A final agreement to restructure Puerto Rico’s sales tax-backed bonds will be filed by Oct. 15 in federal court, where a judge overseeing the U.S. commonwealth’s bankruptcy case will decide its fate, parties to the deal said yesterday, Reuters reported. A plan support agreement between Puerto Rico, its Sales Tax Financing Corporation (COFINA), the island’s federally created oversight board, bondholders and bond insurance companies that was announced yesterday would be the first debt adjustment plan to seek court approval. Puerto Rico has been in bankruptcy court since May 2017 trying to restructure about $120 billion of debt and pension obligations. A deal with COFINA creditors surfaced earlier this summer. “The deal provides for more than a 32 percent reduction in COFINA debt, gives Puerto Rico approximately $17.5 billion in debt service savings and enables local retail bondholders in Puerto Rico to receive a significant recovery,” said Natalie Jaresko, the oversight board’s executive director, in a statement.
Investment funds owning about $1.9 billion of Puerto Rico’s general obligation bonds have formed a committee to negotiate a consensual restructuring with the commonwealth and the federal oversight board that manages its finances, the Wall Street Journal reported. Members of the committee are seeking to differentiate themselves from a pre-existing group of general obligation bondholders that includes Aurelius Capital Management LP, which is fighting the board and the island’s government in ongoing litigation. The new group organized in August after the oversight board reached important deals with Puerto Rico’s two other largest classes of debt — bonds issued by its power utility and its sales-tax authority — raising hopes that general obligation creditors might also broker a settlement. The committee includes hedge funds Fir Tree Partners and Mason Capital Management LLC and mutual-fund manager First Pacific Advisors LLC, according to a bankruptcy court filing.
Puerto Rico’s official death toll from Hurricane Maria, the most powerful storm to hit the Caribbean island in almost a century, was raised yesterday from 64, a number widely discounted as far too low, to nearly 3,000, based on a study ordered by the governor of the U.S. territory, Reuters reported. The report found that an estimated 2,975 deaths could be attributed directly or indirectly to Maria from the time it struck in September 2017 to mid-February of this year. By comparison, deaths blamed on Hurricane Katrina in 2005 range from about 1,200 to more than 1,800, most along the Gulf Coast of Louisiana and Mississippi. Researchers said they adjusted for various factors that could account for fluctuations in mortality, most notably the displacement of some 241,000 residents who fled the island in the immediate aftermath of the storm. They also found that the poor and elderly were disproportionately hard hit in terms of risk of fatalities.
Bondholders in debt issued by Puerto Rico's Employees Retirement System (ERS) were denied a bid to claim collateral property on Aug. 17 by the federal judge overseeing the commonwealth's bankruptcy proceedings, Pensions & Investments reported. U.S. District Judge Laura Taylor Swain for the district of Puerto Rico, San Juan, ruled that any security interest over ERS revenues, including employer contributions, held by the bondholders was "invalidated and unenforceable," since Congress gave authority to the Financial Oversight and Management Board to make changes. The ERS bondholder group that sued, including Altair Global Credit Opportunities Fund and several Oaktree Capital Management (OAK) funds, held $2 billion of roughly $3.15 billion in ERS bonds as of February 2017, according to their court motion, which cited "an extensive security package at the time the bonds were issued to protect their investment…. Without this security package, it would have been impossible for the ERS to sell the bonds in the first place," the bondholders argued. Read more.
In related news, an investigative report released late on Monday found that short-term fixes, deficit financing and political pressures helped drive Puerto Rico into a fiscal catastrophe that landed the U.S. commonwealth in bankruptcy court last year, Reuters reported. The 600-page report commissioned by the island’s federally appointed oversight board last September also addresses potential claims for investors and regulators and recommends ways for Puerto Rico to avoid future fiscal problems. With roughly $120 billion in debt and pension liabilities, Puerto Rico commenced bankruptcy proceedings in federal court in May 2017. A fiscal oversight board created by the U.S. Congress in 2016 under PROMESA tapped law firm Kobre & Kim to produce the report. In conducting its probe, the law firm had access to documents that had been restricted from public view by U.S. Judge Laura Taylor Swain, who oversees the island’s bankruptcy. The report found that contrary to accusations by some bondholders, Puerto Rico’s Sales Tax Financing Corporation, known as COFINA, was not created to evade the island’s constitutional debt limit. “Over time, however, COFINA became a comparatively accessible source of liquidity that staved off the need for Puerto Rico to find a more permanent solution to its financial problems,” the report said. Read more.
A U.S. federal judge on Friday ruled against a group of bondholders that bought debt issued by Puerto Rico’s largest public pension, the Employees Retirement System (ERS), denying their ability to hold claim on property used as collateral, Reuters reported. With roughly $120 billion in debt and pension liabilities, Puerto Rico filed for bankruptcy protection under a court-ordered process created under PROMESA. Judge Laura Taylor Swain, who presides over Puerto Rico’s bankruptcy process, stated ERS bondholders “do not possess a perfected security interest” over property pledged by the bankrupt public entity to pay its debt. According to Swain, “any security interest held by” this group of bondholders over ERS revenues is “invalidated and unenforceable.” The ruling lands yet another blow to Puerto Rico bondholders who seek to minimize their losses amid the U.S. commonwealth’s record municipal bankruptcy. ERS bondholders had argued otherwise, claiming they had a right to receive payments out of ERS’s revenue sources, particularly employer remittances into the pension system.
Puerto Rico bonds soared as much as 30 percent after the island reached a debt restructuring deal with owners of its sales-tax backed securities, marking a significant milestone in the government’s record bankruptcy, Bloomberg News reported. The U.S. territory’s subordinated sales tax bonds due in 2039, the most actively traded, jumped to about 53 cents on the dollar from 41 cents Wednesday, while senior-lien bonds due in 2040 jumped to as much as 89.5 cents from 81.7 cents. The sales-tax bonds were the most actively traded municipal securities yesterday, according to data compiled by Bloomberg. Governor Ricardo Rosselló said the preliminary deal with bondholders and insurers would reduce Puerto Rico’s sales-tax-backed debt — known as Cofina — by about a third and save $17.5 billion. If enacted, it would allow owners of bonds with the highest claim on the funds to recoup 93 percent of their investment, with 56 percent recoveries seen for owners of subordinated securities, according to a term sheet released by the island. That’s more than investors had expected. It is the second major agreement for Puerto Rico in as many weeks, coming on the heels of the one struck with its power company’s bondholders July 30. The deal will need to be sent to bondholders for a vote and win approval from the judge overseeing the bankruptcy before it takes effect. Read more.
While Puerto Rico attempts financial recovery in bankruptcy court, many thousands of ordinary people on the island have found recovery — financial and otherwise — remains elusive, Bloomberg News reported. Just this week, key stretches of its rickety power grid failed once again; the U.S. Army had to send 13 soldiers to help deal with a backlog of corpses at the island’s morgue. And the economy remains mired in a decade-old recession that’s sent hundreds of thousands fleeing to the mainland, including many young and educated workers. Read more.
