Puerto Rico board, creditors remain far apart

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The Puerto Rico Oversight Board and central government bondholders remain far apart, according to documents released Wednesday night.

On Aug. 24 the board proposed a 20.6% to 22.3% cut in total consideration for general obligation and Public Building Authority bondholders compared to the existing Feb. 9 approved plan support agreement. By comparison, groups of holders of these bonds on Aug. 24 proposed a 3.2% cut in consideration compared to the Feb. 9 plan.

However, the board said Wednesday it was continuing negotiations with holders of more than $9 billion of the central government debt to achieve a restructuring of the debt. The February 2020 plan support agreement hasn’t been terminated, the board said, even as it worked to replace it.

“The Oversight Board will update the U.S. District Court for the District of Puerto Rico, which has jurisdiction over the Title III process, in late October about the status of the negotiations,” the board said.

Pedro Pierluisi
Whether or not Puerto Ricans elect Pedro Pierluisi, shown, in November to be governor may impact the workout for central government bondholders, said Puerto Rico attorney John Mudd.

The board posted the Aug. 24 proposals on its web site Wednesday night.

The board needs a class of the bondholders to vote in favor of the plan support agreement for the bankruptcy judge to approve the central government plan of adjustment. At this point, it appears the board wouldn’t be able to get this.

Since the spring, the board has said it will need to renegotiate the February plan support agreement for the bonds in light of the reduced government income expected due to the COVID-19 pandemic.

Municipal Market Analytics Partner Matt Fabian said, “The slowest path is best. With the potential for a Democratic takeover of Congress and the presidency, and talk of ending the Senate filibuster, it’s possible that Puerto Rico’s status could be changed in the next few years. Any debt plan agreed to has to consider this alternative as, if not likely, a reasonable scenario. Plans that ignore it should be ignored themselves.”

“Right now the board is on a wait-and-see mode,” said Puerto Rico Attorney John Mudd. “Waiting for the new board members to be appointed, which may change the way it negotiates the debt or the Title III [bankruptcy]. Bondholders may be doing the same.

“Also, the board is waiting to see which new government will be elected,” Mudd said. “It seems [Popular Democratic Party Governor candidate Charlie] Delgado Altieri will be much more hostile to the board than [New Progressive Party Governor candidate Pedro] Pierluisi but that remains to be seen.

“What is clear is that there will be no plan of adjustment until next year, maybe even as late as March-May, 2021, meaning that confirmation will be sometime late 2021,” Mudd said.

In the February plan, $16 billion of Highways and Transportation Authority, Employees Retirement System, Infrastructure and Finance Authority Rum, Metropolitan Bus Authority, and Convention Center District Authority bonds were to be paid at three cents on the dollar. The board said in the written presentation it released Wednesday: “GO Share of Total Consideration: Junior creditor recoveries further limited given key court cases (i.e., HTA and ERS).”

In the February agreement these creditors were to be given $527 million in cash. The board is now proposing to give them $50 million in cash and apparently nothing more.

According to the board proposal, the maximum annual debt service level for the GO and guaranteed PBA debt would be set at $1.05 billion, down from $1.47 billion. The creditors said they would accept the reduced level for fiscal years 2020 and 2021 but that the level should be increased to $1.2 billion thereafter through fiscal year 2044.

Whereas the board proposed a GO/PBA bond term of 20 years, the bondholders proposed a 25-year term.

The board wanted the true interest cost of the GO/PBA bonds to be reduced to 4.135% to 4.811% from 5.548% found in the February agreement. On Aug. 24 the bondholders group was insisting on the February figure.

The board said that the blended recovery of GO and PBA bonds in its plan would go down to 57.2% to 58.4% from the 73.6% found in the February deal, for claims net of original issue discount. The bondholders’ proposal would retain the 73.6% value.

The board proposed payment of the bonds with between $4.993 billion and $5.22 billion of new GO and subordinate Puerto Rico Sales Tax Finance Corp. (COFINA) bonds and $5.984 billion of cash. By comparison, the bondholders proposed payment with $7.406 billion of the two types of bonds, $5.984 billon in cash, and $611 million in a pledged sales and use tax equity.

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Puerto Rico Commonwealth of Puerto Rico Puerto Rico Public Buildings Authority Puerto Rico Highway & Transportation Authority Puerto Rico Employees Retirement System Puerto Rico Infrastructure Financial Authority Puerto Rico Sales Tax Financing Corp (COFINA) PROMESA