OBoard’s new agreement with bondholders would leave local gov’t without cash by ’29
The proposed new agreement struck recently by the Financial Oversight and Management Board for Puerto Rico with bondholder groups implies higher annual fixed payments and cash disbursements and for a longer period of time than in the October 2020 proposal, according to Espacios Abiertos Senior Public Policy Analyst Daniel Santamaría-Ots.
“What remains constant with this new agreement are the Board’s own projections that in a base scenario, Puerto Rico would run out of money to operate the government in or before 2029. That means that over the next eight years, more tax adjustments will have to be made to meet the debt payment and be able to operate the government,” Santamaría-Ots said.
The economist explained that the Plan Support Agreement (PSA) with General Obligation (GOs) and Public Buildings Authority (PBA) bondholders announced by the Board establishes an initial cash payment of $7 billion, which represents an increase of $1.0 billion over October’s proposal to pay $5.9 billion.
Annual fixed payment amounts would also increase by $100 million. Previously, a fixed payment of $1.0 billion was foreseen while the new proposal states that it would rise to $1.15 billion.
Another difference is that the new agreement entails a payment term that is five years longer than the previous one, since it is slated to last 25 years, that is until 2046, compared to the previous 20 years.
Santamaría-Ots also stated that the new PSA is contemplates a $1.7 billion increase in the issuance of general obligation bonds.
“With regard to the new issuance of capital appreciation bonds, in October the proposal was zero, the Board’s announcement states that it will be $730 million with a maturity value of $1,066 million, an increase of $730 million,” he said.
Furthermore, the annual limit of the Contingent Valuation Instrument (CVI) related to IVU collections is also higher in the new PSA, rising from $50 million to $200 million to $400 million annually. The CVI total limit would also be higher, increasing from $1 billion to $3.5 billion, a difference of $2.5 billion. The term of the CVI would be extended by two years, from 20 years in the October proposal to the current agreement’s 22 years.
“Before committing the people of Puerto Rico to a 25-year debt repayment, it is urgent that the Board make the new macroeconomic projections, and that an updated fiscal plan be published and certified,” he said.
“It’s crucial that the Board speak clearly about the adjustments that in less than eight years the government will be required to make to continue the operation of its services, since the projected savings from structural reforms, according to the Board itself, will not be sufficient to cover debt payments and the government’s operation,” the economist said.
The Board announced on Feb. 10 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 to Mar. 8, 2021.