Puerto Rico Ups Recovery Rates in Revised Plan to Creditors

QuickTake: Puerto Rico's Swelling Debt
  • Commonwealth offers $1.85 billion in annual debt service
  • General obligation bonds would recover 74%, up from 72%

Puerto Rico reduced the amount of potential losses for creditors in a revised debt-restructuring proposal as island officials seek to accelerate negotiations while the commonwealth moves closer to default and Congress considers oversight of its finances.

Puerto Rico and its advisers made public details of the offer first presented in March. General obligation and sales-tax bondholders would recover more of their investments under the latest plan. It would reduce the commonwealth’s $49.3 billion of tax-supported debt to between $32.6 billion and $37.4 billion, a smaller reduction than the cut to $26.5 billion in its earlier plan.

That might not be enough relief for Puerto Rico as the island struggles to grow its economy and improve its finances, said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which oversees $4.2 billion of municipal bonds, including commonwealth securities.

“Nothing’s changed and without a drastic reduction of the debt service that Puerto Rico is under, I don’t know how they’re going to climb out of their hole,” Dalton said. “I still worry there’s still a long road ahead even if they did come to some agreement.”

Puerto Rico and its agencies racked up $70 billion of debt after borrowing for years to pay its bills. Governor Alejandro Garcia Padilla in June 2105 said the island was unable to repay all of its obligations on time and in full. Two agencies have missed debt payments since then and its Government Development Bank owes $422 million May 1. The commonwealth and its agencies face a $2 billion debt payment July 1.

The revised plan increases to $1.85 billion from $1.7 billion the amount Puerto Rico will spend on annual debt-service.

Puerto Rico’s revised proposal offers a 74 percent recovery on general obligations and commonwealth-backed debt, up from 72 percent in its first plan that it unveiled Feb. 1. Sales-tax bonds, called Cofinas by their Spanish acronym, would recover 57 percent, up from 49 percent. It also replaces “growth bonds” included in the commonwealth’s first proposal, with capital-appreciation bonds, which delay interest payments until the debt mature. Growth bonds, by comparison, would only repay if Puerto Rico’s revenue exceeds certain projections.

The commonwealth would allocate $2.4 billion to its pensions in the first five years of the plan. Puerto Rico’s largest pension system’s assets were less than one percent of the $30.2 billion it owes current and future retirees, as of June 2014.

Debt Moratorium

“A sustainable solution cannot place the burden on one stakeholder group alone, and we have the moral and legal obligation to protect the health, safety and well-being of our citizens,” Victor Suarez, Puerto Rico’s secretary of state, said in a statement. “These are the priorities we must balance while working to reach an agreement that will put Puerto Rico back on the path to prosperity.”

Puerto Rico residents who hold commonwealth securities would be repaid last. The revised proposal offers those on-island investors a return of full principal beginning in 2065 and ending 2069. They would receive a reduced 2 percent interest rate starting in 2017.

Garcia Padilla last week signed into law a debt-moratorium bill that allows him to suspend payments on all of the island’s debt through January 2017. He declared Saturday an emergency period for the Development Bank to preserve its dwindling cash, but declined to place a moratorium on the bank’s debt. Puerto Rico’s latest offer gives a 36 percent recovery rate on GDB bonds.

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