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Puerto Rico general obligation bonds traded higher yesterday in the wake of a report of a tentative deal involving debt that the U.S. commonwealth’s federally created financial oversight board has been trying to void, Reuters reported. More than $6 billion of bonds Puerto Rico issued in 2012 and 2014 had been targeted by the board for allegedly being issued in violation of a debt limit in the Caribbean island’s constitution. As a result, owners of those bonds were assigned low recoveries in a debt restructuring plan the board submitted in September to a U.S. District Court hearing Puerto Rico’s bankruptcy case. The <em>Wall Street Journal</em> reported on Wednesday that competing groups of bondholders and the board reached an initial compromise that would settle a dispute over the 2012 and 2014 bonds. A tentative deal would increase recoveries for the bonds and remove the need to litigate their validity.

Competing bondholder groups and the oversight board supervising Puerto Rico’s debt restructuring have reached a tentative compromise that moves the U.S. territory closer to leaving bankruptcy, the Wall Street Journal reported. The deal settles a dispute between holders of Puerto Rico general obligation bonds that were issued before 2012 and owners of general obligation bonds issued more recently. The oversight board has previously contested the validity of the newer debt and proposed owners of those bonds receive lower recoveries. The agreement, which requires court approval, is expected to be announced next week. The board and the competing factions worked out the rough terms of their bargain during court-mandated mediation in recent months but are still discussing some legal points of disagreement. Hedge funds including Monarch Alternative Capital LP, GoldenTree Asset Management LP and Whitebox Advisors LLC were part of a committee advocating for owners of the older—or legacy—bonds while a group including Aurelius Capital Management LP and Autonomy Capital negotiated on behalf of investors in the newer bonds. Together, the older and newer bonds total more than $18 billion in debt. An early agreement between the legacy group and the oversight board contemplated paying about 64 cents on the dollar for the older bonds and between 45 and 35 cents on the newer bonds. The new deal involves a higher payment on the more recently issued bonds.

The U.S. Court of Appeals for the First Circuit said that Puerto Rico pension bondholders have no collateral rights over money collected by the U.S. territory’s public retirement system after it filed for bankruptcy in 2017, WSJ Pro Bankruptcy reported. The court said that income received by the pension fund after it entered bankruptcy proceedings aren’t payable to creditors who bought $3 billion in pension obligation bonds. Lawyers for the bondholders didn’t respond to a request for comment. Puerto Rico’s financial oversight board has proposed paying back those bonds at 13 cents on the dollar as part of a broad financial restructuring. A decade ago, with its assets dwindling and the government skipping contributions, Puerto Rico’s Employees Retirement System, or ERS, sold the pension debt to keep itself afloat and buy time for its investment portfolio to grow. Proceeds from the bond issuance were supposed to ensure benefits would be paid until elderly pensioners died off and younger employees began retiring with leaner benefit packages. Bondholders were assured they would be repaid ahead of retirees, while contributions from public agencies were pledged as collateral. Instead of paring down the pension funding gap, the debt sale further indebted ERS when returns on its investment failed to keep pace with the interest on the bonds. ERS had virtually no assets to its name when Congress passed a rescue law, known as Promesa, in 2016 to help Puerto Rico reorder its debts. After Promesa was enacted, the employer contributions that supported the bonds were moved out of creditors’ grasp. With few assets left in the pension fund, municipalities and public agencies began paying benefits on a pay-as-you-go basis to the tune of hundreds of millions of dollars. Read more. 

In related news, the majority New Progressive Party (NPP) leadership of the Puerto Rico Legislative Assembly ruled out on Wednesday approving legislation that would increase electricity rates on the island — a key provision in the Puerto Rico Electric Power Authority (PREPA) restructuring support agreement (RSA) with the public utility’s bondholders, Caribbean Business reported. The RSA requires lawmakers to approve legislation containing the rate hike as well as the creation of a “special purpose vehicle” (SPV) — similar to the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym)—that would issue new securitization bonds replacing existing bond issuances. The debt service on these bonds would be covered with additional revenue from a proposed surcharge, or “transition charge,” on customer electricity consumption during the 47-year period of the agreement. This charge could increase electricity costs by as much as 20 percent over the next five years. It would apply to all consumers regardless of whether they generate their own electricity, unless they disconnect completely and permanently from the PREPA grid. “We are not going to endorse any agreement, proposal or negotiation whose consequence will be increasing anything for any Puerto Rican,” Senate President Thomas Rivera Schatz told reporters Wednesday evening after coming out of a legislative conference meeting in which Gov. Wanda Vázquez Garced and Prepa Executive Director José Ortiz tried to persuade lawmakers to approve legislation they presented to increase PREPA rates by 4 percent to pay bondholders in the deal. Read more. 

