Puerto Rico Gov. Ricardo Rosselló signed a negotiated debt restructuring deal for the Government Development Bank Thursday, affecting $4.1 billion in bond debt.

The deal offers three different bond restructurings that reduce principal by 25% to 45%. If it goes forward, bondholders would get to choose the restructuring deal for their bonds. The options with bigger principal reductions would offer bigger percent coupons and stronger security for repayment.

Puerto Rico Gov. Ricardo Rossello.
Puerto Rico Gov. Ricardo Rosselló said the agreement maximized opportunities for several creditor types.

"The Law for Debt Restructuring of the Government Development Bank for Puerto Rico represents an important step in providing an orderly resolution of the GDB while maximizing the opportunities for recovery of municipalities, [credit] cooperatives, local bondholders and the other creditors of the bank," Rosselló said, according to a written statement from his office.

The deal was negotiated through Title VI of the Puerto Rico Oversight Management and Economic Stability Act, which specifies conditions for negotiated debt deals.

The Puerto Rico Oversight Board has already approved the deal. According to PROMESA at least 50% of each creditor type and at least 66% of the voting creditors in each type must approve the deal for it to be enacted. In mid-June holders of over 50% of the outstanding bond par value committed to support the deal. The deal currently combines the bondholders with other forms of creditors, in what at least one municipality says is a breach of PROMESA.

It remains to be seen if the deal gets the support of at least 50% of the outstanding debtholders of all types and if it gets the vote of at least 66% of the votes, by debt amount.

Federal District Court Judge Laura Taylor Swain would also have to approve the deal for it to be enacted. PROMESA Title VI, Section 601 (m)(1)(D) says the deal is only approved after the territory’s “district court” has reviewed the application and ordered that section 601’s requirements have been satisfied.

Rosselló’s signing of the deal “may suggest a way forward in other negotiations,” said Ted Hampton, senior credit officer and lead Puerto Rico analyst at Moody’s Investor’s Service. The signing may lead to more activity towards negotiated deals in other types of Puerto Rico debt, he said.

On July 26 San Juan’s government filed a suit against the deal in U.S. District Court, saying the deal wouldn’t treat cities’ assets at the GDB legally. San Juan is Puerto Rico’s largest city and serves as the territory’s capital.

Since San Juan’s filing, Puerto Rico municipalities Cabo Rojo, Juana Díaz, Hormigueros, San Germán, San Lorenzo, Mayaguez, and Luquillo have either joined with or have sought to join with San Juan in the case.

For example, on Aug. 10 the municipality of San Lorenzo filed a motion to intervene in the case, saying its “interest in this action is to ensure that its ability to provide essential services to its citizens will not be impaired by the illegal Restructuring Support Agreement to restructure the debts of the GDB.”

“As explained in San Juan’s complaint, the RSA purports to unlawfully appropriate Municipality of San Lorenzo’s interests in two types of property,” San Lorenzo said.

“First, the RSA contemplates a raid of property tax revenues held in a trust pursuant to a trust agreement at GDB for the benefit of Puerto Rico’s municipalities in order to pay the GDB’s bondholders,” San Lorenzo states. “Second, the RSA purports to illegitimately strip Puerto Rico’s municipalities who maintain deposits at the GDB of their statutory right under the laws of Puerto Rico to set-off the amount of their deposits in the GDB against the amount of their debts to the GDB.”

Puerto Rico’s Fiscal Agency and Financial Advisory Authority declined to comment for this story.

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