approved.

One of the first hurdles is getting Puerto Rico’s legislature and governor to approve the new bonds authorized by the support agreement announced Sunday, said James Spiotto, Chapman Strategic Advisors managing director.

Puerto Rico bankruptcy Chief Mediator Barbara Houser
Puerto Rico Bankruptcy Chief Mediator Barbara Houser said that the judge should rule on issues concerning the HTA, ERS, PRIFA, and CCDA bonds.

On Sunday Gov. Wanda Vázquez said she opposed the new deal on her government’s debt. The legislature has generally been less willing to accommodate bondholder wishes than the governor has and it is unclear how its members will act on the new proposal.

Puerto Rico attorney John Mudd agreed that the governor and legislature would be a hurdle. If the plan fails to gain support from lawmakers, the board may seek to get a favorable reading on section 305 of the Puerto Rico Oversight, Management, and Economic Stability Act. This restricts the judge from taking actions affecting the “debtor” without the Oversight Board’s permission.

Mudd also said that the 3 cents on the dollar offered to the Employees Retirement System bondholders and 1.8 cents on the dollar that the board appears to offer to the “nonsecured creditors” for their bonds would be an obstacle. By nonsecure creditors, Mudd was referring to holders of Highways and Transportation Authority, Convention Center District Authority, and Puerto Rico Infrastructure Authority debts that some say are subordinated to payment of the central government’s general obligation debt. The HTA, ERS, CCDA, PRIFA bonds and other debt being threatened with the tiny payouts totals $16 billion.

The deal will likely face these problems all the way into the period after any potential plan confirmation would occur, Mudd said.

Spiotto said the hallmark of all municipal bankruptcies is that all central parties come together to support a compromise because the alternative is expensive and requires ongoing litigation. To avoid this the local government may ultimately follow the typical pattern, he said.

The board in the earlier plan of adjustment last fall set up voting classes by the vintage of the bonds’ issue date. The board will likely try to do this again, one bondholder source said, though Spiotto said there may be challenges to this approach at the confirmation hearing.

In a report that Title III bankruptcy Chief Mediator Barbara Houser filed in the bankruptcy on Monday, she reproduced the board’s recommended schedule for the handling the new debt deal. Some key dates are Feb. 28, which is deadline for the board to file an amended plan of adjustment for the central government debt and an amended disclosure statement; June 30, when confirmation discovery would commence; and Oct. 13 to 23 for the actual confirmation hearing.

Houser said her team “expresses no view on the [board’s] proposed confirmation schedule other than to say it appears to satisfy technical requirements and is directionally correct.”

In the meantime, Houser asked Title III Judge Laura Taylor Swain to rule on several matters being contested concerning the ERS bonds on the one hand, and the HTA, CCDA, and PRIFA bonds, on the other. She said that the creditor parties are far apart from the board, making arbitration unlikely to succeed. She said the judge’s ruling would affect the viability and legality of the Plan Support Agreement for the central government debt.

Houser said that the board’s challenges to fees paid to underwriters for past bonds should be stayed until after the confirmation of a plan.

On Monday evening, bond insurers Assured Guaranty, Ambac, National Public Finance Guarantee, and Financial Guaranty Insurance Company released a statement opposing the proposed restructuring deal. “We believe the recently released Amended Commonwealth Plan Support Agreement is counterproductive to an orderly restructuring of Puerto Rico’s debt obligations and risks embroiling Puerto Rico in many more years of protracted litigation at significant cost to taxpayers and potentially compromises Puerto Rico’s future access to capital markets.”

“Failure to legally, in good faith, and inclusively negotiate a path out of bankruptcy will prolong Puerto Rico’s path to economic stability and reentry to capital markets,” they said.

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