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Puerto Rico unveils new restructuring deal as cash dwindles

Published:Wednesday | April 13, 2016 | 12:00 AM
Governor of Puerto Rico, Alejandro García Padilla.

Puerto Rico's govern-ment released a new proposal on Monday for restructuring part of its US$70-billion debt to buy time to implement a fiscal plan as multimillion-dollar payments loom for the United States territory facing dwindling cash reserves.

Government officials proposed to exchange US$49 billion of debt into up to US$28 billion of base bonds and nearly US$2 billion of tax-exempt capital appreciation bonds. They said the voluntary exchange would allow creditors to recover the full principal they invested, regardless of future economic growth rates.

The plan also includes a special clause for those who live in Puerto Rico and hold certain bonds. Officials said that group could receive up to US$8 billion of local holder base bonds that repays the full principal they originally invested at a two per cent interest rate.

Government officials said Puerto Rico could cut US$12 billion to US$16 billion from its debt load under the new deal. They said this would allow the island's government to keep providing essential services,

pay back local vendors and suppliers, boost liquidity and fund retirement systems, among other things.

"The fact is that we will only be able to address these issues by working together," said Secretary of State Victor Suarez.

Investor groups have proposed tougher terms. They did not respond to a request for comment on the new plan, which could mean a loss for some. Puerto Rican officials said they discussed the plan with investors' advisers in late March.


David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, said bondholders would likely not consider the deal aggressive enough, but said it was a smart move by government officials amid uncertainty of how courts and US Congress will respond to the island's economic crisis.

"This is a good-faith effort in the sense that it's holistic," he said in a phone interview. "It provides for varying types of recovery, depending on whether you want to be part of (Puerto Rico's) future or whether you want to go ahead and cash out your investment immediately."

A group of investors and the Assured Guaranty insurance company, which together hold nearly US$6.5 billion worth of general obligation bonds, have offered to defer repayment of nearly US$2 billion in principal for the next five years to help the island avoid a default in July.

The investors also offered US$750 million in liquidity through another general obligation bond sale. Puerto Rico's government rejected the deal, saying it would only incur more debt and lead to cash shortfalls.

Government officials said their proposal would reduce the debt service-to-revenue ratio on tax-supported debt from 36 per cent to 15 per cent. They noted that that is still higher than the most indebted US states. Creditors, however, have questioned the validity

of financial statistics that Puerto Rico's government has provided.


The plan comes as Puerto Rico urges the US Congress to approve a debt-restructuring mechanism. US House Republicans are seeking consensus on a bill that aims in part to create a federal fiscal control board to audit the island's government. Democrats, GOP conservative and local officials have rejected it.

US Treasury Secretary Jacob Lew said on Monday that the bill has not been completed.

"There are still a number of very difficult issues that are open that, if resolved in the right way, will lead to bipartisan support, but if not resolved in the right way, just won't work. And we're not going to support something that doesn't work," he said.

Puerto Rico's governor recently signed a debt-moratorium bill and declared a state of emergency at the Government Development Bank, which issues loans and oversees debt transactions. The move means, in part, that officials will only allow withdrawals to fund necessary costs for health, public safety and education services. It does not place a moratorium on the bank's principal or interest payments.

Officials have warned that the bank could default on a nearly US$423-million payment due to creditors in May.