Puerto Rico reaches tentative deal with bondholders

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      By Victor Joita, CFAAssociate Municipal Analyst, Eaton Vance Management and Bill Delahunty, CFADirector of Municipal Research, Eaton Vance Management

      Boston - On February 9, 2020 — after almost three years in bankruptcy — the Financial Oversight and Management Board for Puerto Rico reached a tentative deal with roughly 50% of Puerto Rico's General Obligation holders. While the new Plan Support Agreement is a step in the right direction, we believe that the Commonwealth's exit from Title III Bankruptcy is still a long way off.

      Key highlights of the agreement 1

      • Puerto Rico's general fund debt would be reduced from $35 billion to $11 billion.
      • Recovery rates for General Obligation and Public Building Authority bondholders would range from 65.4% to 77.6%, and the validity of the General Obligation bonds that were issued after 2012 would be settled.
      • Other classes of debt — including the Employees Retirement System, rum excise tax and "clawback" debt — would receive a recovery rate of just 3%.
      • Overall, the blended recovery rate would be 41%, and bondholders would exchange their current holdings for $10.7 billion in new debt and $3.8 billion in cash.
      • New bonds totaling $10.7 billion would be split 50/50 between new General Obligation bonds and new Puerto Rico Sales Tax Financing Corporation (COFINA) Junior Bonds.
      • Importantly, the new debt deal would not impact the other agreements in place, such as the deal reached with COFINA debt that restructured $17 billion.

      Shortly after the announcement, Puerto Rico's Governor Wanda Vazquez and various other lawmakers publicly rejected the deal, citing the new plan as too generous to bondholders at the expense of Puerto Rico's pensioners. In our view, though, the new plan actually protects pension benefits for approximately 75% of retirees — with the potential for nearly full recoveries for all retirees over the next 15 years if certain economic conditions are met.

      Aggressive timing for exiting bankruptcy

      According to the Mediation Team, the General Obligation deal could be completed by October 2020, setting the stage for Puerto Rico's exit from bankruptcy sometime after that. However, the timing could be aggressive given that the plan of adjustment faces strong opposition from Puerto Rico's lawmakers and various other unsecured creditors, as a large part of the debt reduction is coming at their expense.

      Bottom line: The tentative General Obligation agreement is a step in the right direction toward Puerto Rico's eventual exit from bankruptcy. But considering the numerous parties opposed to the deal, it could ultimately take longer than expected to complete.

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