Puerto Rico is seeking to cut its debt load by 46 percent in its first offer to investors, a proposal that may face revisions as bondholders fight to get the most repayment, Bloomberg News reported yesterday. The commonwealth unveiled its plan yesterday to reduce the island’s obligations and help restart an economy that’s failed to grow in the past decade. The proposal for a voluntary exchange would cut the island’s debt to $26.5 billion from $49.2 billion, put off all interest payments until the 2018 fiscal year and affect even general-obligation bonds, which have the strongest repayment pledge, according to a restructuring proposal posted on the Government Development Bank website. The plan may pit the commonwealth’s investor groups against each other. In the proposal, general-obligation bonds get more money back than sales-tax debt, called Cofinas by their Spanish acronym. Cofina investors may take issue with that, said Lyle Fitterer, head of tax-exempt debt in Menomonee Falls, Wis., at Wells Capital Management, which oversees $39 billion of municipal bonds, including Puerto Rico securities. The island, which doesn’t have access to municipal bankruptcy, may need a legal framework to bring all of the island’s creditors together, Fitterer said. Read more.
In related news, a New York Times analysis today reported that the Puerto Rico Electric Power Authority (PREPA) has been giving free power to all 78 of Puerto Rico’s municipalities, to many of its government-owned enterprises, even to some for-profit businesses — although not to its citizens. It has done so for decades, even as it has sunk deeper and deeper in debt, borrowing billions just to stay afloat. Now, however, the island’s government is running out of cash, facing a total debt of $72 billion and already defaulting on some bonds — and an effort is underway to limit the free electricity, which is estimated to cost the power authority hundreds of millions of dollars. But like many financial arrangements on the island, the free electricity is so tightly woven into the fabric of society that unwinding it would have vast ramifications and, some say, only worsen the plight of the people who live here. “If the towns don’t get free energy, they’re going to have to pay for it by increasing their property taxes or something, so the people will end up paying,” said Eduardo Bhatia, the president of the Puerto Rico Senate. Residents of the island are already upset about a recent sales tax increase to 11 percent, from 7 percent, and a property tax increase now would cause an outcry. The last assessment was in 1958. Read more.
Additionally, the House Natural Resources Subcommittee on Indian, Insular and Alaska Native Affairs will hold a hearing today at 11 a.m. ET titled “The Need for the Establishment of a Puerto Rico Financial Stability and Economic Growth Authority.” To review the witness list and background for today’s hearing, please click here.
Experts gather later this week in San Juan to discuss Puerto Rico's economic distress and other important cross-border insolvency topics at ABI's Caribbean Insolvency Symposium. Click here to register!
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
