OBoard reaches ‘agreement in principle’ on debt, drawing concerns
The Financial Oversight and Management Board for Puerto Rico announced that it reached an agreement in principle with several creditor groups to lower Puerto Rico’s debt to what it termed “sustainable levels” as a result of a mediation process.
In tandem with the announcement, the Oversight Board asked the court to extend the deadline for filing an amended plan of adjustment from Feb. 10, 2021 to March 8, 2021.
“Puerto Rico needs to put the debt restructuring behind it as soon as reasonably possible with an agreement that will be sustainable for Puerto Rico,” said the Oversight Board’s Chairman David Skeel.
“What we achieved at this point is a realistic proposal that will open a path to recovery from bankruptcy, and we informed the U.S. District Court for the District of Puerto Rico of our agreement,” he said.
An official statement from Gov.Pedro Pierluisi described the economic terms of the agreement in principle reached as “feasible.” However, Pierluisi added that the Oversight Board was informed that the government of Puerto Rico will not support an adjustment plan containing cuts or changes to pensioners. Pierluisi called for an adjustment plan that does not contain pension cuts and reflects only the economic terms of the agreement in principle.
The announced agreement in principle includes creditors holding approximately $7 billion of General Obligation (GO) and Public Building Authority (PBA) bonds. It builds on the Plan Support Agreements already reached with the Retiree Committee and certain unions.
Skeel said the Board’s goal is to file a consensual plan of adjustment for the Commonwealth of Puerto Rico that includes as many creditors as possible. The Creditors’ Committee, unions, Employee Retirement System (ERS) bondholders, and bond insurers are not included in the current agreement.
According to the Oversight Board’s Executive Director, Natalie Jaresko, the additional time requested will be used to continue the mediation process, set down the agreed terms in a plan support agreement, and extend support for the agreement.
Senior Public Policy analyst for nonprofit Espacios Abiertos, Daniel Santamaría Ots, quickly blasted the proposed agreement, calling it unsustainable. Santamaría warned that even if projected savings are achieved through the implementation of structural reforms, Puerto Rico’s government would run out of cash by 2029.
In February 2020, the Oversight Board had filed a plan of adjustment to restructure approximately $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, and ERS. In response to the COVID-19 pandemic, the Oversight Board asked the court to put that plan on hold to assess the long-term effect of the pandemic on Puerto Rico. The Oversight Board and creditors resumed the mediation process last summer.
The economist indicated that while the Board’s October 2020 proposal called for annual debt payment of between $1.05 billion to $1.1 billion from an initial cash balance of $5.9 billion.
“This new proposal, not yet official, would involve annual payments of between $1.15 billion and $1.3 billion for 20 years (until 2041) and annual payments of $991 million between 2042 and 2058. With the new payment of $2.3 billion annually in pensions (PayGo), the General Fund is left in a worrisome situation similar to the pre-restructuring period,” Santamaría Ots noted.
He said the new proposal would mean a cut to the principal debt ranging from 55% to 58%, lower than the 66%-69% from the October 2020 plan.
He emphasized that the Board’s scenario is based on optimistic projections of savings with structural reforms ($8.9 billion in 10 years) and conservative projections of the contraction of the economy due to austerity measures proposed by the Board.