Puerto Rico working group gives details of revised exchange proposal

By Caroline Salls

Pittsburgh, April 11 – The Working Group for the Fiscal and Economic Recovery of Puerto Rico released the details Monday of a revised voluntary exchange proposal presented to advisors to Puerto Rico’s creditors in response to counterproposals and feedback received from many creditor groups.

According to a news release, the working group and its advisers held a series of meetings and talks with creditors and advisers since the presentation of its first proposal in January in an effort to reach a consensual agreement regarding a debt structure that will be sustainable over the long-term and enable the commonwealth to achieve strong, broad-based economic growth.

The working group said the new proposal, if accepted by the creditors, would give Puerto Rico the time it needs to implement a Fiscal and Economic Growth Plan (FEGP).

Together with implementation of the FEGP, the group said a comprehensive debt restructuring will ensure that Puerto Rico has sufficient resources to provide essential services to all residents, pay back its local vendors, suppliers and taxpayers, rebuild depleted cash resources, fund necessary capital expenditures, create investment opportunities in the local economy and fund its retirement systems.

Proposal changes

Specifically, the new proposal includes the following enhancements to the original proposal:

• Puerto Rican residents will be offered the option to receive a par base bond with a long-dated maturity and a 2% interest rate under a “local option;”

• Annual total debt service was increased to $1.85 billion from $1.7 billion, allowing the commonwealth to increase the total amount of base bonds by 11% to 30% depending on how many Puerto Rican residents elect the local option.

The working group said in its presentation that local holders who do not opt in to the local treatment will receive the same recovery as non-local holders. In addition, the group said the commonwealth is evaluating other means of providing relief to those Puerto Ricans who live off of their interest payments;

• A growth bond was replaced by a capital appreciation bond. The group said the growth bond was a contingent payment instrument, payable only if the commonwealth economy achieved a specific level of economic growth. In comparison, the capital appreciation bond is mandatorily payable, like the base bond, and will enable all creditors to recover the principal amount of their existing investments regardless of future growth;

• Interest will now be paid currently on the bonds. Previously, interest payments only began in 2018; and

• As a result of these changes, Puerto Rico’s $49.3 billion of tax-supported debt would be reduced, depending on how many Puerto Rican residents elect the local option, to between $32.6 and $37.4 billion. Under the original proposal, tax-supported debt would have been reduced to $26.5 billion.

Exchange terms

If all Puerto Rican residents elect the local option, the working group said the $49.3 billion of tax-supported debt would be exchanged into up to $27.8 billion of newly issued mandatorily payable base bonds and $1.7 billion of newly issued capital appreciation bonds.

In addition, holders of some bonds who reside in Puerto Rico would have an option to receive up to $8 billion of new local holder base bonds.

Interest payments on the base bonds would begin in January 2017, scaling up to 5% by fiscal year 2021, when principal payments would begin. Interest payments on the local holder base bonds would begin in January 2017 at a rate of 2% and would be paid current at that rate through the life of the bonds. The capital appreciation bonds would accrue interest at a rate of 5% beginning in 2017, and when they are repaid, the final payment amount would equal the difference between the base bond and the original par amount of the exchanged security, thereby enabling creditors to recover the full principal amount of their current holdings.

According to the release, the proposal also seeks to reduce the commonwealth’s ratio of debt service-to-revenue on tax-supported debt to 15% from the current level of 36% based on 2021 revenues, a level the working group said is consistent with the debt limit included in the Constitution of Puerto Rico.

Although a debt service-to-revenue ratio of 15% still exceeds the ratio of the most heavily indebted of the U.S. states, the working group said the new debt service schedule is structured to give the commonwealth the opportunity to further reduce that ratio as a result of economic growth and to develop into a stronger credit over time.

The exchange offer is subject to participation of all creditors, as well as the U.S. federal government maintaining at least its current percentage levels of programmatic support for the commonwealth.

If Puerto Rico does not obtain a legal mechanism by which to bind holdouts or the U.S. government allows the level of programmatic support for Puerto Rico to materially decline, the working group said the terms of the exchange offer will have to be revisited and creditor recoveries adjusted downward accordingly.

Bondholder proposal response

In addition, the working group responded to a proposal made last week by holders of general obligation bonds.

As previously reported, On April 5, the G.O. bondholders’ proposal calls for a deferral of principal for the next five years, continued interest payments at contractual rates and $750 million of new financing.

The working group said contractual interest payments required by the bondholders’ proposal “would result in cash shortfalls in the early years, even after accounting for the new money component.”

In addition, the group said no surplus would remain to pay other creditors.

“Other [creditors] have already indicated that such a result is unacceptable and would result in extended litigation,” the working group said.

Without legislation, the working group said the G.O. bondholders’ proposal cannot be implemented as it requires 100% participation from many holders who are not members of the group that have made the proposal.

© 2015 Prospect News.
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