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The Puerto Rico Oversight Board’s proposed central government debt adjustment faces several obstacles, most prominently bond insurers’ possible withdrawal of support and local government opposition, Bond Buyer reported. Judge Laura Taylor Swain gave the board until the end of today to submit a plan of adjustment for bonds, pensions, and unsecured debts. The board reached an agreement with leading bondholders and insurers in early February that will define some of the plan of adjustment’s terms. The plan support agreement (PSA) required the support of 70% each of the holders of general obligation bonds, public building authority bonds, and holders of both bonds. The Feb. 23 agreement did not get that level of support. The plan garnered the needed additional support to reach the 70% levels within 12 hours of being announced, according to Board Executive Director Natalie Jaresko, and the board announced that on Feb. 24. However, 15 percentage points of the support comes from bond insurers Assured Guaranty and National Public Finance Guarantee. While the insurers signed the PSA, the insurers can withdraw from the agreement if they choose as late as April 1.

Puerto Rico’s governor announced yesterday that a federal control board reached a key deal that would reduce the U.S. territory’s overall debt by nearly 80%, but that his administration is rejecting it amid concerns about cuts to the island’s crumbling public pension system, the Associated Press reported. The impasse between the governor and a board that oversees Puerto Rico’s finances threatens to throw into limbo attempts to end a bankruptcy-like process for a government that six years ago declared unpayable its more than $70 billion public debt load. The deal was reached with creditors who hold general obligation bonds and Public Building Authority bonds sold by Puerto Rico’s government and would resolve $35 billion worth of debt and non-debt claims, according to the board. It also would reduce debt held by those creditors from $18.8 billion to $7.4 billion, a 61% reduction, and would provide them with $7.4 billion in bonds and $7 billion in cash, among other things. The board said the deal would free up more than $300 million a year for government services, and that instead of the 30 cents for every dollar in taxes and fees that Puerto Rico’s government collects that once went to creditors, it would be less than 8 cents. “It will set Puerto Rico on the path to end bankruptcy,” said board chairman David Skeel. “We think this is a very, very big moment in Puerto Rico’s recovery.” Gov. Pedro Pierluisi disagreed. He said in a statement that while the agreement is positive in many ways for Puerto Rico, his administration does not back the deal that is scheduled to be submitted in court next month and requires final approval from a federal judge overseeing the bankruptcy-like process. “The plan of adjustment should not be structured in a way that affects our pensioners even more,” he said.

Puerto Rico moved closer to resolving the largest municipal-debt default in U.S. history after creditors owed roughly $11.7 billion backed a settlement framework, the most Wall Street support yet amassed for a restructuring of the territory’s core public debts, the Wall Street Journal reported. The proposed settlement released today would reduce roughly $18.8 billion in general obligation debt to roughly $7.4 billion, lowering interest payments to bondholders to levels that Puerto Rico’s financial supervisors believes it can support after years of population loss and economic decline. Some bonds covered by the deal have gained value in recent months, buoyed by fixed-income investors’ appetite for high-yielding municipal debt and expectations that Puerto Rico’s court-supervised bankruptcy is nearing its end. The agreement marks the culmination of months of private talks between finance officials and creditors to assess the long-term damage to Puerto Rico’s economy stemming from Covid-19. Investment firms that participate would exchange their claims for a mix of cash, restructured bonds and tradable securities known as contingent value instruments that only pay out if sales-tax collections exceed certain projections. A sustained rally in high-yield municipal bonds, including Puerto Rico’s, helped to ease the deal, according to bondholders and advisers involved in negotiations. Yield-hungry investors have been drawn to risky municipal bonds in part due to the U.S. Federal Reserve’s commitment to ultralow rates. Also fueling the rally are expectations that federal support for Puerto Rico will increase with the White House and both houses of Congress under Democratic control, according to analysts and investors.

Puerto Rico’s financial oversight board reached a tentative agreement with investors on how to reduce $18 billion of bond debt and is seeking additional time to file a formal adjustment plan to the court, Bloomberg News reported. The board yesterday asked a court overseeing Puerto Rico’s record bankruptcy to give the panel and creditors more time to finalize an accord, according to a court document. The board is seeking to file a debt restructuring plan by March 8. It had a Feb. 10 deadline to submit a plan or term sheet. The deal involves owners of more than $7 billion of Puerto Rico bonds who signed on to an earlier debt plan from February 2020, except for one firm that may no longer hold Puerto Rico securities, according to the court filing. The board didn’t provide any details, including prospective repayment amounts, but hopes to release such information “within a week,” according to the court filing. “We requested that the court grant more time to continue the mediation process, set down the agreed terms in a plan support agreement, and extend support for the agreement across a broad spectrum of creditor groups for a fair and affordable plan of adjustment that will enable Puerto Rico’s economy to grow and the people of Puerto Rico to prosper,” Natalie Jaresko, executive director of the oversight board, said in a statement yesterday. Read more.

