Progress on Puerto Rico’s Bond Debt

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<h3>James A. Klotz</h3>

James A. Klotz

The government of Puerto Rico, its fiscal oversight board and creditors are moving toward agreement on a significant chunk of the commonwealth’s bond debt.

Progress is afoot on its power utility debt, sales-tax backed bonds and Government Development Bank debt, while a new committee was formed to address its general obligation bonds.

The deals, if they’re finalized, would restructure about 40% of Puerto Rico’s bond debt.

Progress Cited on Puerto Rico's Bond-Debt

Puerto Rico’s General Obligation debt

The new group formed last month to tackle Puerto Rico’s General Obligation debt includes hedge funds Fir Tree Partners and Mason Capital Management LLC as well as First Pacific Advisors LLC, a mutual fund manager, according to the Wall Street Journal. All told, the committee owns about $1.9 billion of Puerto Rico’s GO debt.

The committee is separate from a group of bondholders that includes Aurelius Capital Management LP, which is involved in litigation with Puerto Rico’s government and oversight board. That group contends the oversight board is illegal, and GO bondholders should have first claim on tax revenues, before holders of about $18 billion of bonds issued by Cofina, the island’s sales-tax authority.

Puerto Rico is responsible for approximately $13 billion of outstanding GO bonds.

Creditors approve Puerto Rico’s General Development Bank debt deal

Meantime, creditors overwhelmingly approved a plan to restructure bonds issued by Puerto Rico’s Government Development Bank.

Preliminary voting results were announced last week.

Under the deal, the GDB would transfer portions of its loan portfolios, real estate and other assets to a newly formed organization, the GDB Debt Recovery Authority. Further, GDB bondholders, municipal depositors and private entity depositors would have access to these assets under certain provisions.

The agreement would also end outstanding claims against the GDB and its leaders.

The GDB, once Puerto Rico’s bond issuer and financial advisor, ceased operations in April 2016 after the governor declared a state of emergency. It had about $4.2 billion in outstanding debt.

The Puerto Rico Oversight Board (Promesa) certified the proposed deal for court consideration and creditor voting in July.

There is, however, resistance to the pact. The Committee of Unsecured Creditors are suing to block it, arguing that prominent officials of the GDB, who were instrumental in Puerto Rico’s fiscal woes, were also members of the commonwealth’s oversight board and other fiscal advisors who support the deal.

During a court hearing last week, the federal judge presiding over the commonwealth’s bankruptcy cases took it under advisement.

Milestone for Puerto Rico’s debt adjustment plan

A final agreement on Puerto Rico’s bonds backed by sales taxes – which the chief of the oversight board called a “significant milestone in resolving Puerto Rico’s debt crisis” – is expected to be filed by Oct. 15.

It would be the first debt adjustment plan to seek court approval.

“The deal provides for more than a 32% reduction in Cofina debt, gives Puerto Rico approximately $17.5 billion in debt service savings, avoids additional costly and time consuming litigation and enables local retail bondholders in Puerto Rico to receive a significant recovery,” said Natalie Jeresko, an investment banker and executive director of the oversight board.

The agreement was reached between Cofina, the oversight board, bondholders and bond insurance companies.

The plan would set the stage for a “consensual restructuring” of Cofina debt by the end of the year, according to Jeresko.

Preliminary agreement on Puerto Rico bonds issued by its power utility

Earlier this summer, Puerto Rico’s power company, Prepa, reached a preliminary agreement with bondholders on restructuring its $9 billion of debt.

Under the deal, bondholders would be required to exchange their debt for two new classes of securities at 77.5 cents on the dollar.

One type matures in about 40 years and pays 5.25% interest, which bondholders would receive at an exchange rate of 67.5 cents on the dollar, while the second type would be exchanged at 10 cents on the dollar.

The agreement goes further in slicing Prepa’s debt service bills than an agreement oversight board members rejected last year, who said it failed to adequately modernize the utility and lower the cost to residents.

Talks between the utility and creditors were at a stalemate. Meantime, the utility suffered significant damage from last year’s hurricane.

The oversight board views the deal as a step forward in ultimately privatizing the dated utility.

Negotiations continue with other creditors, including bond insurers.

Firms involved in the preliminary deal include Knighthead Capital Management, Franklin Advisers, BlueMountain Capital Management, OppenheimerFunds, Silver Point Capital, Angelo, Gordon & Co. and Marathon Asset Management.

A step forward on Puerto Rico’s bond debt

With more than $70 billion owed to creditors, no one could expect a quick, simple solution to Puerto Rico’s bond debt (“Bondholders After Puerto Rico’s Bankruptcy”).

While there are still more questions than answers for bondholders, the past few months have seen significant progress, and we will continue to monitor the negotiations. Meantime, the market value of almost all Puerto Rico issues has improved significantly.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Sep 17, 2018

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