Oversight board announces terms of debt restructuring agreement with some GO, PBA bondholders

By The Star Staff

The Financial Oversight and Management Board for Puerto Rico announced Tuesday the terms of a debt restructuring agreement with certain holders of commonwealth general obligation bonds (GO) and Public Buildings Authority (PBA) bonds that would reduce some $18.8 billion in debt to $7.4 billion.

The terms of the agreement reflect negotiations with creditors who were parties to the restructuring agreement the oversight board reached in February 2020 and follows months of court-supervised mediations after the oversight board’s assessment of the cumulative effect of the COVID-19 pandemic, the ongoing recession, and a series of natural disasters over the last several years on Puerto Rico and its economy.

The new agreement with GO bondholders and PBA bondholders, in summary:

• Reduces $18.8 billion of commonwealth debt held by GO and PBA bondholders by 61%, to $7.4 billion.

• Provides GO and PBA bondholders with $7.4 billion in bonds and $7 billion in cash, lifting the weight of unsustainable debt from future generations.

• 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 for Puerto Rico.

“We achieved a fair, sustainable, and consensual agreement that puts Puerto Rico on a path to recovery and is an important tool to lift the weight of bankruptcy from the people and businesses of Puerto Rico,” said David Skeel, chairman of the oversight board. “I firmly believe this is the best outcome we could achieve in today’s economic uncertainty, not only for the people of Puerto Rico but also for creditors who have an interest in Puerto Rico’s long-term viability and creditworthiness.”

“This new agreement puts Puerto Rico in a significantly better fiscal position, both compared to the terms we were able to negotiate before the severe pandemic and compared to U.S. states with high levels of debt,” Skeel said. “The Plan of Adjustment we expect to present next month is based in part on this agreement with creditors, together with the agreements already achieved with the Official Committee of Retirees and certain unions, as well as the outcome of further ongoing mediation with other creditor groups. The Plan will ensure that Puerto Rico resolves its insolvency once and for all. That is the goal the Oversight Board set: once and done. We intend to achieve it.”

“We reached the agreement filed today through good-faith efforts on all sides and the leadership of our mediator,” Skeel added. “I would like to thank Judge Barbara Houser, as well as Judge Roberta Colton and their mediation team, for their important role in this process.”

The agreement reduces the maximum annual debt service payments to $1.15 billion for current interest bonds, compared to payments as high as $4.2 billion without restructuring. The annual debt service in the restructuring agreement reached before the pandemic was $1.5 billion, and the new agreement would free up more than $300 million per year for government services. The annual payments add up to a total of $34.1 billion over the life of the debt under the new agreement, a 62% reduction from the $90.4 billion Puerto Rico would have to pay under the original contractual debt agreements before the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) of 2016.

Without PROMESA, 30 cents of every dollar in taxes and fees the government collects from the people of Puerto Rico would go to creditors. The new agreement reduces the annual payments to less than 8 cents of every dollar the government collects.

“The reduction in annual debt service payments is a significant milestone on Puerto Rico’s road to recovery,” said the oversight board’s executive director, Natalie Jaresko. “Taken together with the debt policy legislated by the government last year that restricts incremental debt issuance to avoid the mistakes of the past, this agreement establishes sustainable debt levels, allows Puerto Rico to focus on structural reforms and growth, and provides the government the budgetary ability to provide the services people need and deserve. All of this puts Puerto Rico on a path to renewed market access.”

The new agreement’s cash and debt consideration to bondholders provides a 27% average reduction for GO bondholders and a 21% average reduction for PBA bondholders, in addition to reducing their claims by many years’ worth of interest payments.

Given the considerable uncertainty about Puerto Rico’s long-term economic growth after the hurricanes, earthquakes, and now the pandemic, the new agreement includes a CVI that shares a portion of outperformance with creditors if Puerto Rico’s economy is growing more than the projections in the 2020 Certified Fiscal Plan for Puerto Rico. The CVI utilizes the 5.5% of Puerto Rico’s sales and use tax (IVU by its Spanish acronym) pledged to the Puerto Rico Sales Tax Financing Corp. as the measure for outperformance. Should the island government collect more of the 5.5% IVU than projected, the creditors who are parties to this agreement would receive 45% of the increment above the amount projected, subject to both annual and lifetime caps. If the economy performs as projected or falls below expectations, creditors receive no incremental compensation from the CVI.

Under the plan support agreement (PSA), seven classes of bondholders holding GO bonds as well as PBA bonds will get anywhere between 67% and 80% in recoveries and while support for the new debt deal is less than 66% of the threshold needed, officials believe that in practical terms it will be confirmed.

The debt support agreement states that it must go into effect by Dec. 15 of this year or else the court may deny confirming it. A document provided by the oversight board shows that the PSA has more than 66% support in four classes of bonds but for three classes of bonds, the PSA has more than 50% support but less than 66% approval.

Skeel said the PSA has the support of 60% of the bonds. He said the PSA needs approval of two-thirds of each class of bonds but “keep in mind that is two-thirds of those who vote,” so “60% may well be in practice enough to confirm a plan because not every bondholder will vote but, we of course would like to get it over the threshold.”

Jaresko said the debt adjustment plan to be submitted on March 8 will include a proposed 8.5% cut to pensions higher than $1,500 per month but that it will also have a pension reserve to guarantee payments.

Gov. Pedro Pierluisi Urrutia said that while he supports the new debt deal, the government will not be a signatory to the PSA as it opposes any impact on pensions. Lawmakers have also said they will not approve any bill that would enable a debt deal that has pension cuts.

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