(Reuters) – Puerto Rico’s federally created financial oversight board on Monday defended a new agreement with creditors, saying it will result in an affordable and sustainable debt level and allow the U.S. commonwealth to exit bankruptcy next year.
The board has come under fire by Puerto Rico’s government and some creditors over pension cuts or its disparate treatment of bondholders.
On Sunday, the Financial Oversight and Management Board announced a deal that establishes terms for restructuring more than $18 billion of Puerto Rico’s general obligation (GO) and Public Buildings Authority (PBA) debt. A group of investment firms that signed on to the agreement, which calls for recoveries of about 64% for GO bonds and 73% for PBA debt, own about $3 billion of what the board calls “vintage” bonds that are not being challenged in court.
The deal, along with an agreement last week with a retirees committee over pensions that the Puerto Rico government opposes, will be part of a core government debt-adjustment plan the oversight board said it expects to file in U.S. District Court within 30 days. Puerto Rico entered a bankruptcy-like process in 2017 to restructure about $120 billion of debt and pension obligations.
“We’ve reached a significant milestone for Puerto Rico. The end of bankruptcy’s in sight,” Natalie Jaresko, the board’s executive director, told reporters on Monday.
She said the deal would reduce $35 billion of liabilities to $12 billion and lower the island’s maximum annual payments on debt, including already restructured sales tax-backed bonds, by 64 percent to $1.5 billion.
Other creditors are pushing back on the agreement.
Assured Guaranty, which insures some GO bonds, said on Monday that only about 10 percent of bondholders back the deal, which it contended involves an “unprecedented and meritless attempt to invalidate certain lawfully issued general obligation bonds, acceptance of erroneous and misleading financial projections in the oversight board’s legally flawed fiscal plan, and artificial separation of similarly situated creditors into classes that would receive unequal treatment.”
The board has taken steps in court to void certain bonds issued by the government and its agencies and also filed claims to recoup more than $1 billion in debt service payments from investors.
Jaresko said those bondholders can avoid litigation and accept recoveries of 45% for GO bonds issued in 2012 and 35% for 2014 bonds, noting that if the bonds are ultimately invalidated by the court they would receive nothing. If the court rules the bonds did not violate a debt limit in Puerto Rico’s constitution, recoveries would match those in the agreement, she added.
Puerto Rico’s government opposes the deal mainly because it includes a reduction in pension payments to certain retirees. The government’s fiscal agency warned on Sunday that without legislative and executive support and action, the upcoming debt adjustment plan could not be implemented.
Jaresko said the upcoming debt-adjustment plan is aimed at sustaining pensions, which are currently funded on a pay-go basis, and that it was unclear if the plan requires legislation.
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