Puerto Rico exchange transaction discussions end with no agreement

By Caroline Salls

Pittsburgh, June 21 – The Government Development Bank for Puerto Rico (GDB), the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) and the Commonwealth of Puerto Rico have not reached an agreement on a transaction related to Puerto Rico Sales Tax Financing Corp. (Cofina) and general obligation bond debt, according to a news release.

GDB, AAFAF and Puerto Rico said they held discussions with some holders and insurers of debt issued by Cofina, some holders of general obligation bonds issued by Puerto Rico and a material holder of general obligation bonds and Cofina subordinated bonds regarding a potential voluntary exchange transaction.

As part of the discussions, GDB, AAFAF and the commonwealth presented a proposal on June 14, and some of the bondholders presented separate counterproposals.

In response to a counterproposal presented by Puerto Rico in connection with the bonds it issued, some holders of general obligation bonds presented a second counterproposal.

However, no agreement has been reached, and the discussions have ended.

Puerto Rico terms

In its June 14 proposal, Puerto Rico said it was prepared to provide roughly $15 billion of incremental debt service to the G.O. and commonwealth-guaranteed (CW-guaranteed), Cofina senior and Cofina subordinated creditors.

Specifically, G.O. holders and Cofina senior and subordinated creditors would receive new debt implying a recovery of 81%, 80% and 60% of par plus estimated accrued interest, respectively, as of July 1.

These creditors would also receive an additional $1 billion of cash interest over the first four years, provided through both the increase in the face amount of cash-pay debt and an increase in the cash interest rates, with PIK interest to be paid for the differential between 5% and the cash interest rate paid during the first four years, for a total of 5% yield through the life of the bond.

The final maturity for the majority of the G.O. and Cofina creditors would also be improved.

Puerto Rico’s revised proposal does not incorporate any new money nor does it specify the form the newly issued debt must take in a voluntary exchange.

As part of the proposal, the commonwealth requested that Cofina creditors allow it to access Cofina revenue during the first half of the fiscal year to support liquidity needs “and avoid a lengthy and costly litigation

The commonwealth said its June 17 counterproposal would include a G.O. bonds discount of 83.5% of principal in a base bond, and exchange bonds would be offered in base bond and growth bond consideration.

Exchange bonds would be offered via general obligation bonds or a federal bonding authority.

Bondholder counterproposal

Under the G.O. bondholders’ June 20 counterproposal, G.O. and guaranteed bondholders would receive new bonds equal to 89% of bondholders’ claims with an initial interest rate of 5%. The rate would step up 50 basis points in fiscal year 2019 and 75 bps in each of fiscal year 2020 and fiscal year 2021, with the rate capped at 7%.

These bondholders would also receive 11% contingent convertible bonds that would carry no interest until occurrence of a trigger event and a blended rate of 5.6% after a trigger event. These bonds would be convertible into new G.O. or guaranteed bonds.

On June 21, certain G.O. bondholders made a new proposal to commonwealth officials for the restructuring of the bonds, according to a late evening press release from Paul, Weiss, Rifkind, Wharton and Garrison LLP, an adviser to the bondholders that made the proposal.

Under the new proposal, about $18 billion of existing G.O. bonds would be exchanged for new G.O. bonds at 89% of par, and the commonwealth's debt service would be reduced by $2.9 billion over the first five years.

Cofina creditor response

In a separate release, an informal group of Cofina bondholders said its most recent counterproposal was “designed to help address Puerto Rico’s fiscal crisis and stabilize the commonwealth’s economy while protecting both individual investors and institutions.”

“As creditors with strong legal property rights and alignment of interests with the Puerto Rican people, our group welcomed the opportunity to constructively discuss the commonwealth’s latest restructuring proposal,” the bondholder group said in the release.

“After assessing the latest proposal shared by the commonwealth and its advisers, we developed a good-faith counterproposal that balances creditors’ rights with Puerto Rico’s liquidity needs and economic growth objectives.

“Unfortunately, after their negotiations lapsed with other creditors, the commonwealth’s advisers failed to make a counterproposal to us at this time.

“Given our track record of constructive engagement with other stakeholders, we prefer to continue negotiations.

“Our latest counterproposal reflects our willingness to accept real principal haircuts, and it adopts several concessions set forth in the commonwealth’s June 14 proposal, including acknowledgement of and respect for our first lien on all Cofina revenues and assets.

“Our group also accepted a smoothing of our portion of the pledged sales and use tax base amount in order to provide interim liquidity relief to the Commonwealth as it struggles to address its economic crisis, subject to agreement on a sufficient collateral cushion and mechanism.”

The bondholder group is made up of retirees and individual investors in Puerto Rico and throughout the United States, as well as asset managers GoldenTree Asset Management LP, Merced Capital LP, Tilden Park Capital Management, Whitebox Advisors LLC and others, the release said.

The group said it has come out in support of many of the components of the Puerto Rico Oversight, Management, and Economic Stability Act released by the House Natural Resources Committee.

© 2015 Prospect News.
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