Puerto Rico Oversight Board puts a number on central government bondholders' losses

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The Puerto Rico Oversight Board said that central government bondholders would get recoveries of 36% to 38% under its restructuring plan for $35 billion of bonds.

According to the board’s summary of the proposed Plan Support Agreement released Sunday, the overall recovery would vary depending on whether courts ultimately determine if $6.8 billion of Puerto Rico’s debt issued in 2012 and 2014 was valid and should be paid equally to earlier-issued bonds.

The plan comes almost three years after the board was formed under the Puerto Rico Oversight, Management, and Economic Stability Act to guide fiscal management and help restructure the territory's debt. While the board has secured investor support for Government Development Bank and sales tax financing corporation restructurings, bondholders and commonwealth officials said the latest plan, for the central government's debt, wouldn't fly.

Cumberland Portfolio Manager and Analyst Shaun Burgess said he didn’t think the deal would go “anywhere in its current form. Creditors are clearly not going to take what the [Oversight Board] has offered and I doubt it could be affirmed in court with how disparately it treats creditors.” Cumberland owns insured Puerto Rico debt.

“The announcement is an attempt to panic bondholders and to convince the [U.S.] Senate to confirm board members,” said attorney John Mudd. “Maybe it will work, who knows?”

Mudd said he doubted that bondholders would accept the offer and without this litigation would continue, preventing the approval of a plan of adjustment. “Can the judge approve a plan of adjustment opposed by the Commonwealth [of Puerto Rico], especially if legislation is needed?”

If the courts determine that the bonds are invalid and shouldn’t be paid, more money would go to general obligation and Commonwealth-guaranteed Public Building Authority bonds issued before 2012. In this case, these would have recoveries as high as 87.3% for the PBA bonds. Earlier-issued GOs would get 68.2%.

If courts determine the opposite, earlier-issued PBA bonds would get 75.6% and the early-issued GOs would get 68.2%.

In all cases non-GO and non-PBA central government bonds would get hit hard, receiving only about 9% recoveries.

If the court rules the 2012 and 2014 GO and PBA bonds were invalid, the board assumes that bondholders who don’t opt in for a deal would be paid nothing more for the GO bonds. It assumes in this case the non-opt-in holders of the 2012 PBA bonds would get a 23.4% recovery.

Those who opted in for the board’s proposed deal would get recoveries from 35% to 57.8%, depending on their bond and regardless of how the courts rule on the bonds validity.

If the courts uphold the 2012 and 2014 GOs and PBAs, recoveries for those not opting for the board’s proposed deal would range from 68.2% to 75.6%.

The GO and PBA bonds account for about $19 billion outstanding and the remainder of the central government debt affected by the plan is about $16 billion.

According to the board, the plan is initially supported by holders of $3 billion of the affected bonds. It is also supported by the Official Committee of Retirees and other unions. However, one of the two unions, the teachers’ union, had a members vote on the proposal for adjustment to their pensions and other changes. Last week the teachers voted against it.

“The support agreement with creditors and the agreement with the Committee of Retirees and the unions are milestones for Puerto Rico on the path towards a future with sustainable debt payments, secure pensions, and fiscal stability,” said Oversight Board Chairman Jose Carrión. “A commonwealth plan of adjustment will provide investors with confidence that Puerto Rico has turned the corner after its financial crisis. The people of Puerto Rico will finally be able to live without the uncertainty of unsustainable government debt that so profoundly affected the commonwealth’s ability to attract investors, create jobs and economic growth.”

The board said it planned to file a plan of adjustment that included the terms in the released Plan Support Agreement within 30 days.

Most participants and observers of the board’s plan said that it was unlikely to receive court approval withour revisions.

While the agreement was a “milestone” in the board’s efforts to restructure the debt, “the framework has a lot of missing detail that we’ll be looking for, and we also expect these are not the final numbers,” said John Ceffalio, AllianceBernstein vice president. AllianceBernstein owns a “modest” amount of GO debt.

Christian Sobrino Vega, Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director, said Gov. Ricardo Rosselló’s administration opposes the agreement. He said the government cannot support an agreement that includes a cut to pension benefits, as the board’s plan does.

“Not one word of the PSA is considered acceptable to [FAFAA] and we can confidently state that no legislation, executive action or other administrative approval required from the government of Puerto Rico will be taken to implement an agreement that directly or indirectly supports a plan of adjustment that cuts payments to our retirees," Sobrino Vega said. "Furthermore, any financial consideration included in the PSA that seeks to incentivize support or subscription to the PSA should not be assumed to be available now or in the future given that the Government of Puerto Rico has not provided its consent to the same.

He continued, “The Oversight Board, creditors and other interested parties are well aware that without participation of the government of Puerto Rico through legislative, executive and administrative action, no plan is feasible, no agreement can be executed, and no security will be marketable.”

Sobrino Vega said the government was “hopeful” that the board would revise the underlying fiscal plan so that there were no cuts to retiree pensions.

Burgess said, “The fact that [the board members] are including [2012 and 2014] debts in this restructuring support agreement may actually weaken their arguments that it is invalid and they have no obligation to pay for it.”

Howard Cure, director of municipal research at Evercore, agreed with some of what Burgess said. “It remains to be seen if the bankruptcy court judge will allow a differentiation between different vintages of the same security with pre-2012 … bonds receiving a higher recovery rate than later issued debt.”

If the governor succeeds in completely protecting pensions than there would have to be “even bigger” cuts to bonds, Cure said.

Assured Guaranty released a statement saying it opposed the plan. It said the plan is premised on several terms that violate laws: “an unprecedented and meritless attempt to invalidate certain lawfully issued general obligation bonds, acceptance of erroneous and misleading financial projections in the Oversight Board’s legally flawed fiscal plan, and artificial separation of similarly situated creditors into classes that would receive unequal treatment.”

The bond insurer also said, “We are prepared, if necessary, to litigate this matter to the fullest extent to protect our rights, those of municipal bond investors, and the rule of law.”

Mudd said the recovery for unsecured commonwealth creditors of 9% is “very, very low.”

In the plan the board is saying that PBA bondholders would get better recoveries than GO bondholders, because the PBA has a claim against the commonwealth government. If a court were to confirm a plan of adjustment that includes the current plan support agreement terms, the government would have to pay $1.07 billion in cash to the PBA bondholders.

In addition, the PBA bondholders enjoy the government’s guarantee on their bonds. By having both these claims on fund, the PBA bonds will get paid more than GO bonds, the source said.

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