• The Star Staff

Fiscal board back in talks with creditors for new debt adjustment plan

By The Star Staff

The Financial Oversight and Management Board for Puerto Rico is recommencing negotiations with creditors toward a new plan of adjustment for the commonwealth debt after agreeing last week on a new offer to creditors that would cut the commonwealth debt to about $11.9 billion from about $35 billion.

The decision had to be made because U.S. District Court Judge Laura Taylor Swain gave the oversight board until Feb. 10 to file a debt deal with the court or, at a minimum, a term sheet with its offer. At a news conference, Natalie Jaresko, the executive director of the oversight board, said she hopes stakeholders can reach a consensus on a deal by then. There are fewer than 80 days to negotiate and possibly less time with the holidays in between.

The oversight board was unable to start negotiations and lost a month after it was unable to approve new terms on its Oct. 30 meeting because one of the board members left the meeting, leaving the board without a quorum, for which the board needs four votes to pass resolutions. The board made a new offer to take into account the pandemic’s impact on the government’s finances.

The oversight board’s offer to creditors provides for $6 billion in cash, $5 billion in general obligation (GO) bonds, and a contingent value instrument (CVI) of up to $1 billion. The CVI will be based on a portion of the sales and use tax (IVU by its Spanish acronym) revenue if tax collections exceed the estimates of the fiscal plan certified in May 2020. The board’s prior debt adjustment plan unveiled in February did not include a CVI, whose goal is to ease creditor concerns regarding various potential economic upside scenarios not incorporated into the certified fiscal plan.

The amended terms propose an 8.5 percent reduction to pensions that are higher than $1,500 per month, impacting only 30 percent of 330,000 retirees.

Under the deal, GO bondholders should be able to recover between 59 percent and 64 percent of what they invested. Pension bondholders and holders of Convention Center District bonds will not get anything. All creditors will have a blended recovery of 34.1 percent.

During the discussion of the resolution agreed to by the oversight board, adviser Jaime El Koury said that if the negotiations produce changes to the terms of the proposed offer, then those changes will have to be approved by the board before they are presented to the court. He said that if the negotiations fail, then the board will be authorized to file the plan of adjustment under its own proposed terms.

Justin Peterson, President Trump’s representative on the oversight board, voted in favor of the resolution even though he said he did not like it. He and fellow board member David Skeel said they will participate in the negotiations.

Peterson said governor-elect Pedro Pierluisi and his team should also be part of the negotiations with bondholders. Pierluisi said Saturday he plans to be involved.

Center for the New Economy Policy Director Sergio Marxuach said in a written column that one of the main quibbles with the proposed Plan of Adjustment (POA) is that according to the oversight board’s own analysis, the commonwealth’s cash balance as of June 30, 2021, after payment of the POA obligations, is estimated to be slightly below the required minimum working capital level of $2.5 billion (which includes commonwealth working capital needs, Federal Emergency Management Agency advances, and initial liquidity of the Puerto Rico Electric Power Authority transmission and distribution project.

“Indeed, under the current proposal, liquidity tightens significantly by 2026 and by 2030 the initial cash balance is negative at the beginning of that fiscal year,” Marxuach said.

The government, however, has $9 billion in its main government account and over $20 billion in other government accounts, most of which is restricted.

Marxuach said the introduction of a CVI is a novel and welcome development as it provides an alternative for mitigating the high level of uncertainty since it is very difficult to make reliable medium- and long-term economic and financial projections in the best of times.

In the absence of reliable economic and financial projections, it is unfeasible for Puerto Rico to submit in good faith a POA that will be binding on the island’s government for 30 years, Marxuach contended.

“Yet, it is required under PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act] for Puerto Rico to submit a viable Plan of Adjustment in order to successfully exit the Title III process and Judge Taylor Swain has given the parties until February 10, 2021 to agree to the basic terms of a POA,” Marxuach said. “The CVI helps the parties to get around this conundrum and mitigate some of the uncertainty surrounding the Fiscal Plan, by providing investors with an equity-like exposure to Puerto Rico, should its economy overperform, while protecting the government and residents of Puerto Rico in the event government revenues come in below expectations.”