Puerto Rico – Third Quarter 2018 Review

As the third quarter comes to a close, a fragile sense of optimism for the future of the Commonwealth of Puerto Rico has blossomed. It has arisen not just from the resolve of its people in the wake of Hurricane Maria but also from important milestones that have been reached in the long restructuring of Puerto Rico’s debt, starting with the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Economic conditions are beginning to improve.

We now sit a year removed from one the worst natural disasters in the Commonwealth’s history, Hurricane Maria. The monumental storm shattered the lives of the citizens of Puerto Rico, causing billions of dollars in damages and contributing to the deaths of thousands. Today, the people of Puerto Rico remain entrenched in the long, arduous process of recovery and rebuilding. Billions of dollars are set to flow to the Commonwealth, but only a fraction of those funds has been received to date. Eventually, infrastructure will be rebuilt; quick patches will be replaced by permanent fixes; and time will help to heal those who have lost loved ones or their homes or livelihoods.

On the restructuring front we have seen a number of important developments. These include restructuring proposals for the Puerto Rico Sales Tax Financing Corporation (COFINA) and the Puerto Rico Electric Power Authority (PREPA), as well as the continuing Title IV restructuring of the Government Development Bank (GDB) and ongoing negotiations for the possible Title IV restructuring of the Puerto Rico Aqueduct and Sewer Authority (PRASA).

One of the most important milestones to date remains the formal agreement among the Federal Oversight Management Board (FOMB), the government of Puerto Rico, and both senior and junior creditors, as well as monoline insurers, to restructure COFINA’s existing debt. The restructuring of COFINA, at a massive $17.6 billion, would rank among the largest in municipal history. 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 terms would see existing bondholders receive new senior lien bonds secured by a 5.5% sales-and-use tax (SUT), with recoveries of 93% for senior bondholders and 56% for subordinate bondholders. Now supporting the agreement are prominent general-obligation bondholders Aurelius Capital Management and Six PRC Investments LLC. Although the support of such significant players is a welcome sign, it by no means signifies a “done deal.” Unknowns remain, including the treatment of interest payments held in escrow for senior and subordinate bondholders.