Puerto Rico Files Debt Cutting Plan to Bankruptcy Court

(Bloomberg) -- Puerto Rico is asking the court overseeing its record bankruptcy to consider a revised restructuring plan to cut $18.8 billion of bond debt backed by the central government, reviving a restructuring effort that has largely been stalled for a year by the coronavirus pandemic.

Puerto Rico’s financial oversight board late Monday filed its debt adjustment plan, which hews to the terms of the tentative deal between the board and rival creditor groups announced last month. Owners of more than $13 billion of the securities have signed on to the revised plan, accounting for more than 70% of the debt, according to the board.

The proposal also seeks to fix Puerto Rico’s pension system, which owes more than $50 billion and has no assets. That means all payments to retirees come from the commonwealth’s operating budget. The board aims to reduce some pensions by 8.5% while leaving those at $1,500 a month and below intact. It would also create a pension reserve trust to help fund the retirement system.

“This plan substantially reduces the burden of debt payments on future generations, stabilizes and protects pensions that have been mismanaged for so long, and affirms the collective bargaining agreements of government workers,” David Skeel, the board’s chairman, said in a statement late Monday.

The court filing is a major step in the island’s nearly four-year long bankruptcy and reflects the economic toll that the pandemic has taken on the island’s economy. The board filed a similar restructuring plan in February 2020, only to ask the court one month later to delay hearings on the debt deal as it grappled with the outbreak.

While investors holding more than 70% of Puerto Rico’s general-obligation bonds and Public Buildings Authority debt have agreed to the new plan, there is push back from elected officials whose power over the process has been curtailed by the federal law that allowed for the bankruptcy. Governor Pedro Pierluisi and Puerto Rico lawmakers have said they won’t support a debt restructuring deal that includes any reductions to pension benefits, though the outcome will ultimately be determined in court.

“My administration has been emphatic that this pension cut is not reasonable and is also not necessary to confirm the amended plan of adjustment,” Pierluisi said in a statement Tuesday. “So we will clearly establish our position in the confirmation process that will begin before the Title III court.”

Under the terms of the deal, holders of the island’s general-obligation and Public Buildings Authority debt would receive $14.4 billion, $7 billion in cash and the rest through the sale of new securities, including current-interest bonds and capital appreciation debt. Investors would also receive a so-called contingent-value instrument that would pay off if sales-tax revenue surpasses targets.

The earlier 2020 plan gave investors $15.6 billion, which included a smaller cash payment and didn’t offer a contingent-value instrument.

Prices on some Puerto Rico securities increased after the board on Feb. 23 released details of the pact. General obligations with an 8% coupon and maturing in 2035, one of the government’s most actively traded bonds, sold Monday at an average 77.4 cents on the dollar, up from an average 75.7 cents since the start of 2021, according to data compiled by Bloomberg.

Still, the recent trading price is higher than the 67.7 cents on the dollar that investors would receive for that security in the restructuring deal. That reflects speculation that the new general obligations will increase in the secondary market, just as the commonwealth’s restructured sales-tax bonds have done, as well as the potential gains investors will receive if sales taxes exceed estimates.

Under the terms of the plan, the 8% coupon general-obligation bond -- which has a claim of $4.18 billion -- would receive a $1.2 billion cash payment and $1.6 billion of new current interest debt and capital appreciation bonds, according to court documents. That would give those investors 67.7 cents on the dollar even before calculating the potential payments from the excess sales-tax revenue.

Overall, the pact will allow bondholders to recover between 67.7% to 80.3% of their investment, depending on the class of security and based on what the commonwealth owed when the bankruptcy began in May 2017, according to a disclosure to investors last month. That range falls to 53% to 74.5% when considering unpaid interest on the securities.

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