Three Puerto Rico legislators are proposing a bipartisan bill aimed at avoiding a July 1 default through a bondholder exchange.
Puerto Rico Rep. Tatito Hernandez, Speaker Jaime Perello and Minority Leader Jenniffer Gonzalez introduced the bill in the House that, if approved, would allow holders of the commonwealth's general obligation bonds to swap their outstanding securities for a series of exchange bonds. The Commonwealth would save $1.9 billion in debt service payments over the next five years under the legislation. The island nation is saddled with about $70 billion of debt, with $2 billion owed to bondholders on July 1.
A summary of the bill, called the General Obligation Exchange Act, states that the principal amount of exchange bonds shall equal 100% of the outstanding principal and accrued interest on the GO bonds being exchanged. There would be no repayment of principal for five years and maturity dates would be extended by an average of five years. The amortization period would begin on July 1, 2020 and last for 25 years at the same interest rates.
The Main Street Bondholders coalition came out in support of the bill. The group was formed in August 2015 through the 60 Plus Association, an advocacy group for senior citizens.
"This bill lays out a feasible pathway for the island to avoid default on July 1st, and, importantly, upholds Puerto Rico's Constitution," said 60 Plus Association Spokesman Gerry Scimeca.
Howard Cure, director of municipal bond research at Evercore Wealth Management, said the new Puerto Rico house legislation provides another alternative to bondholders to go along with the debt restructuring conditions decided by a control board, if the Puerto Rico rescue bill known as PROMESA clears Capitol Hill, or taking their chances in court once a default occurs.
"Delaying principal payments until July 1, 2020, with the same interest rates might seem enticing for some holders," said Cure. "However, to accept this offer you would need to be confident that the Commonwealth could somehow get their financial house and economy in order and would be able to resume what is still fairly onerous debt payments compared to their budget."
Cure added that investors would also like to know if Puerto Rico will make exchange offers to other debt holders such as the Puerto Rico Electric Power Authority (PREPA) and see if the GO offer is more favorable. If employees and retirees are not asked by the Commonwealth to not sacrifice pensions under the General Obligation Exchange Act, Cure said, GO holders may prefer the decision of the PROMESA board or a court.
The press office for Puerto Rici Gov. Alejandro Garcia Padilla didn't immediately respond to an email seeking comment on the proposed bill.
