Gov’t revises terms in 2nd offer presented to creditors

Written by  //  April 11, 2016  //  Government  //  No comments

Commonwealth restructuring advisors Jim Millstein and Richard Cooper, discuss the terms of the new offer to creditors. (Courtesy, Sin Comillas)

Commonwealth restructuring advisors Jim Millstein and Richard Cooper, discuss the terms of the new offer to creditors. (Courtesy, Sin Comillas)

Members of the government’s Working Group for the Fiscal and Economic Recovery of Puerto will release today details of a revised voluntary exchange proposal presented to advisors to the Commonwealth’s creditors in March.

The revised proposal was made in response to counterproposals and feedback received from many of the Commonwealth’s different creditor groups, government and restructuring officials said during a roundtable at the Government Development Bank Sunday morning.

The new proposal, if accepted by the creditors, would give Puerto Rico the time it needs to implement the Fiscal and Economic Growth Plan, officials said.

The government is offering creditors the following:
•    An increase in annual aggregate debt service to $1.85 billion from $1.7 billion, or the equivalent of 15 percent of projected 2021 revenues;
•    Replacing the “Growth Bond” initially proposed — which was contingent on the Commonwealth reaching a determined level of economic growth — with a “Capital Appreciation Bond” that is mandatorily payable and will enable all creditors to recover the principal amount of their existing investments regardless of future growth;
•    Interest will now be paid currently on the Base Bonds starting next year;
•    Puerto Rico residents will be offered the option to receive a par Base Bond with a long-dated maturity (2069-2070) and a 2 percent interest rate. There is no payment holiday for this bond;

The adjustments would reduce the Commonwealth’s $49.3 billion of tax-supported debt to between $32.6 and $37.4 billion, depending on how many Puerto Rico residents elect the Local Option. Under the original proposal, tax-supported debt would have been reduced to $26.5 billion, government officials explained.

Furthermore, the Commonwealth would reduce its debt service-to-revenue ratio to 15 percent, from its current level of 36 percent, said Jim Millstein, the government’s restructuring official hired by the Commonwealth to work with creditors on restructuring some $49 billion in public debt.

Holders of Public Finance Corporation, Employee Retirement Systems and Government Development Bank obligations are likely to opt into the Local Bonds offer, he said.

Meanwhile, the Capital Appreciation Bonds would accrete at a 5 percent annually starting next year, and when they are repaid in 2056, the final payment amount would equal the difference between the Base Bond and the original par amount of the exchanged security, enabling creditors to recover the full principal amount of their current holdings. However, they would be taking a haircut because they would not be getting interest on top of the par, Millstein explained.

One of the essential elements of the Commonwealth’s offer is to lower its ratio of debt service-to-revenue on tax-supported debt from the current level of 36 percent to approximately 15 percent based on 2021 revenues, a level consistent with the debt limit contemplated by the Constitution of Puerto Rico.

“That would leave the government of Puerto Rico with room to make investments in infrastructure and its people,” he said.

The government is relying on several assumptions for the proposal’s success, including the availability of the same level of federal support.

“If the government adopts the FEGP and demonstrates it has a real commitment to fiscal discipline, the ratings agencies will come back and re-rate,” Millstein said, referring to the government’s current junk bond status. “It’ll take two to four years, but it’ll happen and there will be a liquid and active market for these bonds because Puerto Rico will have demonstrated it is capable of paying these bonds.

GDB President Melba Acosta said meetings with creditors will continue this week.

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