OBoard reaches deal with P.R. creditors to restructure $35B in debt
The Financial Oversight and Management Board for Puerto Rico has reached an agreement with certain Commonwealth bondholders to resolve $35 billion of debt and non-debt claims via a revised plan of adjustment.
The new agreement reduces the Commonwealth’s debt service (including principal and interest from the COFINA Senior Lien bonds) by 56%, to $39.7 billion from $90.4 billion.
Relative to the previous Plan Support Agreement the Oversight Board reached with a smaller group of bondholders last year, this agreement reduces total debt service by an additional $5 billion.
Under the new agreement, Puerto Rico would completely resolve its legacy debt in 20 years, 10 years sooner than under the previous agreement, the federally appointed body said.
“The new and more favorable agreement is a win for Puerto Rico,” said the Oversight Board’s Chairman José Carrión.
“It lowers total debt payments relative to the agreement we reached last year, pays off Commonwealth debt sooner, and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years,” he said.
The new agreement reduces $35 billion of debt and other liabilities by 70%, or $24 billion, to less than $11 billion, an additional $1 billion reduction relative to the previous agreement.
Holders of $8 billion of bonds support the agreement, including Puerto Rican credit unions and traditional municipal investors. This support increases the Oversight Board’s ability to move forward toward exiting bankruptcy this year. The previous agreement was terminated.
“The new agreement is another step forward for Puerto Rico, one that gets the island much closer to ending bankruptcy and to the beginning of a true economic recovery,” said the Oversight Board’s Executive Director Natalie Jaresko.
“Bankruptcy is holding Puerto Rico back. We need to resolve it and with this agreement, Puerto Rico will resolve it faster, protecting the pensions of retirees and the government services the people of Puerto Rico need and deserve as specified in the Oversight Board’s certified Fiscal Plan and budget,” she said.
The new agreement provides a 29% average reduction for General Obligation (GO) bondholders and a 23% average reduction for holders of Puerto Rico Public Buildings Authority bonds. Commonwealth creditors would receive $10.7 billion in new debt, half in GO bonds and half in COFINA Junior Lien bonds, as well as $3.8 billion in cash.
The new agreement, which was approved by the majority of the members of the Oversight Board, reduces the Commonwealth’s maximum annual debt service payable in any future year, including COFINA Senior Lien bonds, by more than 70%, from $4.2 billion annually to a sustainable level of below $1.5 billion a year.
The Oversight Board agreed to settle its challenge of $6 billion of bonds that it contends exceeded the Commonwealth debt limit.
The settlement allows the Oversight Board to eliminate the risk of a costly and protracted legal battle. The board will continue to challenge other bond issuances, including bonds issued by the Employee Retirement System, as well as seek recovery of fees earned by the banks, law firms and other parties earned when they helped issue bonds in excess of Puerto Rico’s constitutional debt limit, it stated.
Creditors weigh in
Following the Oversight Board’s announcement, the Puerto Rico Ad Hoc Group of Constitutional debt holders said the agreement “is a result of many months of hard work by the representatives of the FOMB, the court-appointed mediation team and the various creditor groups.”
“We believe this settlement positions the Commonwealth of Puerto Rico on a clear path toward emerging from the current Title III proceedings that will result in a significant reduction of the Commonwealth debt burden and restore the island’s access to capital markets that is critically important to support the economic recovery of Puerto Rico. This settlement represents meaningful compromises on the part of all parties and is in the best long-term interests of the people of Puerto Rico,” the group said in a statement.
Meanwhile, the Lawful Constitutional Debt Coalition (the “LCDC”), which includes certain GO bondholders and PBA creditors bonds, said the compromise reached with the Oversight Board, which builds upon the proposed September 2019 plan of adjustment “enjoys substantially broader support.”
“This agreement among a cross-section of major creditors and the Oversight Board represents a significant step forward for Puerto Rico on its path to exiting bankruptcy on sound financial footing,” said Miller Buckfire & Co., in his capacity as the LCDC’s financial advisor.
“In addition to reducing the Commonwealth’s outstanding debt by approximately $24 billion, the settlement shortens the timeline for debt repayment by 10 years and places a cap on annual debt service, which will keep payments at or below 9.16% of government revenues,” he said.
“This deal also does not touch federal funds or monies going to pensioners and mitigates the risk of protracted litigation that could have cost the Commonwealth hundreds of millions of dollars per year in restructuring-related expenses,” he added.
“It is important to highlight that creditors with long-term investments and interests in Puerto Rico have been willing to make meaningful compromises that will ultimately help restore capital formation and ignite economic activity on the island,” he said.
Under the terms of the agreement, GO and PBA creditors will accept haircuts that average 30%. These concessions anchor the consensual restructuring of more than $35 billion in outstanding debt and set the stage for Puerto Rico to experience the type of economic revitalization that other municipal issuers such as Detroit realized following their bankruptcies, Miller Buckfire & Co. said in a statement.
A 30% haircut in principal is better than Cofina deal, but it is still too rich. At what interest rate will the new bonds be issued? Will this entail new money to invest in badly needed infrastructure or will it only reduce debt service? Without any agreement on new investment, economic growth in PR will not reignite. Without growth, it will be difficult to avoid future debt default on these bonds. More information is required!!!!!