Puerto Rico FOMB sees deal as way out of Title III, denies disparate bond treatment

17 June 2019

Puerto Rico’s Financial Oversight and Management Board (FOMB) has paved the way for a 2020 exit from Title III with its new deal with USD 3bn of general obligation (GO) bondholders, said FOMB executive director Natalie Jaresko, even as stakeholders threw cold water on the agreement.

 

“We’ve reached a significant milestone for Puerto Rico,” Jaresko told reporters at a press conference today (17 June). “The end of bankruptcy is in sight.”

 

The plan support agreement between Puerto Rico and USD 3bn of the USD 18bn in GO bondholders would reduce GO liabilities to USD 23bn from USD 35bn. Bondholders are currently being offered different amounts for debt — between 23% and 73% — depending on whether their validity is being challenged in court. The deal also includes cuts to the pension system that received retiree committee support last week.

 

The deal received immediate pushback. The government of Puerto Rico said in a press release it did not support the deal, and would not pass any legislation to allow it to come to fruition because of the pension cuts. Jaresko said that cuts to the USD 50bn in pension obligations were necessary in order to secure the system. The cuts negotiated with the retirees committee — a flat 8.5% for pensions over USD 12,000 — would result in almost three quarters of retirees seeing no cut at all, and they were less than the cut — 10% annual savings and a 25% marginal cut — proposed in the fiscal plan. She said that legislation may not be necessary in order to get the cuts as part of an exit plan, which she expects to file in the next 30 days.

 

The FOMB and government haven’t been in active talks over the broad budget either, Jaresko said.

 

Bond insurer Assured Guaranty also criticized the plan, saying in a release that it is an “unprecedented and meritless attempt to invalidate certain lawfully issued general obligation bonds.” Jaresko denied that any general obligation bonds were being treated differently. The different recovery rates reflected the legal proceedings to invalidate debt because it allegedly breached the debt ceiling, Jaresko said. Bondholders could either agree to lower payouts than the bonds that the FOMB does not believe breached the debt ceiling, or they could risk going to court and, if the bonds are found invalid, getting zero return. However, if the bonds are found to be valid, they will get the same payout as the other bonds.

 

Jaresko also said that the deal marked the beginning of a larger negotiation. Just as with the Puerto Rico Electric Power Authority (PREPA) they initially were making a deal with a minority of bondholders, but hoped to build on the deal with others until they have wider support.

 

The deal follows a voluntary restructuring of Puerto Rico Sales Tax Financing Corporation and Government Development Bank for Puerto Rico debt. The PREPA deal, which has not yet received court approval, has the support of at least 58% of bondholders, according to court documents.

 

by Simone Baribeau