Puerto Rico's oversight board announces new debt restructuring

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The Puerto Rico Oversight Board announced a new debt restructuring deal offering recoveries of between 54.1% and 65.8% for general obligation bonds and 70.9% and 76% for Public Building Authority bonds. It also provides as little as 3% for $16 billion of Employees Retirement System bonds and bonds subordinated to GO debt in Puerto Rico’s constitution.

The board announced the deal Sunday evening.

Puerto Rico Oversight Board Chairman José Carrión
Puerto Rico Oversight Board Chairman José Carrión said the new agreement would benefit Puerto Rico.

On Sunday, Gov. Wanda Vázquez, who had supported a September agreement with the bondholders, said she opposed the new agreement. She said the board had given the bondholders an improved agreement and therefore the board should have given pensioners a better agreement as well. The treatment of pensioners is unchanged in the new agreement.

Shaun Burgess, portfolio manager at Cumberland Advisors, said, “Good news for both creditors and the commonwealth. This would be a big piece off the board and get Puerto Rico closer to wrapping up their bankruptcy saga. This agreement is a significant improvement over the prior deal and could actually get done with the level of creditor support.

“The government not being on board is going to be an obstacle so this isn’t a done deal yet,” Burgess said. It “offers significantly better recoveries for creditors which should help to bring on more creditor support.” Cumberland owns insured Puerto Rico bonds.

The new agreement has the support of about $8 billion of bondholders, according to the board. This compares to about $3 billion of the bondholders who supported the September agreement.

The restructured commonwealth debt would mature no later than 20 years from now, compared to the 30-year term in the September agreement.

If the new deal goes forward, the GO, PBA, and ERS bondholders would get $10.67 billion of new bonds and $3.81 billion of cash. The new bonds would consist of 50% of GOs and 50% of Puerto Rico Sales Tax Financing Corp. (COFINA) subordinate bonds.

The true-interest cost of the deal would be reduced to 5.548% in the new deal from the 5.716% in the old deal.

“The new and more favorable agreement is a win for Puerto Rico,” Oversight Board Chairman José Carrión said in a statement. “It lowers total debt payments relative to the agreement we reached last year, pays off Commonwealth debt sooner, and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years.”

The board says the new agreement reduces $35 billion of debt and other liabilities to less than $11 billion.

In the new deal, holders of recently issued PBA and GO bonds would get lower payouts than holders of pre-2012 issued bonds. However, the board is no longer threatening them with getting nothing, as it had in the earlier deal.

“The Oversight Board will continue to challenge other bond issuances, including bonds issued by the Employee Retirement System, as well as seek recovery of fees earned by the banks, law firms and other parties earned when they helped issue bonds in excess of Puerto Rico’s constitutional debt limit,” the board said in a written statement.

James Spiotto, managing director at Chapman Strategic Advisors, said the deal showed the sides were “making progress,” since a greater portion of the bondholders support the current deal as compared to the earlier one.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said, “I think this is just another step toward negotiating a workout for general obligation bonds and should not be construed as a completed deal. This agreement still needs approval from the monoline insurers who think that a higher payment level can be achieved by the Commonwealth undergoing further economic and management reforms.

“The plan would also need approval by the governor and legislature who are not embracing this latest proposal and are trying to protect the employee retirement system and retirees,” Cure added.

On Monday, the chief mediator in the Title III central government bankruptcies, Barbara Houser, filed a recommendation in the case for Judge Laura Taylor Swain. Houser recommended that the stays on litigation concerning the adversary proceedings and the main bankruptcies continue to prevent litigation on issues of the validity, priority, and secured status of the GO, PBA, and Puerto Rico Infrastructure Finance Authority debts.

Houser cited the progress found in Sunday’s agreement as the reason for her filing.

The signatories to the Sunday’s plan support agreement include 26 investment and hedge funds and six Puerto Rico-based credit unions. Among the signatories are Aurelius Capital, which is leading a challenge to the constitutionality of the federal government’s 2016 appointment of the board. The U.S. Supreme Court is currently considering the case.

As part of the agreement, Aurelius and other parties to the case that have signed the agreement say that while the litigation can continue, the signatories would not urge any possible resulting new board to overthrow the agreement and would urge it to enforce the agreement.

In a news conference on Monday, Puerto Rico Oversight Board Executive Director Natalie Jaresko emphasized the benefit of the deal as compared to the September proposal for the Puerto Rican people and government. She said the achievement of a debt restructuring would be a boon for the island’s economy.

The shortening of the maturity of the debt would reduce pressure on the island’s budget, which the board has been projecting would have deficits around 25 years or more in the future, Jaresko said.

The agreement, along with the earlier COFINA restructuring, will reduce the maximum central government annual debt payments to $1.5 billion from the original $4.2 billion, according to the board. Compared to the September agreement, total debt service is reduced by $5 billion.

As of early afternoon Monday, the 2014 Puerto Rico GO was trading between $74.50 and $75.25, according to IHS Markit. On Friday it had been trading at $72.62.

Going forward, one GO holder said there are several steps that must be taken to finalize the deal. Other creditors must sign up. The Puerto Rico legislature must enact “minor legislation.” Judge Swain must approve it but she could approve it with as little as one creditor class supporting it.

Finally, it may be a practical if not legal necessity to get the governor to support the deal.

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PROMESA Commonwealth of Puerto Rico Puerto Rico Public Buildings Authority Puerto Rico Employees Retirement System Puerto Rico Highway & Transportation Authority Puerto Rico Infrastructure Financial Authority Puerto Rico