Puerto Rico Government Releases Bond Exchange Proposal

The Working Group for the Fiscal and Economic Recovery of Puerto Rico released this morning details of a comprehensive voluntary exchange proposal presented to advisors to Puerto Rico’s creditors last week.  This plan can be found on the website of the Government Development Bank for Puerto Rico here.

The proposal seeks to reduce the U.S. territory’s mandatorily payable tax-supported debt and near term debt payments, providing the Island time to implement the Fiscal and Economic Growth Plan (FEGP) and to stimulate real economic growth. As explained in the group’s press release, the proposed debt restructuring, if accepted by creditors, seeks to ensure that Puerto Rico has sufficient resources to provide essential services to all Puerto Rican residents, pay back its suppliers and taxpayers, rebuild depleted cash resources and fund its retirement systems.

The exchange is intended to make up $16.06 billion of a projected deficit of $27.98 billion over five years and $23.87 billion of $63.38 billion over 10 years. The rest would be covered by local tax and spending measures guided by a new fiscal board which was established by insular law in November but for which Governor Alejandro Garcia Padilla has not yet named members.

The Government’s financial team had hoped to have the plan finalized more than a month ago. After an initial meeting in November, the Government’s proposal for a new ‘superbond’ to replace existing bonds of the Government and most of its instrumentalities was “polished,” according to Chief Financial Officer and Government Development Bank (GDB) President Melba Acosta. At the time, it was said that the new bonds would carry a lower interest rate and defer principal repayments for five years but the Constitution of Puerto Rico’s provisions requiring payment of debt incurred or guaranteed by the Government itself before any other expenditure would apply and a number of revenue sources would be segregated to ensure repayment.

Just as the territorial government’s financial team was ready to sit down again with bondholder group advisors, however, the talks were put on hold because of developments within the Federal government — particularly hopes of Governor Alejandro Garcia Padilla, U.S. Treasury Department officials, and some congressional Democrats that congressional Republicans would agree to special bankruptcy legislation for territorial governments that would cover “state” level bonds vs. just those of instrumentalities and a bankruptcy process for debt of entities that are not insolvent.

With Republicans refusing to agree in December, Puerto Rico’s financial team then hoped to get clearance for talks at the beginning of January. It didn’t, but was given the authority later in the month.

Garcia Padilla, U.S. Treasury officials, and many congressional Democrats are still hoping to have all Puerto Rico government debt reduced through a special bankruptcy law — but the insular government’s financial team is also worried about bond payments due May 1 and July 1. The Government and six of its instrumentalities owe more than $469 million by May 1, including almost $423 million in GDB payments, and the Government and 13 instrumentalities are supposed to pay more than $1.9 billion on July 1, including almost $780 million by the Government itself, $233 million by the Highways and Transportation Authority, more than $177 million by the Aqueduct and Sewer Authority, just under $148 million by the Public Buildings Authority guaranteed by the Government, and over $77 million by the Infrastructure Financing Authority.

Also providing an incentive for the Government of Puerto Rico to go ahead with talks were concerns expressed by Republicans in Congress on learning that the territorial government had not attempted to work out a solution with creditors (other than those of the Electric Power Authority) before seeking extraordinary bankruptcy authority.

These concerns were heightened by the revelation that multiple bondholder groups had offered to lend the insular government the funds it needs to meet its debt obligations in the near term, but the Garcia Administration had been unwilling to discuss the offers. One group said that the interest rate would be reasonable and that principal would not need to be repaid for five years.

The congressional Democratic commitment to enabling Puerto Rican government bond debt to be reduced in a Federal bankruptcy court was demonstrated by the letter that all 44 Democrats and the two independents who vote with the Democrats sent to Senate Majority Leader Mitch McConnell last week.