In related news, the U.S. Court of Appeals for the First Circuit rejected three out of four legal challenges to the Puerto Rico Sales Tax Finance Corp. (COFINA) bond restructuring, which addressed the biggest stack of Puerto Rico bonds outstanding, The Bond Buyer reported. The appeals court judges found that the appellants had failed to seek stays or appeals of the approved bond restructuring — about $17.6 billion of debt — in a timely fashion and that the plan had advanced well beyond the point where it could be practically undone. On these bases the court upheld the restructuring plan on the basis of the legal doctrine of equitable mootness, which seeks to avoid undoing complex bankruptcy reorganizations. The three cases decided included two launched by holders of subordinate COFINA bonds, the Elliot and Peter Hein cases, and another spearheaded by a member of the Puerto Rico House of Representatives, the Pinto Lugo case. The appeals court panel released a single decision for three of the cases late on Monday. It hasn’t yet released a decision on Coop de Ahorro y Cred. de Rin, et al. v. Financial Oversight and Management Board for Puerto Rico. Title III bankruptcy Judge Laura Taylor Swain approved the restructuring of what was then $17.6 billion in COFINA bonds on Feb. 5, 2019. The deal went into effect Feb. 12, 2019. In it the new COFINA entity was given 53.65% of the revenue granted to the original entity. Claims for the senior and subordinate bonds were reduced. Read more.

Puerto Rico yesterday presented a budget proposal of $10.7 billion for fiscal year 2022 — about $700 million more than the federally-appointed oversight board is recommending, Bloomberg News reported. Governor Pedro Pierluisi called his spending plan “realistic” and necessary to jump-start the economy of the bankrupt U.S. territory. He said the additional costs will be more than covered by surplus tax revenue and additional federal aid that the board had not built into its projections. The Fiscal Oversight and Management Board, or FOMB, has the final say in Puerto Rico’s budget. For fiscal 2021, the panel approved a $10.05 billion spending plan versus the $10.2 billion proposal presented by then-Governor Wanda Vazquez. Retirement costs will continue to take up a large portion of the island’s resources, as its pension system is broke and all payments to retirees must come from the general fund. Pierluisi’s budget allocates $2.1 billion to cover pension payments in fiscal 2022, similar to what the commonwealth paid this fiscal year. In addition, the budget allocates $2.8 billion for payroll, $5.2 billion for operational expenses and $535 million for capital expenses.

Insurers of around $3 billion in Puerto Rico highway bonds will ask an appeals court to let them continue their fight for toll revenues on Thursday, this time with the goal of pursuing their case outside of the court overseeing the commonwealth’s debt restructuring process, Reuters reported. The bond insurers, which include Assured Guaranty and Ambac Assurance, are urging the 1st U.S. Circuit Court of Appeals to reverse U.S. District Judge Laura Taylor Swain’s September decision rejecting their requests for relief from the automatic stay that protects bankrupt entities against litigation and attempts to collect on debts during the bankruptcy process. They sought the relief in the hope of bringing their revenue-related claims to another court after Swain rejected earlier attempts to make their case in Puerto Rico’s bankruptcy-like proceedings, known as Title III. The bond insurers, represented by Cadwalader Wickersham & Taft, Weil Gotshal & Manges, Milbank and Hogan Lovells, say that Judge Swain “misunderstood” their rights.

A federal control board revealed Friday that Puerto Rico paid more than $28 million in salaries in recent months to people who no longer work for the U.S. territory’s Education Department, even after officials last year flagged the practice as a problem, the Associated Press reported. The announcement came during a meeting of the board that oversees Puerto Rico’s finances as the U.S. territory government undergoes a bankruptcy-like process. The board first publicly flagged the problem in late September, announcing it had contacted federal and local law enforcement agencies after discovering the Education Department paid more than $84 million in salaries to some 17,500 people from 2007 to 2020 who no longer worked there. The board said the department failed to meet its requirement to implement a time and attendance system by mid-December. Board member Andrew Biggs noted that the government years ago had invested $33 million in a time and attendance software system that is not used, leading to the loss of more than $84 million over more than a decade. The department has one of the largest government budgets, with $1.36 billion allocated in fiscal year 2021, and the board called for the budget to be adjusted if the more than $28 million is not recovered.