Puerto Rico disclosure statement hearing scheduled for July 13

By Sarah Lizee

Olympia, Wash., May 5 – The Commonwealth of Puerto Rico’s hearing on approval of its disclosure statement has been scheduled for July 13, according to an order filed Tuesday with the U.S. District Court for the District of Puerto Rico.

The commonwealth’s amended plan of arrangement outlines the restructuring of about $35 billion of debt and other claims against the commonwealth, the Public Buildings Authority (PBA) and the Employee Retirement System (ERS), and more than $50 billion of pension liabilities.

The board said the plan provides a path to exit bankruptcy as early as this calendar year and creates a foundation for Puerto Rico’s recovery and economic growth.

As previously reported, the amended plan substantially reduces Puerto Rico’s debt and debt service payments from the government’s contractual obligations and the previous plan of adjustment filed in February 2020.

The terms of the amended plan reflect the cumulative effects of the Covid-19 pandemic, the ongoing recession, and a series of natural disasters over the last several years on Puerto Rico and its economy, the board said.

“This plan substantially reduces the burden of debt payments on future generations, stabilizes and protects pensions that have been mismanaged for so long, and affirms the collective bargaining agreements of government workers,” oversight board chairman David Skeel said in the release.

The plan includes three support agreements, including the agreement with general obligation (GO) and PBA bondholders reached in February, the agreement with the official committee of retirees (COR) and the agreement with the Public Servants United of Puerto Rico (SPU)/American Federation of State, Country and Municipal Employees (AFSCME), Council 95, to protect pensions for the long-term and secure collective bargaining agreements.

“The amended plan of adjustment is a contract between a diverse group of stakeholders – Puerto Rico, its retirees, a group of public employees, and certain bondholders – to help Puerto Rico manage its debt in a sustainable fashion, restore Sistema 2000 employee contributions, protect future pensions by funding a pension reserve trust, and balance its budget,” said the oversight board’s executive director, Natalie Jaresko.

The plan’s main elements involve the restructuring of the debt of the central government, PBA and ERS; claims against the commonwealth based on revenues historically and conditionally appropriated to certain instrumentalities; and general unsecured claims against the commonwealth, PBA and ERS.

The plan represents major concessions by bondholders and other parties, saving significant amounts in debt service that can help to protect pensions and critical government services.

Specifically, the plan reduces the outstanding commonwealth debt and other claims by almost 80%, to $7.4 billion from $35 billion in new GO debt.

The plan ensures sustainable and affordable annual debt service of less than 8% of fiscal year 2020 own-source revenues by reducing the maximum annual debt service to $1.15 billion from as much as $4.2 billion, making as much as $3 billion per year available for the services needed by the people of Puerto Rico.

The plan reduces the commonwealth’s total debt service payments, including Cofina senior bonds, by more than 60%, to $34.1 billion from $90.4 billion, saving Puerto Rico almost $60 billion in debt service payments.

The amended plan has substantial support from creditors. Holders of over $13 billion of bonds have now signed on to the GO and PBA plan support agreement, representing more than 70% of aggregate GO and PBA claims.

The plan includes the agreements the oversight board previously reached with COR and a group of current government employees represented by SPU/AFSCME, Council 95.

The agreement with retirees restructures pension liabilities to enable their sustainability in the long-term, while ensuring more than 80% of current and future retirees see no reduction.

In financial terms, that means retirees as a creditor group receive a recovery rate on their claims against the commonwealth of over 95%, by far the largest recovery of all creditor groups.

The agreement includes a flat 8.5% pension cut with a floor so that no one will have their total monthly retirement benefits reduced below $1,500.

Further, the agreement would establish an independently managed pension reserve trust for the PayGo pension system to support payment of pensions over the next 30 years.

Finally, the envisioned pension reductions can be restored if government finances outperform the certified fiscal plan by $100 million or more in any given year; 10% of the excess would be allocated to retirees to offset the pension cut.

The agreement with SPU/AFSCME ensures that collective bargaining agreements will remain in effect for five years following the plan’s effective date, reflecting labor terms in the certified fiscal plan and increased employer contributions to the medical plan set at $170 per month, rather than the $125 provided in the certified fiscal plan.

Up to $1.5 billion of employees’ contributions to Sistema 2000 would be returned in full to participants along with any interest credits the contributions would have accrued before Puerto Rico’s bankruptcy.

If government finances outperform the certified fiscal plan by $100 million or more in any given year, 25% of the excess would be allocated to eligible employees, incentivizing employees to help the government work more efficiently.

The Commonwealth of Puerto Rico announced its Title III petition filing on May 3, 2017. The case number is 17-03283.

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