The Puerto Rico Oversight Board's latest fiscal turnaround plan for the commonwealth may more than double debt payments to bondholders, compared with proposals earlier this year.

The commonwealth’s plan released Wednesday and certified by the Oversight Board Thursday would generate a projected $6.7 billion surplus over six years before debt service, a $400 million increase compared with previous estimates outlined by Gov. Ricardo Rossello.

That would represent about 33% of $20.5 billion in debt service due over the six year period covered in the plan, according to credit analyst who asked to not be identified because of company policy. A previous proposal presented by Rosselló to the Oversight Board in February suggested that the island’s government could pay from 8.1% to 14.1% of debt due through the 2023 fiscal year. A January plan pitched by the Governor had allowed for zero debt service through 2022.

Puerto Rico Oversight Board chairman José Carrión III (center).
"These plans offer a once-in-a-generation opportunity," says Puerto Rico Oversight Board Chairman José Carrión (center).

The new plan, which was unveiled the same day an island-wide blackout hit the Commonwealth, factors in $62 billion of federal hurricane disaster relief funding that government leaders expect will “provide a critical temporary boost to the economy.” The proposal forecasts economic growth that will boost revenues, as well as savings from 10% reductions in pension benefits and streamlining of government operations. The board also wants sick leave and vacation pay for government workers slashed in half.

“The plan proposes spending cuts, including to municipalities and universities, 10% pension benefit cuts, reforms including enrolling government workers in Social Security, and other reforms that would be consistent with substantial haircuts to bonded debt,” Moody’s analyst Emily Raimes said in a statement. “The eventual bondholder recoveries will be determined EITHER by the court or negotiated agreements.”

Howard Cure, director of municipal bond research at Evercore Wealth Management, said the plan appears to set the stage for supplemental or additional debt service payments if cash flows exceed projections. He stressed that the plan still creates uncertainty about whether the island will be able to re-enter the capital markets.

“Will new issues be required to have some kind of senior lien or priority payment over existing debt holders or will they be on parity? The island’s infrastructure needs are critical for both providing basic services and as a way to help stimulate the economy, which can’t begin to attract, retain and grow businesses without improvements and added infrastructure resiliency,” Cure said.

The plan also meets a March 29 demand by the oversight board for 10% average pension cuts on certain retirees. An additional proposal in the plan, which needs legislative approval to take effect, would shift future benefits from a defined benefit to a defined contribution plan, which Cure said “should ultimately lead to some significant savings.”

Another crucial aspect of the plan for bondholders, according to Cure, involves an effort to centralize all financial management through the office of a chief financial officer. Cure said having a centralized office spearheaded by a CFO would help improve transparency for bond investors.

“A continuing concern for investors is the timeliness and validity of the financial statements issued by the Commonwealth,” said Cure. “Any attempt to publish regular, audited numbers and frequent cash flow analysis would be welcome.”

The oversight board, which was created by Congress under the Puerto Rico Oversight, Management and Economic Stability Act, was expected to approve seven total fiscal plans Thursday and Friday including the Puerto Rico Electric Power Authority, the Puerto Rico Aqueducts and Sewer Authority and the University of Puerto Rico. The board noted that the Commonwealth has more than $70 billion in outstanding debt and over $50 billion pension liabilities.

“Several years of economic decline, excessive borrowing, and fiscal mismanagement drove thousands of people and businesses to leave the Island,” José Carrión, chairman of the Oversight Board, said in a statement. “Then the historic Hurricanes Irma and María forced even more to leave Puerto Rico as it struggled to recover from the storms’ catastrophic devastation. These plans offer a once-in-a-generation opportunity to do things right and turn these trends around.”

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