Puerto Rico’s Plan of Adjustment went into effect Tuesday as did the restructuring of $33 billion of bonds, with bondholders and bond insurers beginning to receive the newly restructured bonds and trading starting in earnest.
Puerto Rico completed the exchange of more than $33 billion of existing bonds and other claims into $7 billion of new bonds on Tuesday, as the commonwealth began repaying bondholders for the first time since it defaulted on its debt in 2016. It marks an official end to a years-long, contentious bankruptcy process.
“The effective date represents a critical step to bring Puerto Rico’s financial crisis to an end,” said Oversight Board Chairman David Skeel. "The Puerto Rico government formally moves on from fiscal instability and insolvency into a future of opportunity and growth, making today a truly historic day.”
Annual debt service will decrease from a maximum of $3.9 billion before the debt restructuring "to a stable, affordable, and predictable $1.15 billion each year," saving the government more than $50 billion in debt service payments, the Oversight Board said in a release.
The $7.2 billion of general obligation bonds being issued as Series 2022A have both current interest and capital appreciation tranches. Series 2022A current interest bonds have 10 maturities from 2023 to 2046 and the capital appreciation bonds have maturities in 2024 and 2033.
The bonds, cash, and CVIs will be distributed first to dealers, who will distribute them to clients, with some receiving the bonds Tuesday and others in a few days.
Bondholders were free to trade the bonds as soon as they received them. On Tuesday, block trading showed: Puerto Rico 4s of 2035 (74514L3L) traded at a high of $103.936 to yield 3.60% to a low of $101.060 to yield 3.89%. Puerto Rico 4s of 2041 (74514L3N) traded at $99.995 to yield 4.00% to a low of $99.250 to yield 4.06%. Puerto Rico 0s of 2043 traded at $57.00-$57.25. Puerto Rico 4s of 2046 traded at a high of $99.07 and at 4.06%-4.11% (74514L3P).
Prime Clerk is handling the distribution of the bonds, cash, and contingent value instruments under the oversight of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said Oversight Board Executive Director Natalie Jaresko.
“Remaining in bankruptcy has been a drag on the economy in multiple ways,” Jaresko said on Tuesday. Getting out of bankruptcy is “huge.” By exiting the central government’s bankruptcy, the board has given the government “affordability, sustainability, and predictability.”
“What we saw in Detroit was that after getting out of bankruptcy, it really did help fuel an economic boost and economic growth. So, we are very hopeful that it does that here,” Jaresko said.
“Today we move from fiscal instability to a future of opportunity and growth. Our economic recovery is on track and our pensioners, the University of Puerto Rico, and the municipalities are protected," Omar Marrero, secretary of state and executive director of FAFAA, said in a release. "By significantly reducing our government debt to a sustainable level, we can meet our obligations while having the resources to fuel our economy."
Municipal analysts
The payments are the first for the GO, Public Building Authority, Employees Retirement System, Convention Center District Authority, Puerto Rico Infrastructure Finance Authority, and Municipal Bus Authority bonds since 2016. There was an earlier settlement on PRIFA ports bonds, which are not covered in this restructuring.
While the terms of the HTA bond restructuring have been largely set in the central government Plan of Adjustment executed Tuesday, HTA bondholders are not getting cash, bonds, or CVIs at this time. They are expected to get their consideration when further conditions are met and the U.S. District Court for Puerto Rico approves their Plan of Adjustment, which the board hopes will happen this year.
The effective date also implements the Pension Reserve Trust provisions created in the Plan of Adjustment, Skeel noted.
The Pension Reserve Trust is projected to be funded with more than $10 billion of contributions over the next 10 years, and up to $1.4 billion this year, "to protect and preserve the ability to pay retirement benefits to current and future government retirees," the Board said. "The Pension Reserve Trust is designed to prevent Puerto Rico from repeating the mistakes of the past and in which it ran out of funds to keep the promises made to public employees."
The Plan of Adjustment also establishes a debt management policy to "prevent Puerto Rico from repeating past practices that led to the accumulation of its unsustainable debt," according to the board release. New debt may only be used to finance capital improvements, not operating deficits. The government can only refinance debt to reduce borrowing costs, not to take on more liabilities.
“Restructuring the debt is only the tip of the iceberg. Puerto Rico needs to improve financial management, ensuring financial transparency and accountability, to produce long-term growth and stability,” Jaresko said. “Puerto Rico should never fall back to the financial mismanagement practices of the past. The Government will need to redouble its efforts to manage its resources carefully for the benefit of the people of Puerto Rico.”
“We now have a cleaner, clearer, and more certain debt profile for creditors and the market. We have established fiscal solvency for the future, with a sustainable plan to repay our obligations to our creditors,” Marrero added.
