Puerto Rico Debt Gains After Bondholders Reject Governor's Offer

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(Bloomberg) -- Puerto Rico debt rose after bondholders rejected Governor Ricardo Rossello’s debt-restructuring proposal, inching the island closer to a potential courtroom workout to slash the $70 billion it owes.

The island’s general obligations maturing in 2041 changed hands Monday at an average 60.8 cents on the dollar in trades of at least $1 million, up from 59.7 on April 25, according to data compiled by Bloomberg. Those with an 8 percent coupon that are due in 2035, one of the most-actively traded Puerto Rico bonds, changed hands Monday at an average 63.9 cents, up from 63.6 cents on Friday.

Investors spurned Puerto Rico’s restructuring offer, according to a filing released over the weekend, when Congress also reached a budget deal that would provide $295 million to help keep the island’s health-care system running. The steps suggest that investors may anticipate better recoveries through bankruptcy-like proceedings, known as Title III, and indicate greater willingness in Congress to aid the distressed territory.

“Aside from perhaps prospects for a better outcome under Title III, $295 million in added Medicaid payments to Puerto Rico under the President’s tax plan may signal a willingness to provide more federal aid to the commonwealth,” said Jeff Lipton, managing director and head of municipal research and strategy at Oppenheimer & Co.

The commonwealth has until Monday night to reach a restructuring deal with its creditors or strike a forbearance agreement to put off law suits, otherwise a legal stay that shields the island from creditors seeking repayment expires. That may spark potentially adverse rulings on cases already filed, as well as new legal challenges.

Puerto Rico had offered holders of its general-obligation bonds as much as 77 cents on the dollar while proposing as much as 58 cents on the dollar for its sales-tax debt, according to the commonwealth’s latest creditor proposal, dated April 24 and posted at midnight Saturday on the Municipal Securities Rulemaking Board’s website, called EMMA.

“A judge is going to have to make a ruling because I just don’t see where they’re going to come to common ground on this without a ruling from a judge,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which oversees $5.7 billion of municipal bonds, including insured Puerto Rico debt. “It’s not going to get fixed overnight.”

A group of investors that own senior sales-tax bonds now wants Puerto Rico to push the workout into court, a step that Congress approved last year to help provide for an orderly restructuring. Matt Rodrigue, managing director at Miller Buckfire & Co., financial adviser to the senior sales-tax group, criticized the governor’s plan for failing to recognize those bondholders greater legal claim on those revenues.

“The right next step is a Title III filing to provide a forum in which creditors’ rights will be respected and it also will provide a continuance of the stay, which will protect the people of Puerto Rico,” Rodrigue said.

While general obligation bondholders are looking to avoid Title III, they say Puerto Rico’s plan isn’t a credible starting point for negotiations. The offer is based on the commonwealth’s fiscal plan, which creditors say doesn’t allocate enough money for principal and interest payments.

“We urge Puerto Rico’s elected leadership to work with creditors to construct a consensual solution that is based on a credible financial forecast and that avoids the free fall Title III that the Oversight Board seems intent on imposing,” Andrew Rosenberg, a partner at Paul Weiss Rifkind Wharton & Garrison, who advises the group of GO bondholders, said in an email Saturday.

The governor on Saturday reiterated his believe that the parties can reach a deal and that talks may continue beyond Monday. He didn’t rule out using Title III.

“I believe that there is a possibility that all parties could reach an agreement,” Rossello told reporters in San Juan. “One of the powers I have is Title III and if I have to use it I will.”

The commonwealth’s proposal illustrates the gap between the parties. Senior Cofinas, as the sales-tax bonds are called, want to receive 95 cents on the dollar, with the subordinate lien getting 60 cents, Rodrigue said. Senior sales-tax bonds with a 6.05 percent coupon and maturing in 2036 traded Monday for 62 cents, above the 58-cent proposal, the data show.

Puerto Rico is offering to repay general-obligation bondholders as much as $10.25 billion of the $13.2 billion it owes, according to the proposal. The island also would repay as much as $10.2 billion of $17.6 billion of sales-tax bonds.

Investors would exchange their existing securities for two different types of debt: tax-exempt senior bonds with a constitutional priority maturing in 30 years, and cash-flow bonds that would be repaid after the senior securities, depending on the commonwealth’s liquidity.

That structure gives general-obligation bondholders a recovery range of as little as 52 percent -- if Puerto Rico only repays the senior bonds -- or as much as 77 percent if it repays both the senior debt and the cash-flow securities. The recovery range for sales-tax securities is 39 percent to 58 percent.

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