Fiscal board files amended debt adjustment plan, disclosure statement

By The Star Staff

The federal Financial Oversight and Management Board announced Tuesday that it filed a disclosure statement and a second amended plan of adjustment that would restructure some $35 billion in debt from the commonwealth of Puerto Rico, the Public Buildings Authority (PBA) and the Employees Retirement System (ERS) as well as $50 billion in pension liabilities.

“It can get Puerto Rico out of bankruptcy this year,” Natalie Jaresko, executive director of the oversight board, said at a news conference.

She insisted that the plan, which was filed late Monday with the U.S. District Court for the District of Puerto Rico, was affordable and sustainable.

The Puerto Rico Electric Power Authority and the Highway and Transportation Authority, two entities in bankruptcy, are not part of the debt adjustment plan as they have their own settlements.

According to the oversight board, the plan reduces the outstanding commonwealth debt and other claims by almost 80%, from $35 billion to $7.4 billion in new general obligation (GO) debt. It would ensure sustainable and affordable annual debt service of less than 8% of fiscal year 2020 own-source revenues by reducing the maximum annual debt service from as much as $4.2 billion to $1.15 billion, making as much as $3 billion per year available for the services.

The plan would also reduce the commonwealth’s total debt service payments (including Puerto Rico Sales Tax Financing Corp. -- COFINA by its Spanish acronym -- senior bonds) by more than 60%, from $90.4 billion to $34.1 billion, saving Puerto Rico almost $60 billion in debt service payments.

The debt adjustment plan presents 66 classes of claims and describes how each will be treated. It contains three plan support agreements (PSAs): the one reached with the GO and PBA bondholders, the agreement reached with the Official Committee of Retirees and the agreement reached with the Public Servants United of Puerto Rico/American Federation of State, Country and Municipal Employees Council 95 related to pensions and collective bargaining agreements.

The plan contains a series of distributions for the different bondholders. The Vintage PBA Bond Claims, Vintage PBA Bond Claims (Assured), Vintage PBA Bond Claims (National), Vintage PBA Bond Claims (Other Insured), and Vintage PBA Bond Claims (Syncora) will be allowed under the plan in the aggregate amount of $2.6 billion. Vintage refers to bonds issued before 2011.

The 2011 PBA Bond Claims will be allowed in the amount of $1.3 billion and the 2012 PBA Bond Claims will be allowed in the amount of $674.3 million.

The plan also allows the Vintage Commonwealth (CW) bond Claims and, the Vintage CW bond claims (Assured), Vintage CW Bond Claims (National), Vintage CW Bond Claims (Other Insured), and Vintage CW Bond Claims (Syncora) in the amount of $5.8 billion; the 2011 CW Bond Claims and 2011 CW Bond Claims (Assured) will be allowed in the amount of $476.4 million; the 2011 CW Series D/E/PIB Bond Claims and 2011 CW Series D/E/PIB Bond Claims (Assured) will be allowed in the amount of $645.6 million; the 2012 CW Bond Claims and 2012 CW Bond Claims (Assured) will be allowed in the amount of $2.9 billion; the 2014 CW Bond Claims will be allowed in the amount of $3.8 billion; and 2014 CW Guarantee bond claims will be allowed in the amount of $345.4 million.

Among the 66 classes of claims, Jaresko said there is a convenience class that is for unsecured claims and other small claims, which will give creditors payment in full on the claims.

About $3 billion in ERS bond claims issued in 2008 remain disputed under the plan. However, the debt adjustment plan also establishes a settlement for ERS bondholders, which is an amount equal to 8.7% of such holders’ aggregate ERS bond claims, inclusive of payments of adequate protection made to holders of ERS bond claims in accordance with a 2017 joint stipulation.

As part of the debt adjustment plan, the oversight board is contemplating an 8.5% cut to pensions higher than $1,500 a month. The pension reductions can be restored if government finances outperform the Certified Fiscal Plan by $100 million or more in any given year.

If the pensioners reject the plan, they may face a 10% cut to their pensions, according to the plan.

The government will buy whatever is left of ERS assets under the plan.

“On the effective date, the commonwealth will purchase all of ERS’s right, title, and interest in ERS’s assets subject to a valid and perfected lien or security interest for an aggregate purchase price in an amount equal to the sum of (a) 100% of cash in ERS accounts as of the Effective Date, (b) 95% of the face amount of performing employee loans as of the Effective Date, (c) 100% of the market price of the COFINA Bonds held by ERS as of the Effective Date, and (d) 50% of the book value of the ERS portfolio of private equity interests held by ERS as of the Effective Date,” the plan states.

The documents were filed after the oversight board on Feb. 23 announced a plan support agreement (PSA) that would restructure $18 billion of commonwealth and PBA bonded debt with those bondholders receiving between 67% and 80% in recoveries. Debt service was reduced to annual payments of $1.15 billion. The PSA would provide GO and PBA bondholders with $7.4 billion in bonds and $7 billion in cash upfront, and includes a contingent value instrument (CVI) that gives GO and PBA bondholders incremental value only if the Puerto Rico economy grows more than projected in the 2020 Certified Fiscal Plan. The $7 billion in upfront cash comes from government bank accounts totaling $20 billion.

The debt adjustment plan also calls for the creation of several reserves to ensure funding because the current fiscal plan projects deficits in the future. One of them is a pension reserve fund for the PayGo pension system to support payment of pensions over the next 30 years.

Another is a debt service fund to be held in trust by the new GO Bonds Trustee for the benefit of the holders of the new GO bonds to be created under the plan. The fund has a requirement level of at least $211 million.

The plans must go to the island legislative assembly for the approval of the legislation enabling the bond exchange and the creation of the CVI. Lawmakers have said they will not support a debt plan that cuts pensions. Gov. Pedro Pierluisi Urrutia has also come out against cuts to pensions and is not supporting the plan.

The governor has indicated support for parts of the proposed debt deal while remaining opposed to pension cuts.

“This amended Adjustment Plan includes the economic terms that were previously announced by the Board,” Pierluisi said in a written statement. “With the presentation of this Plan of Adjustment, a confirmation process begins before the Court of Judge Taylor Swain that, in all probability, will last for the remainder of this year.”

“As I previously announced, the economic terms included in this Adjustment Plan include many positive aspects for Puerto Rico,” the governor added. “For example, it entails a reduction in Puerto Rico’s total debt of almost 80 percent and reduces total debt service by approximately 62 percent. However, the amended Plan of Adjustment presented by the Board still includes a cut to the pensions of public servants of approximately 8.5 percent for those pensioners who receive more than $1,500 a month. My administration has been emphatic that this cut to pensions is not reasonable and it is not necessary to confirm the Adjustment Plan, so we will leave it established in the confirmation process before the Title III Court.”

“My government will actively participate in the confirmation process that begins now and will defend the best interests of our People, including the interests of our pensioners,” Pierluisi said.

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