The New Puerto Rico Support Agreement May Not Be The Final Restructuring Word

The Financial Oversight and Management Board for Puerto Rico (the Board) has announced an agreement with certain Puerto Rico bondholders on a newly negotiated Plan Support Agreement (PSA) that would frame a new Plan of Adjustment (POA) that is expected to lower $35 billion of outstanding Central Government debt by 70%, and reduce the Commonwealth’s debt service (including principal and interest from the COFINA Senior Lien Bonds) by 56%. The new PSA provides a 29% average reduction for general obligation bondholders and a 23% average reduction for holders of Puerto Rico Public Buildings Authority Bonds. Commonwealth creditors would receive $10.7 billion in new debt, half in G.O. bonds and half in COFINA Sales Tax Junior Lien Bonds in addition to $3.8 billion in cash.

Overall, the new PSA, effectively settles the litigation challenging (1) the validity of approximately $6 billion of late-vintage 2012 and 2014 bonds which the Board and Unsecured Creditors Committee argued violated constitutionally-imposed debt limits and (2) the priority of the G.O. bonds. Such late-vintage bonds would now receive better recoveries under the PSA. The PSA is expected to resolve its legacy debt within 20 years, 10 years earlier than anticipated under last year’s POA, and reduce overall debt by an additional $5 billion over the prior POA. The new PSA does not eliminate other Board challenges against the Employee Retirement System Bonds ($3.1 billion) and certain other outstanding claims.

Given a number of hurdles, we remain skeptical that the ultimate Plan of Adjustment gets passed in the form of the new support agreement. Approvals must come from the Governor (who has already voiced opposition to the support agreement), the legislature, and the Title III Bankruptcy Court. Certain other bondholders and the bond insurers have called for a more orderly consensual approach. Furthermore, the offerings made to the bondholders in the Employee Retirement System, Highway and Transportation Authority, Convention Center and Infrastructure Financing Authority and to other creditors are still being challenged. This group of debt is viewed as subordinate to the G.O. and government guaranteed bonds. Against this backdrop, there is no clear indication when Central Government debt will be restructured and when Puerto Rico will emerge from bankruptcy.

Over the past several months, the market for Puerto Rico bonds has demonstrated noted resiliency and price advances indicative of the positive momentum being made on the Commonwealth’s overall debt restructuring and expectations that recovery values would be driven higher through ongoing mediation efforts.

Despite the restructuring progress, however, serious credit concerns remain and we have to question the timing of eventual market access. We continue to seek out a clear and reasonable long-term economic recovery plan for the Commonwealth. Population flight remains a primary credit concern and so we have to focus on the sustainability of future debt service payments should there be a substantive shift in the Puerto Rico tax base. The underground economy remains a concern and we challenge the government to develop a more aggressive plan to thwart the long-standing activity that has eluded proper compliance and economic contribution. We would also like to see a meaningful return of a corporate presence that could advance long-term economic investment. Puerto Rico remains heavily exposed to weather and other natural conditions and events that may disrupt its financial, operational, and economic standing – all of which could have adverse implications for future debt service payments in a post-restructuring world.

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