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Puerto Rico to Slash Bond Debt in New Restructuring Pact

Michelle Kaske
·4-min read

(Bloomberg) -- Puerto Rico and rival bondholder groups reached a tentative deal that would slash the debts owed by the central government, a key step toward resolving the island’s nearly four-year bankruptcy.

The new agreement takes account of the economic hit the pandemic has taken on the U.S. territory since the terms of the previous debt-cutting deal were struck in February 2020. The goal is to receive court approval in the fall and exit bankruptcy by the end of 2021, Natalie Jaresko, executive director of the island’s financial oversight board, told reporters Tuesday.

Under the terms, owners of the island’s $18.8 billion of general-obligation and Public Buildings Authority debt would receive $14.4 billion, $7 billion in cash and the rest through the issuance of new securities, according to a disclosure made to investors. Investors would also receive a so-called contingent-value instrument that would pay off if sales taxes exceed targets.

That compares to a total $15.6 billion in the previous pact, which provided a smaller cash payment and didn’t include a contingent value instrument, according to the documents.

While the deal cuts the island’s debt more deeply than the previous agreement, it is supported by owners of more than $11.7 billion of debt, including bond insurers, Aurelius Capital Management, BlackRock Financial Management Inc., Davidson Kempner Capital Management and GoldenTree Asset Management.

The accord, if eventually supported by a sufficient number of creditors and approved in court, promises to help Puerto Rico emerge from a bankruptcy that has cast a shadow over the island since May 2017 by cutting the central government’s bond debt by 61%. Already contending with a stagnant economy and shrinking population, the territory had been battered by hurricanes, earthquakes and political turmoil even before the pandemic struck.

“It’s a fair deal,” David Skeel, the chairman of the oversight board, told reporters Tuesday. “It provides bondholders with payments that we believe that Puerto Rico can afford in the coming years while also lifting a heavy weight off the shoulders of Puerto Rico’s next generation.”

The prices of Puerto Rico bonds gained Tuesday, despite a slide in the broader market. General-obligation debt due in 2035, the most actively traded security, rose to as much as 78 cents on the dollar, a gain of 4.4% from Monday’s average.

Still, that 78-cent trade is higher than the 67.7 cents on the dollar that bondholders would receive for that security in the debt restructuring deal. Investors are betting prices on the new restructured general-obligation bonds will jump in the secondary market as Puerto Rico’s restructured sales-tax bonds have done.

Puerto Rico’s oversight board said the terms of the pact would allow bondholders to recover between 67.7% to 80.3% of their investment, depending on the class of security and based on what the commonwealth owed when the bankruptcy process began in May 2017, according to a disclosure to investors. That range falls to 53% to 74.5% when considering the unpaid interest on the securities.

The board said in a statement that works out to an average reduction of 27% for general-obligation bondholders and a 21% cut for those who own buildings authority debt.

To exit bankruptcy, Puerto Rico must restructure its bonds backed directly by the central government’s revenue and also fix an unfunded pension system that owes current and future retirees $55 billion.

Governor Pedro Pierluisi acknowledged that the agreement represented a steep reduction in the island’s debts, but said his administration would not join the deal because it includes cuts to public pensions.

“Unfortunately, the FOMB has not yet abandoned the pension cuts included in the February 2020 plan of adjustment,” Pierluisi said in a statement. “Therefore, the government of Puerto Rico communicated to the FOMB and creditors that it would not be part of the PSA announced today.”

Reducing some pension benefits are needed to strengthen the retirement system, establish a reserve trust and get court approval, the oversight board’s Jaresko said. More than 70% of pensioners will see no change in their benefits, she said.

“This is the best route, the fairest most confirmable route to confirmation and exiting bankruptcy,” Jaresko said. “And we believe that we’re taking care of the pensioners.”

The board must file to the court a proposed debt restructuring plan by March 8. Judge Laura Taylor Swain on last week approved postponing that deadline from an earlier Feb. 10 due date.

As in last year’s deal, the board will agree to end its legal challenge to cancel $6 billion of debt sold in 2012 and 2014 that it claims violated the island’s constitutional debt limits.

(Updates with estimated timeframe for court approval in the second paragraph.)

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