A group of investors — including certain mutual funds — holding $5 billion in Puerto Rico’s General Obligation bonds revealed Monday the terms of a joint restructuring proposal that calls for offering the government a five-year moratorium on principal payments and $750 million in upfront liquidity.
The term sheet details other parts of the offer that the bondholders claim would give the Commonwealth enough time to deal with its current liquidity crisis and avoid a July 1 default on some $2 billion in debt service payments.
“We believe this proposal has significant local bi-partisan support in the legislature, which should be encouraging to the Government of Puerto Rico,” said Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison LLP, an advisor to the Ad Hoc group of Puerto Rico’s GO bondholders.
“While we would like to negotiate with the Puerto Rican Government in private and in good faith, the debt moratorium it has proposed that is before the Puerto Rican legislature has prompted this public release,” he said.
“We welcome engagement with important stakeholders throughout Puerto Rico, including the legislature and other leaders. We also welcome engagement with other GO bondholders,” he said. It is expected that additional GO bondholders will join in this proposal in the very near future.
Through a consensual exchange offer, GO bondholders agree to defer principal repayments for 5 years. The exchange would save the Commonwealth $1.9 billion in debt service payments over the next five years, they said. The transaction also offers $750 million liquidity loan upfront through a GO issuance at a reasonable interest rate.
“By avoiding a July 1 default, the Commonwealth will avoid damage to the GO debt that would otherwise impact the Commonwealth’s ability to issue GO debt in the future,” the creditors stated in the term sheet.
“This offer should be attractive to the Commonwealth as it defers nearly $2 billion in principal over the next five years, and provides new money. Most importantly, this consensual process avoids a July 1 default, which would irreparably harm Puerto Rico’s economy, hurt millions of American citizens who live on the island, and impair Puerto Rico’s access to markets and its ability to finance essential services.”
Reacting to the proposal, Government Development Bank President Melba Acosta said it “fails to solve the severe and real challenges that the Commonwealth is now facing. Incurring additional debt at a higher cost is not the answer to the Commonwealth’s fiscal issues — indeed it is exactly the type of ‘Wall Street’ solution that led us to the precipice we are now looking over.”
Moreover, she said that while this proposal would allow the Commonwealth to “scoop and toss” its GO obligations and pay GOs interest, it would do so at the expense of holders of all of the other credits of the Commonwealth, many of whom are residents of Puerto Rico.
“The Commonwealth has been clear from the beginning — we need a comprehensive restructuring that, while recognizing priorities among creditors, does not place the burden of the restructuring entirely on any single group of stakeholders,” Acosta said.