Puerto Rico Wins Bankruptcy Deal Ahead of Pension-Cut Fight

Puerto Rico’s financial oversight board struck a deal with the main group of the island’s unsecured creditors, a breakthrough in the government’s bankruptcy that removes one roadblock to the current plan for slashing $35 billion of its remaining debt.

The deal, struck on the eve of a court hearing Tuesday, may also put pressure on the remaining bond insurers that are among the biggest creditors still fighting the proposed debt-restructuring plan.

That will allow the focus of the island’s four-year bankruptcy to shift to the political sphere, with Governor Pedro Pierluisi fighting in court over the board’s plans to reduce pension benefits for some retirees. While the bankruptcy may be able to proceed without the governor’s consent and the oversight board has broad power over the territory’s finances, opposition from the island’s lawmakers could pose an obstacle to the plan, which requires the government to issue new securities in exchange for currently outstanding bonds.

If the island’s lawmakers and the board fail to reach a deal on such a debt issue, the current restructuring agreement with bondholders could be at risk of falling apart by casting doubt on the legality of the new bonds, John Rapisardi, a lawyer at O’Melveny & Myers LLP, which is representing the commonwealth’s government, told U.S. Judge Laura Taylor Swain during Tuesday’s hearing.

“Because the board has insisted on including pension cuts and freezes as part of the plan, there remains a meaningful risk legislation will not be enacted,” Rapisardi said.

Puerto Rico is seeking to resolve its record-setting bankruptcy as early as this year, with confirmation hearings set in November. That would conclude a saga that began in 2017 as it sought to reduce a massive debt load that it couldn’t pay as its population declined and economy contracted. Hurricanes, earthquakes, the coronavirus pandemic and political upheaval have further delayed the process.

The agreement with unsecured creditors, which includes vendors and suppliers, would remove one more hurdle by increasing their payouts to $575 million from $125 million. Brian Rosen, a lawyer at Proskauer Rose LLP, who represents Puerto Rico’s oversight board, disclosed the details in court Tuesday.

The two-day hearing was convened on whether to approve a so-called disclosure statement that is designed to give creditors enough information to decide whether they support the plan. Should Swain approve the statement when the hearing resumes Wednesday, creditors will have until Oct. 4 to vote.

But there are still a handful of political challenges, some of which may not be easy to overcome. Those include winning support from commonwealth lawmakers for locally unpopular moves, like approving new bonds despite their objection to the pension cuts included in the restructuring plan. Retirees have also protested.

Retired police officer Nancy I. Negrón-López called into the telephone-based hearing to suggest that financial advisers who caused the pension system to go bust should lose their houses to help pay government retirees.

“They have the right to an honest pension,” Negrón-López told Swain.

The board claims the bankruptcy court will require some benefit cuts because pensioners are unsecured creditors. Pierluisi and the island’s legislature have balked at reductions that leave even some retirees unscathed, and the governor filed a limited objection to the board’s plan of adjustment.

Under the federal law that put the oversight board in charge of Puerto Rico’s debt restructuring, it may be able to issue the new bonds without lawmaker support. But that would create significant legal risk that could leave bondholders asking for additional compensation, Rapisardi said.

“What kind of security can be issued without legislation?” Rapisardi said. “Would a court-ordered security enjoy the full faith and pledge of the commonwealth constitution?”

The debt restructuring plan includes cutting principal payments on $22 billion of general-obligation and commonwealth-guaranteed securities and pension bonds.

That deal was reached between the board, investment firms that are major bondholders and insurers Assured Guaranty Ltd. and MBIA’s National Public Finance Guarantee Corp. It would cut $18.8 billion of general-obligation and Public Buildings Authority debt. Investors would receive $7 billion of cash and another $7.4 billion of new securities. They would also get a so-called contingent-value instrument that would pay off if sales-tax revenue surpasses estimates.

The deal would give investors holding Puerto Rico’s 2014 general obligations, one of the most actively-traded commonwealth securities, 67.7 cents on the dollar, before calculating any potential payments from the contingent-value instrument. That bond traded Tuesday at 82.8 cents on the dollar, according to data compiled by Bloomberg. That suggests investors are anticipating additional payments from sales-tax revenue.

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