Puerto Rico's $18 Billion Bond Restructuring Nears Completion
20 January 2019 - 10:15AM
Dow Jones News
By Andrew Scurria
Puerto Rico's federal supervisors are making a final push to
write down $18 billion in sales-tax bonds under a settlement that
would mark their largest renegotiation yet of the U.S. territory's
crushing debts.
The restructuring proposal covers the revenue bonds known as
Cofinas, which make up roughly 40% of Puerto Rico's core government
debt. First issued in 2007, the Cofina bonds are backed by sales
taxes that provided investors a secure source of repayment and
lowered Puerto Rico's borrowing costs.
Sales-tax revenue has never fallen short of paying off the
Cofina bonds. But a decade of economic contraction has pushed
Puerto Rico's authorities to seek concessions from those
bondholders to avoid further cutbacks in public services.
The settlement pending before U.S. District Judge Laura Taylor
Swain would eliminate $6 billion in Cofina debt and release to
Puerto Rico roughly half of the future sales-tax revenue currently
earmarked for bondholders.
Court approval would resolve one of the thorniest conflicts in
Puerto Rico's bankruptcy while clearing the way for resolutions
with competing bondholder groups.
Judge Swain didn't issue an immediate ruling after hearing
arguments Wednesday and Thursday from Cofina creditors -- most of
whom support the restructuring proposal -- and from the oversight
board installed to rehabilitate Puerto Rico's economy.
"People voted overwhelmingly with their ballots and their
wallets to accept the deal on the table," said Matthew Feldman, a
lawyer representing the interests of Cofina holders.
Bondholder support for the plan has buoyed prices on benchmark
Cofina bonds close to 80 cents on the dollar, while subordinated
Cofina bonds were trading at just under 50 cents on Thursday,
according to Electronic Municipal Market Access.
If approved, the settlement would pay off senior bondholders
owed nearly $8 billion at 93 cents on the dollar. Junior
bondholders including Goldman Sachs Group Inc. and Santander
Securities LLC would receive 56 cents on the dollar.
Under the proposal, creditors would receive new sales-tax bonds,
affirmed by a court order to be valid and binding. The original
Cofina bond structure was vulnerable to attack by rival bondholders
who insisted it was unconstitutional, saying the sales taxes should
never have been transferred out of the government's control and
pledged as collateral.
Investors have long debated whether Cofina bonds or Puerto
Rico's general obligations would come out on top in a restructuring
since each group asserted an ironclad claim on sales tax money. The
oversight board on Tuesday attacked the general obligations, saying
that $6 billion of those bonds are worthless because they layered
more debt on Puerto Rico than its constitution allowed.
Doubts about who owned the sales taxes -- the government or
Cofina's bondholders -- have clouded Puerto Rico's bankruptcy since
it entered court protection in 2017. Forcing Judge Swain to decide
the issue could have wiped out Cofina's bondholders completely --
or guaranteed them a 100% recovery if the pledge was upheld.
Either outcome would have hamstrung the restructuring process
and made it more difficult to buy peace with all creditors, said
Luc Despins, a lawyer who negotiated the settlement.
The Cofina plan instead relinquishes more than 46% of the
pledged sales taxes, supplying cash to correct the government's
budget imbalance and ameliorate politically unpopular austerity
measures.
Island residents would still be on the hook for repaying the
newly issued sales-tax debt through 2058. Rolando Emmanuelli
Jimenez, an attorney for Puerto Rico's public utility union, said
the proposal didn't require enough sacrifice from Cofina
bondholders given the territory's shrinking tax base.
Adriana Irizarry, a nonprofit worker and mother of three from
San Juan, spoke in support of the proposal even though it will
impair the Cofina bonds her family bought for retirement. She said
she felt "betrayed and defrauded" by the government she had trusted
to pay her back.
"I have already given the government half of my life savings.
What are others willing to give?" she said. "They want to punish us
for investing in our island."
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
January 19, 2019 18:00 ET (23:00 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.