Puerto Rico Releases Government Debt Plan
The plan of adjustment applies to approximately $35 billion of outstanding debt, specifically the proposed recovery for Commonwealth General Obligation, Public Building Authority, and Employee Retirement System Bonds, with 43 classes of bondholder and other creditor claims. Overall debt service would be cut to 9% of Central Government revenue from 28%. Given the amount and types of debt covered under the plan of adjustment, there are many complexities that need to be considered, and even after a thorough review, Oppenheimer expects there to be some confusion. It is important to keep in mind that the proposed recoveries are subject to change given expectations for continued negotiations within the context of a Bankruptcy Court-ordered mediation, ongoing litigation over the legitimacy of certain debt issuances, and a U.S. Supreme Court review of challenges against the validity of the Board’s authority.
While we expect modifications to the plan of adjustment, we do recognize the progress made by the Commonwealth and various creditor groups regarding the rather difficult and multi-dimensional debt restructuring process that is necessary to place the Island on a sustainable path toward fiscal stability. Just as we saw with the Puerto Rico Government Development Bank and the COFINA Sales Tax Bonds, the restructuring will be conducted through a debt exchange and cash allocations. Specific creditor classes will determine recovery values and we suspect that prospects for added conflict will grow as certain classes challenge the terms of the plan of adjustment. As expected, recovery distinctions for bonded debt have been made to reflect litigation surrounding vintage and late-vintage general obligation bond (GO) and government-guaranteed debt. The Oversight Board would like the bankruptcy court to confirm the plan of adjustment in the first half of 2020.
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