Puerto Rico Bankruptcy Tab Nears $1 Billion As Case Nears End

(Bloomberg) -- Puerto Rico is making its case in bankruptcy court for a plan to slash billions of dollars in debt, an expensive process that has so far racked up nearly $1 billion in legal and professional fees that island residents will pay.

Hurricanes, earthquakes, ousting a governor from office and the coronavirus pandemic have prolonged the commonwealth’s bankruptcy to more than four years, adding to its costs and keeping the island under a cloud of default.

Now that may finally change as U.S. District Court Judge Laura Taylor Swain began confirmation hearings Monday on Puerto Rico’s debt restructuring plan that eases the burden from $33 billion of bonds and other debt, including cutting $22 billion of bonds tied to the central government down to $7.4 billion. It would also create a reserve trust to prop up its broke pension system.

“It’s an important milestone to get this started and hopefully ending it in the coming months,” said John Ceffalio, senior municipal research analyst at CreditSights. “They’re on a path to eventually being able to access the bond markets again. They’re on a path to eventually getting a bond rating.”

Puerto Rico’s bankruptcy is the largest ever in the $4 trillion municipal-bond market, surpassing Detroit’s 2013 filing. The confirmation hearings follow years of negotiations with bondholders, insurance companies and labor groups over how to reduce the island’s obligations. Exiting bankruptcy will help the island move on and rebuild an economy that contracted for years.

“The people of Puerto Rico are now presented with an opportunity to adjust and erase billions of dollars of debt and pave the way for Puerto Rico to achieve fiscal responsibility and regain access to the capital markets,” John Rapisardi, partner at O’Melveny & Myers, attorney for the commonwealth, said during Monday’s hearing.

Fees Billed

The restructuring comes at a cost. Law firms and financial advisers hired by Puerto Rico’s financial oversight board, which is managing the bankruptcy, and by the commonwealth government so far have billed $1 billion in fees that must be paid by the island, according to fee examiner reports filed to the court.

The board’s lawyer, Proskauer Rose, has charged $193 million, the most among the outside professionals, according to publicly available numbers provided by the fee examiner. McKinsey & Co., the board’s financial adviser, has billed $108 million; O’Melveny & Myers has submitted $104 million in fees; and Ankura Consulting Group, the government’s financial adviser has charged $74 million. 

The oversight board’s debt plan will forgive $3 billion of pension bonds and slash $18.8 billion of general-obligation bonds and commonwealth-backed securities to $7.4 billion. Along with new bonds, investors will receive a $7 billion upfront cash payment and a security, called a contingent value instrument, that pays if sales-tax revenue surpasses projections.

“The board certainly hopes that the aftermath of the debt restructuring will be material new investments in Puerto Rico that turbo charge the economy as was the case in Detroit and other Chapter 9 municipalities,” Martin Bienenstock, partner at Proskauer Rose, said in court Monday.

Debt Costs

The debt forgiveness means Puerto Rico would only have to pay an average of $666 million for debt service on commonwealth-guaranteed bonds annually for the first 10 years, down from an average $1.6 billion.

Including payments on its sales-tax debt, called Cofinas, the commonwealth has faced annual principal and interest payments of as much as $3.9 billion per year. That would fall to no more than $1.15 billion annually if the court approves the debt restructuring.

Still, the commonwealth spends about $2.3 billion a year to cover retirement benefits for government workers because its pension fund is depleted. So even with a debt restructuring, the island’s bonds and pension benefit costs would consume a quarter of the $11.6 billion of general fund revenue that Puerto Rico estimates it will collect in the fiscal year that ends June 30, 2022, according to the island’s latest fiscal plan. 

“I do fear that the plan, as it stands right now, is going to be very tight,” said Sergio Marxuach, policy director at the Center for a New Economy, a San Juan-based think tank that analyzes the commonwealth’s finances. “Unless the economy here starts growing at a rate that we haven’t seen in like 30 or 40 years, it’s going to be very, very close to avoid another default within the next five, maybe 10 years.”

Structural Reforms

To help ease retirement expenses, Puerto Rico’s financial oversight board is seeking to freeze pensions of teachers and judges and switch them to a defined contribution plan and to eliminate cost of living increases for retired public workers. Those initiatives will be discussed during the confirmation hearings, with Judge Swain set to weigh in on the issues.

The island’s future fiscal stability also depends on structural reforms that its lawmakers have yet to implement, such as increasing workforce participation and making it easier to start and sustain a business. Without those changes, Puerto Rico will face budget deficits, according to its latest fiscal plan.

“I’m very concerned about the long-term economic growth,” Ceffalio said. “The shrinking population down there, especially the shrinking number of young people, does not bode well for the future. So long term, when you look at their ability to pay that debt five, 10, 15 years out, there’s a lot of concerns.” 

©2021 Bloomberg L.P.