The debt reduction agreement for Puerto Rico’s General Obligation (GO) bonds released by the PROMESA Financial Board just before press time for many newspapers last night was not supported by all Board Members and was immediately opposed by Governor Wanda Vazquez Garced (New Progressive Party/PNP).
The Municipal Securities Rulemaking Board submitted a filing disclosing the “Plan Support Agreement” and has shared a Board presentation on the deal.
The Governor’s opposition is particularly critical because the agreement would require enactment of a territorial law, and passage by the Legislative Assembly is inconceivable without the Governor’s support.
The proposal would be questionable even if it had Vazquez’s backing:
- The legislature’s presiding officers, Senate President Thomas Rivera Schatz (PNP) and House of Representatives Speaker Carlos “Johnny” Mendez, have previously said what the Governor cited as her primary reason for rejecting the agreement: its reduction in government employee pensions.
- Further, Members of the minorities in the Assembly would be even less likely to support such legislation.
- Finally, the split among PNP Members between those supporting her and those supporting former short-term Governor, PROMESA Board outside counsel, and Resident Commissioner in the U.S. House of Representatives Pedro Pierluisi for the PNP gubernatorial nomination has diminished Vazquez’s influence in the legislature.
The proposal opens up a second major front for the Board in what is again becoming an adversarial relationship with the territorial government. Neither the Governor nor any member of the Legislative Assembly supports the debt reduction agreement that the Board has reached with almost all creditors of the Electric Power Authority (PREPA).
The difference in the case of the new agreement regarding bonds issued by the Government of Puerto Rico itself and that the Government’s Public Buildings Authority (PBA) issued with the Government’s guarantee of payment is that the PREPA deal is supported by PREPA and Puerto Rico’s Fiscal Agency and Financial Advisory Authority (AFAAF) despite the Governor’s call for it to be renegotiated and her control over AAFAF in particular.
The new GO deal was also released as the Governor, AAFAF Executive Director Omar Marrero, and PROMESA Board Executive Director Natalie Jaresko disputed whether the Board has held up the use of territorial revenue for emergency relief for victims of the earthquakes that have wreaked damage in southwestern Puerto Rico since December 28th.
The new accord was reached with fewer creditors of the Government’s $35 billion in direct debt, $18.8 billion of which is in bonds, than the PREPA agreement. It reportedly represents an arrangement with creditors of about $8 billion of the GO bonds. The Board’s first GO deal was backed by creditors of only $3 billion of the bonds.
The difference in bondholder support is due to the higher payments, greater security, and shorter time frame that the new agreement would provide for payments on bonds issued beginning in 2012. These are bonds that the Board initially asked the PROMESA bankruptcy court to void as unconstitutional and then, in its first agreement with bondholders, proposed to have much lesser payments made on, with less security, over a longer time period than in the new agreement.
The changes caused Puerto Rico economist Jose Caraballo to say that the new accord is unaffordable and increases the odds of the territory plunging into a “prolonged recession” and its government back into bankruptcy.
Recalling that she had considered supporting the PROMESA Board’s earlier agreement with the smaller group of bondholders, Vazquez explained that, because the PROMESA Board “refused to improve the treatment of pensioners, my government has decided to not join this new agreement “ She continued by saying that, “while bondholders receive new legal protections in this new agreement, pensioners receive no improvement.” She pointed out that “this new agreement . . . will require legislation to be implemented.”
The Governor went on to further explain that the new legal protections included “the issuance of new subordinate bonds of COFINA [the Government’s Sales Tax Financing Corporation], which protect the General Obligations creditors through a statutory lien, as well as the creation of a reserve account, the deposits of which will also be protected in favor of the bondholders by means of a statutory lien.”
Vazquez did note, however, that the new accord “contains certain positive aspects, such as a substantial cut in the total debt and a reduction in the amount that bondholders will receive.”
In touting the new agreement the Board reported that it would reduce $18.757 billion in bonds to $10,669 billion in bonds and $3.809 billion in cash instead of to $11.777 billion in new bonds and $2.9 billion in cash, with the interest cost reduced from 5.716% to 5.548%.
Instead of payments of 45% on 2012 bonds and 35% on the 2014 GO bonds, payments would total 69.887% on 2012 GO bonds and 72.21% on the 2012 PBA bonds and 68% on the 2014 bonds.
The payout period would be reduced from 30 to 20 years.
The Board would also drop its legal challenge to $6 billion in 2012 and 2014 bonds but will continue to ask for Employees Retirement System bonds to be nullified and seek recovery of fees from banks, law and financial firms involved in the issuance of the 2012 and later bonds.