An agreement to restructure more than $8 billion of bonds issued by Puerto Rico’s bankrupt electric utility needs more time to obtain approval from the U.S. commonwealth’s legislative body, a lawyer for the island’s federally created financial oversight board said yesterday, Reuters reported. Martin Bienenstock told U.S. District Court Judge Laura Taylor Swain that the board is seeking another postponement, this time for a March 31 hearing on the deal, although lawyers for two bond insurance companies said they would oppose the delay. A board representative said the panel “wants to ensure the legislature has sufficient time to consider and pass” legislation needed to implement the agreement. The court hearing will take up a restructuring support agreement (RSA) reached with a majority of creditors in September that moved the Puerto Rico Electric Power Authority (PREPA) closer to exiting a form of bankruptcy filed in July 2017. The deal would reduce PREPA’s debt by up to 32.5%, but its imposition of higher charges on the utility’s customers has sparked concerns in the legislature. While Bienenstock said the board remains “hopeful that legislation would be submitted within the next weeks,” he warned “it is not exact science” when and if the island’s lawmakers would approve the deal. Bienenstock also said that the oversight board is reviewing a request by 13 members of Congress to renegotiate the PREPA RSA in the wake of a series of earthquakes that shook the island since late December.

Democratic Presidential Candidate Michael Bloomberg has released an economic plan for Puerto Rico that includes resolving the island’s debt and budget problems, moving disaster response and rebuilding funds quickly, and planning reconstruction and other infrastructure investments to position Puerto Rico for long-term, sustainable economic success, according to the Bloomberg 2020 campaign. Bloomberg’s plan supports Puerto Rican efforts to overhaul the current electrical grid, to help Puerto Rico fulfill its vision for a 100 percent clean and renewable energy system that is decentralized and more resilient to future disasters. He also proposes changes to how the federal government supports disaster response and relief, with an emphasis on building the island’s resilience to storms, flooding, and other effects of climate change. Bloomberg also endorsed statehood for Puerto Rico. His economic plan for Puerto Rico will provide the same safety net funding to PR as any other US state, including fair funding for Medicaid, the Earned Income Tax Credit, and Child Tax Credit, in addition to full Social Security benefits.

The Trump administration imposed financial controls on billions of dollars in disaster relief for Puerto Rico, laying out conditions on how the money must be budgeted and spent, the Wall Street Journal reported. To receive the more than $16 billion in grant funding, Puerto Rico must submit detailed budgets, ignore its $15-an-hour minimum wage on federally funded projects and reform record-keeping around real estate properties, U.S. officials said. The U.S. Department of Housing and Urban Development said it would make $8.2 billion available immediately through a credit line while publishing guidelines for Puerto Rico to draw up a plan for $8.3 billion in addition projects that will mitigate risks from natural disasters. Congress approved these tranches more than a year ago under a $20 billion disaster package after two hurricanes ravaged Puerto Rico in 2017, destroying the power grid and causing thousands of deaths. “Now that proper financial safeguards are in place, we can move forward with confidence that these additional disaster recovery funds will reach those who need them the most,” a HUD spokesperson said.

Puerto Rico will be allowed access to $8.2 billion in delayed disaster-aid funding by the U.S. Department of Housing and Urban Development (HUD), the island’s non-voting member of the U.S. Congress said, Reuters reported. Jennifer Gonzalez announced the disbursement of another chunk of funds the U.S. territory’s recovery from Hurricanes Maria and Irma in 2017 after hundreds of earthquakes and aftershocks rattled the island since Dec. 28, collapsing hundreds of homes. However, Puerto Ricans in the United States demonstrated outside HUD offices in several U.S. cities on Wednesday, demanding the U.S. government release all of the $44 billion in disaster and hurricane relief funding allocated to Puerto Rico. To date, only $15 billion of that money has been distributed. Read more. 

In related news, retired government workers in Puerto Rico are bracing for a possible cut to their monthly checks even as the already financially strained island faces one of its most difficult moments with recent earthquakes, NBCMiami.com reported. In the last three years, Puerto Ricans have experienced multiple crises including a deadly hurricane, a government corruption crisis and now a rare seismic sequence — all while grappling with a decade-long economic recession then financial crisis that has led to bankruptcy for the U.S. territory. Puerto Rico’s central government is nearly $70 billion in debt, while the retirement system has at least a $55 billion shortfall. As part of the plan to restructure and repay the Puerto Rico Retirement System’s debt, the Financial Oversight Management Board suggested cuts to pensioners. The fiscal plan submitted on Sept. 27 proposed an 8.5% reduction to all government retirees who receive more than $1,200 per month. Meanwhile, the cost of living in Puerto Rico is increasing, causing uncertainty among pensioners. Read more. 

ABI supports Puerto Rico, and looks forward to the upcoming Caribbean Insolvency Symposium at the El San Juan Hotel, February 3-5, 2020. From the time that Hurricane Maria devastated the island in September 2017 through the recent series of earthquakes that damaged Guánica, some two hours to the southwest of San Juan, ABI has remained committed to supporting its many friends and members on the island, as well as the wider Puerto Rico community affected by these natural disasters. The Caribbean Insolvency Symposium will go on as planned and registration remains open and active. At a time when Puerto Rico faces many challenges, among them a fragile economic situation, one of the best ways to support the island is through events like our upcoming Symposium. Register here.