P.R. gov’t, creditor talks break off despite trading offers
Following the Puerto Rico government’s confirmation Tuesday that negotiations with Rico Sales Tax Financing Corporation (known as COFINA) and General Obligation bondholders had broken off, both creditor groups went public to defend their positions on the ongoing talks.
Early in the day, the Government Development Bank for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority announced that they, along with the Commonwealth’s government, had been conducting confidential discussions with creditors regarding a potential voluntary exchange transaction.
The government presented a proposal to creditors on June 14 that was discussed and countered by senior COFINA and GO bondholders. The government came back with another offer on June 17, which triggered a second counterproposal from COFINA creditors that same day, and another proposal from GO creditors on June 20.
GO creditors proposed an exchange for new GO bonds at 89 percent of the existing face amount, and the Commonwealth’s debt service would be reduced by $2.9 billion over the first five years.
“We believe there is significant bipartisan support in Puerto Rico for this proposal, which gives ‘breathing room’ to Commonwealth leaders by deferring principal payments and reducing contractual interest rates until July of 2022,” said Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison LLP, an advisor to the GO bondholders.
“This proposal shows a clear and continued willingness on the part of GO bondholders to negotiate with the Commonwealth, and avoid an unnecessary July 1 default on General Obligation debt,” he said, referring to the $2 billion debt service payment the government has pending.
However, the terms apparently were not acceptable for the government.
“At this time, the parties have not reached an agreement on the terms of a transaction for COFINA and GO bonds, and they are no longer continuing discussions on a non-public basis with respect to the proposal or any counterproposals,” the GDB said in a statement.
Meanwhile, COFINA senior bondholders said they “negotiated constructively” with Commonwealth advisors and are open to continued discussions.
“As creditors with strong legal property rights and alignment of interests with the Puerto Rican people, our group welcomed the opportunity to constructively discuss the Commonwealth’s latest restructuring proposal. That is why we accepted the Commonwealth’s first ever invitation to enter into a non-disclosure agreement and engage in direct discussions with principal bondholders,” the group said in a statement.
“After assessing the latest proposal shared by the Commonwealth and its advisors, we developed a good-faith counterproposal that balances creditors’ rights with Puerto Rico’s liquidity needs and economic growth objectives. Unfortunately, after their negotiations lapsed with other creditors, the Commonwealth’s advisors failed to make a counterproposal to us at this time,” the group said.
The COFINA Senior Bondholders Ad Hoc Group is a coalition of creditors made up of retirees and individual investors in Puerto Rico and throughout the U.S. mainland, as well as asset managers GoldenTree Asset Management LP, Merced Capital LP, Tilden Park Capital Management, Whitebox Advisors LLC, and others.
“Given our track record of constructive engagement with other stakeholders, we prefer to continue negotiations,” the group said.
Its latest counterproposal reflects a “willingness to accept real principal haircuts and it adopts several concessions set forth in the Commonwealth’s June 14 proposal, including acknowledgement of and respect for our first lien on all COFINA revenues and assets, and implementation through PROMESA with validation under Title III or VI,” the group said, referring to the Puerto Rico Oversight, Management and Economic Stability Act up for a vote next week by the U.S. Senate.
The group said it also accepted a smoothing of its portion of the pledged sales and use tax base amount “to provide interim liquidity relief to the Commonwealth as it struggles to address its economic crisis, subject to agreement on a sufficient collateral cushion and mechanism,” leaving the door open for more talks in days and weeks ahead.
Late Tuesday, Puerto Rico Gov. Alejandro García-Padilla said while his administration “appreciates” creditor willingness to discuss alternatives, “so far, their set of counterproposals are not up to what Puerto Rico needs to ensure a prosperous future.”
“What they offer is a limited short-term liquidity relief, but not enough long-term relief for the island to have a sustainable level of debt,” he said.
“These counterproposals require Puerto Rico to have to sustain a level of debt service well above what other U.S. jurisdictions pay, essentially forcing the Commonwealth to jeopardize its future, while being tided down to a debt load that state faces,” García-Padilla said in a statement.
“In other words, these counterproposals simply take today’s economic problems and postpone them so our children’s generation has to solve them,” he said.