Purto Rico attorney John Mudd said he believed the Title III judge would order a delay in the June 1 COFINA payment.
Puerto Rico attorney John Mudd said that the Puerto Rico debt situation would probably end up in PROMESA’s Title III debt bankruptcy process.

The Puerto Rico Oversight Board's plan to have enough money to pay 26% of debt due in the next nine years is a "first salvo" whose debt payment terms are likely to be negotiated, municipal experts said.

The board's fiscal plan, approved on Monday, has dollar numbers that are still "preliminary," said Shaun Burgess, who oversees Cumberland Advisors' Puerto Rico bond portfolio. Cumberland only owns insured Puerto Rico bonds. "I think there's still more to these negotiations," he said.

Chapman Strategic Advisors managing director James Spiotto agreed. In any restructuring the government needs to come up with a path forward financially. After this takes place, there is normally a conversation with all parties including creditors about ways to maximize revenues, he said.

The creditors have to be involved in order to spur reinvestment in Puerto Rico's economy, Spiotto said. Ultimately this is in the interests in all parties. If this happens, the economy can strengthen, then the government can get more revenue, and then it can more easily pay back its debt.

In the context of a possible agreement by some creditors to reinvest in some part of Puerto Rico, the board may be willing to talk about increasing the commonwealth government's payback of debt, Spiotto said. This would take place within the Title VI of the Puerto Rico Oversight, Management and Economic Stability Act's negotiations, which are already taking place.

The Oversight Board on Monday approved a 10-year fiscal plan that will allow the payment of 26.2% of debt due while imposing austerity measures including partial government employee furloughs and elimination of their Christmas bonus, unless the government meets targets for liquidity and budgeting. The plan would cut pension spending by 10%.

At Monday's meeting the board was asked about the status of debt negotiations with bondholders and about the possibility, already requested by Gov. Ricardo Rossell-, of pushing back a stay on litigation beyond its current end on May 1.

Oversight Board member Arthur González said that negotiations hadn't gone far without an outline of how much money would be available for debt service. He said that the fiscal plan would provide that outline. He said he thought there was real hope to reaching deals with creditors.

González also said the board hadn't taken a position on whether the litigation stay should be extended.

Puerto Rico Attorney John Mudd and Burgess said the decision in the Lex Claims, LLC et al. v. Garcia Padilla et al. case will be important in determining the ultimate treatment of general obligation vs. Puerto Rico Sales Tax Financing Corp. (COFINA) bonds. If Judge Francisco Besosa rules that COFINA is against Puerto Rico's constitution, this would greatly weaken these bonds' claims on debt payment resources, both Mudd and Burgess said. A ruling in the case is expected in the next few weeks.

Observers had different takes on the size of the debt service offer.

A GO bondholder said, "Gov. Rossell- says he's different, that he wants to pay debts and restore credibility, but his fiscal plan looks eerily similar to what [former governor] Alejandro García Padilla had prescribed for the commonwealth. For instance, if they say there are $18 billion in revenues [for all the entities covered by the plan] and just $1 billion is being allocated towards debt services, that means roughly 94% of all expenses are essential services – that just isn't serious."

Page 28 of the fiscal plan indicates an average of $17.1 billion of revenues per year fiscal 2017 to fiscal 2026 and $787 million per year of debt service during this period.

"They will never get back to the markets like this and this kills any chance at statehood," the GO holder said.

Howard Cure, Evercore Wealth Management director of municipal research, had a similar take, saying, "I don't know how Puerto Rico will ever have access to the capital markets unless the current debt situation is negotiated favorably with current holders."

Bel Air Investment Advisors' director of municipal research, Michael Ginestro, was more positive about the plan, saying: "Amounts allocated to debt service across the Puerto Rico capital stack were lower than they were under the previously proposed [Rossell-] plan. But there is still a lot of uncertainty going forward in terms of other revenues that could come in that aren't part of the plan. It's good they came to an agreement, but there is a lot of work to do."

Brad Setser, senior fellow at the Council on Foreign Relations, said the near term fiscal austerity in the plan may be too severe. "The drag on Puerto Rico's economy – and ultimately on its ability to collect tax revenues – may still be underestimated," he said.

Mudd and Burgess said the debt negotiation process would probably go to a court-supervised PROMESA Title III bankruptcy process. With the board offering just 26%, investors may reason that they "might as well go to court," Mudd said.

Title VI doesn't have enough power and comprehensiveness of view for a successful debt negotiation to be completed, Burgess said. If things go to Title III, a judge will order layoffs and an end to Christmas bonuses for government employees, he said.

Spiotto said that the board may reach deals with some types of bondholders and not others, and that these agreements would help in any Title III process.

PROMESA says that the board's certified plan cannot be appealed, Mudd said. The board itself may choose to revise the plan. The plan could be challenged on U.S. constitutional grounds but this is hard to see happening, he said. There could be a constitutional challenge to its implementation.

More likely, the process will soon be in Title III and this is where creditors will do their legal warfare, Mudd said.

In its plan, the board is planning on cutting spending on public pensions by 10%. The unions could launch a legal challenge to this under Puerto Rico law, Spiotto said. However, a court would have the clear right to cut pensions in a bankruptcy process, he explained.

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