Puerto Rico reached an agreement with some bondholders that will cut its debt service by 56% and make it easier for the commonwealth to emerge from bankruptcy, the Financial Oversight and Management Board for Puerto Rico said Sunday.
In exchange, the oversight board agreed to drop its challenge that $6 billion in bonds were invalid because they exceeded legal debt limits. The latest agreement follows one struck with a smaller group of bondholders. The two agreements allow Puerto Rico to reduce its debt service to $39.7 billion from $90.4 billion, and reduces maximum annual debt service by 70%, to less than $1.5 billion a year.
The oversight board has already reached agreements with retirees and public unions, and the three agreements will be part of an amended plan of adjustment the board will file by the end of February. The next steps are hearings and a fina confirmation hearing scheduled for October.
The new bondholder agreement was approved by most of the oversight board members, but is expected to face resistance from the governor, other debtors and groups opposed to proposed changes including pension cuts.
Oversight Board Chairman Jose Carrion said in a statement that the bondholder agreement was more favorable than earlier proposals and it would completely resolve legacy debt in 20 years. "It ... has significantly more support from bondholders, further facilitating Puerto Rico's exit from the bankruptcy that has stretched over three years," he said. Oversight Board Executive Director Natalie Jaresko said in the same statement that the support increases board's ability to exit bankruptcy this year "and to the beginning of a true economic recovery."
The new agreement reduces $35 billion in debt and other liabilities by 70%, to $11 billion from $24 billion, and is supported by holders of $8 billion of bonds.
General obligation bondholders will see an average 29% cut while the reduction for holders of Puerto Rico Public Buildings Authority bonds will average 23%. Commonwealth creditors would receive $10.7 billion in new debt, half in GO bonds and half in COFINA Junior Lien bonds, as well as $3.8 billion in cash.
While the oversight board agreed to not challenge the legality of $6 billion in bonds, it will continue to challenge others, including ones issued by the Employee Retirement System, and will seek to recover fees earned by banks, law firms and other parties related to bonds issued in excess of Puerto Rico's constitutional debt limit.
