Fiscal board issues 6th version of debt adjustment plan ahead of hearing


By The Star Staff


The Financial Oversight and Management Board on Tuesday issued its sixth version of the debt adjustment plan and of its disclosure statement that would restructure some $35 billion in debt but does not include a “Plan B” as ordered by the judge in the event that the Puerto Rico Legislature and government do not enact legislation enabling the debt deal.


As reported by the STAR earlier this week, a hearing to evaluate a disclosure statement for the debt adjustment plan is slated for Thursday. It was originally slated for Tuesday.


The sixth amended Plan of Adjustment reflects a plan support agreement with bond insurers Ambac Financial Group and Financial Guaranty Insurance Co. (FGIC) to settle both their asserted clawback claims against the Commonwealth of Puerto Rico and debts issued by the Puerto Rico Infrastructure Financing Authority (PRIFA).


PRIFA bondholders will receive $260 million in cash, inclusive of restriction fees and consummation costs. In addition, the agreement includes a contingent value instrument based on potential outperformance of Puerto Rico’s 5.5% sales and use tax relative to projections in the 2020 Certified Fiscal Plan and Puerto Rico’s general fund rum tax collections relative to projections in the 2021 Certified Fiscal Plan. Cash consideration to all PRIFA claims reflects a fixed reduction of the amount of PRIFA claims of around 90%.


“With this sixth amended Plan of Adjustment, the Oversight Board has reached agreements with all monoline bond insurance companies involved in the Commonwealth Plan of Adjustment,” said Natalie Jaresko, the oversight board’s executive director, in a written statement. “The agreement to settle the PRIFA claims provides additional support to the Plan of Adjustment prior to confirmation hearings and brings Puerto Rico another step closer to the end of its bankruptcy.”


The government and the Legislature oppose the debt adjustment plan because it proposes an 8.5% cut to pensions higher than $1,500 a month, and have said they will not pass bills needed to enable the debt adjustment plan.


The document, however, did not include a proposed alternative to that issue. The plan discloses the government’s position and includes a summary of recent statements by Gov. Pedro Pierluisi Urrutia and the speaker of the island House of Representatives, Rep. Rafael Hernández Montañez.


The plan then discloses the risks associated with the oversight board’s failure to obtain legislative approval for each legislative measure contemplated by the proposed plan, and the risks associated with implementation of the proposed plan of adjustment should the oversight board proceed without the enactment of legislation contemplated in the plan. The value of those municipal securities, such as the new general obligation (GO) bonds, could be impacted, and the government believes the oversight board is pursuing a risky path.


The oversight board said it believes the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, preempts commonwealth laws, including those enacted before the federal legislation and that the board can write budgets and fiscal plans that can wipe out local laws assigning cash flows to revenue bondholders.


The plan added a new section to discuss, among other things, the oversight board’s analysis of the debtors’ real property assets and efforts to monetize such assets.


“Creditors may raise at confirmation of the proposed Plan whether certain Commonwealth properties should be monetized, including pursuant to Act 26-2017, and, if they are monetized, whether the proceeds from the sale of such properties should be made available to pay creditors,” a section of the plan reads.


The plan reveals that Puerto Rico owns 16,800 real properties and parcels, including some 4,100 buildings and 12,700 parcels of land.


The debt disclosure statement also added that it can not offer guarantees as to the adequacy of the financial information provided by the government.


“The financial information contained herein has not been, and will not be, audited or reviewed by any independent accounting firm or third party and is limited in scope,” the document says. “Although the Debtors believe that they have used their reasonable efforts to assure the accuracy of the financial information provided herein, there can be no assurance that the financial information contained herein is without material inaccuracies or inconsistencies. Neither the Oversight Board nor the Government can vouch for the accuracy and completeness of such information. As a result, you are cautioned not to place undue reliance on any of the financial information contained herein.”


It also discloses that creditors are conducting independent investigations into cash available to the commonwealth and may challenge whether the oversight board’s cash restrictions are correct. Additionally, it says the court may be asked to determine whether available cash should have been considered in formulating the plan of adjustment, and that, if the court finds that additional cash should have been considered and made available for distribution under the plan, there is a risk that the debtors may not be able to demonstrate satisfaction of confirmation standards.


The document also discloses the potential risks and costs associated with the issuance under the proposed plan of adjustment of multiple kinds and maturities of bonds to each holder of bond claims with respect to their current holdings, including any effect on marketability of such bonds, as well as the rationale for structuring distributions in that manner. It advises holders of such bonds that they will need to consult their tax advisers as to the tax implications of the distribution.


Regarding the interest on the GO bonds, the plan says that which is to be issued under the plan of adjustment is intended to be exempt from federal taxes to the maximum extent permitted under the Internal Revenue Code (IRC).


“However, as noted above, the tax status of the New GO Bonds has not been determined as of the date of this Disclosure Statement,” the document says. “In order to determine the maximum amount of New GO Bonds that can be exempt from federal taxes under the IRC, due diligence regarding the use of proceeds of the existing bonds must be completed by Section 103 Bond Counsel, among other matters. This diligence process has started but will take some time to complete.”


“In addition, a ruling or other guidance from the IRS regarding the allocation of proceeds of the New GO Bonds between purposes eligible for tax-exempt financing and purposes not eligible for tax-exempt financing will be sought in order to maximize the amount of New GO Bonds that can be issued as exempt from federal taxes under the IRC,” the document notes. “A ruling request has not yet been submitted to the IRS, but it is expected that the guidance from the IRS will be obtained before the effective date.”