Hedge Funds Are Pressuring Puerto Rico With Their Own Debt-Cutting Plan

  • Creditors said crafting debt proposal after postponed meeting
  • Commonwealth needs to restructure $70 billion debt load

Monarch Alternative Capital and WhiteboxAdvisors are among the investors who are putting pressure on Puerto Rico by crafting their own restructuring proposal as the island delays talks to restructure $70 billion of debt, according to people with knowledge of the matter.

The investors, along with other hedge-fund firms such as Davidson Kempner Capital Management and Stone Lion Capital Partners, are in preliminary conversations with other creditors of the U.S. territory on a debt-exchange plan that would seek to make Puerto Rico’s debt load sustainable, said the people, who asked not to be named because the information isn’t public. The funds have also begun reaching out for feedback on the plan from investors such as Brigade Capital Management, Fir Tree Partners, Franklin Advisers Inc., and OppenheimerFunds Inc., the people said.

Puerto Rico plans to hold a conference call Friday with advisers for the investors to discuss the island’s revised fiscal and economic growth plan, said Melba Acosta, president of the Government Development Bank, which is overseeing the commonwealth’s debt restructuring. Officials will revise that plan to 10 years from five years because of lower revenue forecasts, and also make changes to its debt-restructuring proposal, Acosta said in an e-mailed statement Friday.

“We are committed to engaging in conversations with our creditors and
their advisers about our current fiscal standing,” Acosta said in the statement. “We continue our plan to develop a comprehensive set of solutions, including our thoughts regarding a restructuring proposal, wherein all parties make the necessary sacrifices that will support the long-term sustainability of the commonwealth¹s economy.”

The creditors, who hold securities such as Puerto Rico general obligation, development-bank and sales-tax bonds, could release a reorganization plan publicly later this month if they’re able to formulate one on which a broad swath of creditors agree, the people said.

Meeting Postponed

Investors have been waiting for Puerto Rico Governor Alejandro Garcia Padilla’s administration to begin formal discussions on a restructuring agreement after he said in June that the commonwealth and its agencies couldn’t repay all of their obligations. Puerto Rico officials met with advisers to bondholders in late October but haven’t yet unveiled details for a plan to reorganize the debt.

The commonwealth is teetering toward a potential default on its direct debt. U.S. Treasury Secretary Jacob J. Lew plans to travel to Puerto Rico on Jan. 20 to meet with Garcia Padilla and legislative leaders to discuss the island’s economic challenges. Lew urged Congress in a letter to House Speaker Paul Ryan Friday to pass legislation that would help the island restructure its debt and provide fiscal oversight.

Representatives for Brigade, Davidson Kempner, Fir Tree, Franklin, Monarch, Oppenheimer, Stone Lion and Whitebox declined to comment.

Restructuring advisers who represent the island had been scheduled to meet with representatives of at least five groups of creditors starting as soon as Wednesday, people with knowledge of the matter said earlier this month. The U.S. territory postponed a meeting planned for that day.

As Puerto Rico’s economy has contracted for most of the past decade, the island’s government and its agencies have increasingly borrowed to fill budget shortfalls. Now the commonwealth is running out of cash. It avoided defaulting on its general-obligation debt this month by diverting revenue that was supposed to be used to repay other securities.

The island’s 8 percent general-obligation bonds due July 2035 fell about 1 cent to an average of 71.5 cents on the dollar Friday, according to data compiled by Bloomberg.

Offering Concessions

Creditors have also begun reaching out for help to shape the proposal from some of the bond insurers that are responsible for covering losses on part of the Puerto Rico debt, the people said.

The initial talks among creditors resulted in a draft accord to reduce the amount Puerto Rico owes its noteholders that would be achieved through debt exchanges, the people said. A final plan would probably involve investors swapping existing bonds for new ones whose seniority is determined according to their existing securities’ rank, the people said.

The creditors have discussed substantial cuts to subordinated sales-tax bonds, known as Cofinas, the people said.

Bondholders want to resolve Puerto Rico’s debt crisis before the commonwealth would possibly default on its direct debt. The Government Development Bank owes $422 million to investors in May. An additional $2 billion is due July 1 from the commonwealth and its agencies.

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