Puerto Rico: The Ball Is Rolling

August has brought welcome news for the Commonwealth of Puerto Rico and for creditors eager to see a resolution to the bankruptcy process that started more than two years ago with the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).

There is now a restructuring agreement for Sales Tax (COFINA) bondholders and a court decision validating the powers of the Fiscal Oversight and Management Board (FOMB), as well as a restructuring proposal for the Puerto Rico Electric Power Authority (PREPA), all of which offer reason for optimism. These developments join the restructuring of the Government Development Bank (GDB), along with better-than-expected economic conditions.

When observers look back at the bankruptcy of Puerto Rico, they will point to the restructuring of COFINA as a major milestone. The formal agreement between the FOMB, the government of Puerto Rico, and both senior and junior creditors as well as monoline insurers marks a momentous step forward. It follows months of court-supervised mediation efforts. As part of the arrangement, COFINA bondholders have agreed to give up a portion of sales tax revenues to the Commonwealth: 53.65% of the Pledged Sales Tax Base Amount on a “first-dollar” basis would back new COFINA securities, while 46.35% would flow through to the Commonwealth. The disclosed term would see existing bondholders receive new senior lien bonds secured by the 5.50% sales-and-use tax (SUT), with recoveries of 93% for senior bondholders and 56% for subordinate bondholders. The accrued COFINA interest currently held in escrow will go to COFINA bondholders, with final disbursements between senior and junior bondholders still to be determined. In light of the circumstances, we believe this is a good outcome for bondholders as well as the Commonwealth, as the deal provides approximately $17.5 billion in debt-service savings. Execution risks do remain, and terms can change, so this is still far from a done deal.