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Puerto Rico oversight board rejects bondholder agreement

A repayment agreement announced Monday by two major groups of Puerto Rico bondholders was rejected by the federal oversight board implementing a new fiscal plan for the commonwealth.

The agreement between holders and insurers of general obligation bonds and so-called COFINA bonds, which are tied to sales tax revenue, was ordered by a federal court overseeing Puerto Rico's bankruptcy case. The parties said in a statement that the settlement framework "would significantly decrease the duration and cost of Puerto Rico's bankruptcy, while also providing for substantial deleveraging." The agreement calls for creating a trust and mechanism for exchanging the bonds.

In rejecting the agreement, the Financial Oversight and Management Board for Puerto Rico said in a statement Monday that the terms "were not crafted with any prior input from either the oversight board or the government and are completely unaffordable."

"The proposed terms would create large and recurring structural deficits over the long-run as compared to the long-term primary surpluses projected in the certified" plan, the board said.

While the proposed settlement terms do not align with the fiscal plan certified by the board on April 19, the board said it is "encouraged" that major creditors, even those with competing claims, are working together towards that same goal.

The board, which was given authority to enforce a fiscal plan by 2016's Puerto Rico Oversight, Management and Economic Stability Act, also noted that achieving any surpluses is "highly dependent" on the government fully implementing the fiscal plan, in particular the proposed labor reforms that Gov. Ricardo Rossello has refused to accept.

Those labor changes include pension reform that would freeze pension benefit accruals by July 1, 2019, and enroll all employees in defined contribution plans, as well as Social Security. Benefits would be reduced progressively to an average cut of 10%, except for participants below the poverty level.

The board on May 11 informed the government of Puerto Rico that its fiscal year 2019 budget does not comply with the new fiscal plan.

The same day, the board did approve a restructuring agreement between holders of $4.1 billion in debt from Puerto Rico's Government Development Bank. That agreement establishes two pools of bond claims, one for claims guaranteed by the commonwealth and one for non-guaranteed claims, with equal treatment for depositors, bondholders and general unsecured creditors.