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Puerto Rico oversight board to recertify fiscal plan; COFINA bondholders close to agreement

Puerto Rico Gov. Ricardo Rossello

Puerto Rico's oversight board said Friday that it will recertify a fiscal plan for the commonwealth after the Legislature failed to enact labor reforms that were part of an understanding reached with the government on May 30.

Separately, a coalition of the largest group of bondholders with sales-tax-related debt issued by the Puerto Rico Sales Tax Financing Corp., COFINA, said Friday it has reached an agreement in principal between agents for the commonwealth and COFINA.

"Our group, which in the aggregate holds more than $4 billion in COFINA senior and subordinate bonds, is committed to achieving a confirmable plan of adjustment consistent with the court-appointed agents' agreement that will restart payments for COFINA bondholders and restore Puerto Rico's access to the capital markets in a timely manner," a coalition statement said. "We seek a compromise that respects the relative priorities under the bond resolution while permitting COFINA subordinate bondholders to immediately resume receiving coupon payments through new bonds that have the same relative rights and priorities as the new bonds received by COFINA senior bondholders."

Congress gave the Financial Oversight and Management Board for Puerto Rico the authority to enact and impose a fiscal plan. The board has certified two earlier versions of a plan after a series of negotiations with Gov. Ricardo Rossello, largely over labor reforms.

Mr. Rossello agreed in May to labor reforms in the fiscal plan, including making Puerto Rico an "at-will employment" jurisdiction for current and new employees, but the changes required action by the Puerto Rico Legislature. Its failure to pass legislation containing the changes led to the board's decision to recertify the plan again.

In a June 29 letter to the governor and legislative leaders, board members said, "we now know that the government of Puerto Rico will not implement the new fiscal plan" because it failed to pass "the most important component of the labor reform package."

Without that, board Chairman Jose Carrion said, "the path forward becomes more difficult."

The commonwealth is expected to submit a fiscal year 2019 budget on June 30. If the oversight board determines that it is not in compliance with the fiscal plan, it will certify its own budget on June 30.

Mr. Rossello continues to object to the board's proposed pension reforms, which call for freezing pension benefit accruals by July 1, 2019, and enrolling all employees in defined contribution plans, as well as Social Security. Benefits would be reduced progressively to an average cut of 10%, with no cuts for participants whose combined pension and Social Security benefits are below the poverty level of $1,000 per month. The pension reforms are also expected to be included in a plan of adjustment to be confirmed by the court overseeing Puerto Rico's bankruptcy proceedings, which will also address Puerto Rico's debt with bondholders, retirees, and others.