Puerto Rico recovery working group presents restructuring proposal

By Caroline Salls

Pittsburgh, Feb. 1 – The Working Group for the Fiscal and Economic Recovery of Puerto Rico and its restructuring advisers met Friday with the advisers to Puerto Rico’s creditors to present the commonwealth’s restructuring proposal, according to a working group news release.

Specifically, the group said six meetings were held with advisers representing the holders of all of the major tax-supported credits, including local and mainland mutual funds, cooperatives, hedge funds and monoline insurers.

“We believe today’s meetings were an important first step in what we hope will continue to be a mutually respectful negotiation process,” the working group said in the release.

“We believe the proposal we presented is fair, balanced and reflective of the commonwealth’s actual capacity to pay our creditors over the long term, and we will be scheduling additional meetings to continue these discussions in the coming weeks.

“It is our hope that our creditors will work with us on a solution that will allow us to invest in Puerto Rico and grow our economy so that the island’s future is one that is built upon a fiscally stable foundation.

“Reaching a resolution is in large part contingent upon a continuation of federal funding for Puerto Rico, particularly with respect to health care. And in the event a very high participation level is not achieved, an effective restructuring regime will be necessary.”

Growth plan

The working group said in a separate release Monday that the proposal seeks to reduce the commonwealth’s mandatorily payable tax-supported debt and near-term debt payments, giving Puerto Rico time to implement a Fiscal and Economic Growth Plan (FEGP) and to stimulate real economic growth.

Together with the FEGP, the group said the proposed debt restructuring, if accepted by the commonwealth’s creditors, will ensure that Puerto Rico has sufficient resources to provide essential services to all residents, pay back its suppliers and taxpayers, rebuild depleted cash resources and fund its retirement systems.

As previously reported, the FEGP includes a comprehensive set of measures designed to put Puerto Rico back on a path to economic growth and long-term sustainability. The working group said implementation of the expense and revenue measures in the FEGP – totaling $20.6 billion in revenue increases and $13.8 billion in expenditure reductions over the next 10 years – are projected to reduce the commonwealth’s cumulative fiscal deficit for the next decade to about $34 billion.

However, the working group said Puerto Rico faces more than $33 billion of payments on its tax-supported debt during the next 10 years.

A voluntary exchange offer is intended to restructure those payments to allow the commonwealth to catch up with its suppliers and taxpayers and implement the FEGP’s fiscal and economic initiatives and, over the long term, make its tax-supported debt sustainable, the release said.

In addition, Puerto Rico is instituting a fiscal control board to provide necessary oversight and ensure the commonwealth complies with the FEGP and the terms of the exchange offer.

Restructuring terms

Specifically, the restructuring proposal calls on creditors to exchange their existing securities for two new securities, including a base bond with a fixed rate of interest and amortization schedule and a growth bond, which is payable only if the commonwealth’s revenues exceed set levels.

The working group said the new securities would also provide creditors with enhanced credit protections, such as a commonwealth guarantee and statutory liens and pledges on some revenues.

Under this proposal, the $49.2 billion of tax-supported debt would be exchanged into $26.5 billion of newly issued mandatorily payable base bonds and $22.7 billion of newly issued growth bonds, the release said. Both bonds would mature in 2051.

Interest payments on the base bonds would begin in January 2018, scaling up to 5% by fiscal year 2021, when principal payments would begin. The growth bonds would be payable only to the extent the commonwealth’s revenues exceed its current baseline projections as a result of real economic growth.

By sharing in Puerto Rico’s economic recovery, the working group said creditors would have the opportunity to recover the principal amount of their investments.

The first such payments, if any, would be made beginning in the 10th year after the close of the exchange offer. In any given year in which the growth bond would be payable, creditors would receive payment of up to 25% of revenues.

In addition, the working group said the proposal would lower the commonwealth’s debt service-to-revenue on tax-supported debt to roughly 15%, a level consistent with the debt limit contemplated by the Constitution of Puerto Rico, from the current unsustainable ratio of 36%.

Although at a ratio of 15% Puerto Rico would still remain at levels exceeding the most heavily indebted of the U.S. states, the working group said debt service on the base bonds has been structured to give the commonwealth the opportunity to further reduce that ratio as a result of economic growth and develop into a stronger credit over time.

If Puerto Rico’s economy is able to grow in line with the growth assumed for the United States, the working group said investors will be able to recover the full principal amount of their investments through payments on the growth bonds.

The exchange offer is predicated upon a number of key assumptions, including “very high participation levels” from the creditor groups as well as the federal government maintaining at least its current percentage levels of programmatic support for the commonwealth, the working group said.

If participation levels cannot be achieved or the government allows the level of programmatic support to significantly decline, the working group said the terms of the exchange offer will have to be revisited and creditor recoveries adjusted accordingly.

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