SAN JUAN, (Reuters) – Puerto Rico would reduce a major portion of its debt by more than 60% under a long-awaited restructuring proposal the bankrupt U.S. commonwealth’s federally created financial oversight board filed in court yesterday.
The so-called plan of adjustment covering $35 billion of bonds and claims and more than $50 billion of pension liabilities would allow Puerto Rico to exit a form of bankruptcy that commenced in May 2017 if it wins U.S. District Court approval.
“This is the beginning of the end of Puerto Rico’s bankruptcy process,” José Carrión, chairman of the oversight board, told reporters following a public hearing on the plan.
The proposal, which would reduce the value of bonds and other claims, won the support of Puerto Rico’s new governor even though it calls for pension cuts for about 40% of the island’s government retirees.
Confirmation of the plan by U.S. Judge Laura Taylor Swain, who is hearing Puerto Rico’s bankruptcy cases, is expected in the first half of 2020, according to Natalie Jaresko, the board’s executive director.
But Puerto Rico faces “an uphill battle,” according to James Spiotto, managing director of Chapman Strategic Advisors, who pointed to the proposal’s relatively low support among creditors compared with plan of adjustment filings in previous high-profile municipal bankruptcies.
“If enough people don’t accept it, how’s the plan going to be feasible?” he said.
Plan support agreements cover $4 billion of bonds so far, up from $3 billion when an initial deal was announced in June, according to the board.
Assured Guaranty, which insures nearly $1.5 billion of Puerto Rico general obligation and Public Buildings Authority (PBA) bonds, said it does not support the plan “as it is premised on a number of terms that violate Puerto Rico law, its constitution and PROMESA,” the 2016 U.S. law that created the oversight board.
Jaresko said the board will continue to negotiate with other creditor groups to increase support.
Owners of bonds issued by Puerto Rico, the PBA and Employees Retirement System would face losses on their initial investments ranging from 28% to 87%, with higher reductions earmarked for bonds that the board and some creditors are seeking to invalidate.
The board is trying to void more than $6 billion of general obligation bonds sold in 2012 and 2014 on the basis they were issued in violation of Puerto Rico’s constitutional debt limit. The proposed plan of adjustment contains a settlement offer for challenged bonds, while postponing litigation on the validity of the debt until after the plan is confirmed in court.
Annual debt service would be reduced to 9% of government revenue from 28%, according to the board.
PENSION CUTS CONTROVERSY
The plan creates an independent reserve trust for Puerto Rico’s pay-as-you-go public sector retirement system and calls for a maximum 8.5% pension cut for retirees who receive more than $1,200 in monthly benefits. A federal court-appointed committee representing more than 167,000 retirees has agreed to the plan.
Other groups that represent pensioners such as the Teachers Federation and the Government Retirees and Pensioners Federation rejected the proposal, noting that the court-appointed committee does not represent them in the negotiations
Before former Governor Ricardo Rossello left office last month and was eventually replaced by Wanda Vazquez, Puerto Rico’s government opposed pension cuts.
In a televised address, Vazquez said while she opposes cuts to pensioners in principle, her administration will support the proposed plan of adjustment to avoid risking stiffer pension cuts and “losing the opportunity to restructure more than $35 billion in commonwealth debt.”
So far, Puerto Rico has received court approval for debt restructurings for its Government Development Bank and Sales Tax Financing Corporation known as COFINA. The Puerto Rico Electric Power Authority moved closer to exiting bankruptcy earlier this month when two holdout bond insurers joined a deal to restructure its debt.
