Puerto Rico Offers Bigger Payments, Longer Maturities

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Puerto Rico offered a revised restructuring proposal to bondholders that includes paying more annually and extending the maximum maturity of debt by 18 years.

The commonwealth’s latest offer follows a January proposal that drew two counteroffers, one by the general obligation bondholders and another by the Puerto Rico Sales Tax Finance Corp. (COFINA) bondholders.

The new proposal marks some progress as the commonwealth looks to reach a consensual agreement with creditors, according to Alliance Bernstein director of municipal credit research Joseph Rosenblum. However, he was concerned by the potential for disagreements over the offer by GO and COFINA holders and by its lack of specificity about how the island’s economic challenges would be addressed.

“There will be a diversity of views and priorities among the bondholders,” said Standard & Poor’s managing director Robin Prunty. While the hedge funds holding Puerto Rico debt are looking to come out of the deal with a gain on their investment, the bond insurers are trying to avoid a haircut, S&P senior director David Hitchcock said. There are many other divisions among the bondholders.

Puerto Rico is trying to reach a consensual agreement with creditors even as lawmakers in San Juan and Washington hammer out plans to address the island’s $70 billion debt crisis. Puerto Rico’s government last week authorized the governor to declare an emergency moratorium on debt payments. Over the weekend, it issued an order that withdrawals from the Government Development Bank for Puerto Rick be reviewed by a committee at the bank and only be allowed when the money is to be used for essential government services.

The planned debt payment moratorium indicates that Puerto Rico is willing to apply more pressure on the bondholders in negotiations, Hitchcock said.

Puerto Rico’s January offer would have had bondholders take various levels of haircuts, depending on the type of debt they held, to get new “base bonds.” It also included “growth bonds,” that would pay out only if the commonwealth reached particular revenue targets.

The new proposal retains the base bond offer, but reduces haircuts on these bonds. Instead of the growth bonds, it offers capital appreciation bonds. Finally, it includes a local bond option for those who reside in Puerto Rico.

For the base bonds Puerto Rico is offering 80% of face value for GO, 71% for commonwealth guaranteed, 57% for COFINA, and an average of 50% for other debt types. This compares to the original offers of 74%, 65%, 49%, and 39%, respectively.

The capital appreciation bonds would ultimately pay out in an amount equal to the difference between current par value and the newly issued base bond par value.

The local bonds would retain all of original par value, but would have a reduced 2% interest rate and wouldn’t mature until 2065 to 2069. Local bondholders would have the option of taking either the local bonds or the base bond/capital appreciation bonds.

The base bonds would have 1.1% interest rate in fiscal year 2017, though there were conflicting indications as to whether interest would be paid on July 1, 2016. Interest would rise to 3% in fiscal 2018, 3.3% in 2019, 4.1% in 2020, and 5.0% thereafter.

With the base bonds, principal payments would be suspended until fiscal year 2021. The base bonds’ maturities would continue until FY 2056. The offer doesn’t explain the relationship between the maturities of current bonds and the new base bonds. However, it does say that with local opt-in, the GO would have a final maturity of 2046, commonwealth guaranteed would have one of 2050, COFINA would have one of 2053, and others would have one of 2056. Without the local opt-in, these would have final maturities in 2045, 2049, 2052, 2056, respectively.

The capital appreciation bonds would mature between fiscal 2056 and 2067, partly dependent on how many locals opt for the local bonds.

According to Puerto Rico, if all local bondholders elect for the local option, the net present value of the offer would be for GO and commonwealth-guaranteed holders 74%, for COFINA holders 57%, for Government Development Bank for Puerto Rico debt holders 36%, for Highways and Transportation Authority holders 56%, and for other bondholders 51%.

The proposal assumes that there will be a mechanism for Puerto Rico to force all bondholders to accept the terms being offered.

“Together with implementation of the Fiscal and Economic Growth Plan, a comprehensive debt restructuring will ensure the commonwealth has sufficient resources to provide essential services to all Puerto Rican residents, pay back its local vendors, suppliers and taxpayers, rebuild depleted cash resources, fund necessary capital expenditures, create investment opportunities in the local economy, and fund its retirement systems,” the GDB said in a statement.

“The commonwealth is in crisis, and the fact is that we will only be able to address these issues by working together,” Puerto Rico Secretary of State Victor A. Suarez said in the statement. “Our commitment to this is underscored by our willingness to listen to our different creditors and work to meet their needs.”


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