Bond insurers Assured Guaranty, Ltd. and National Public Finance Guaranty Corp. formalized their support for Puerto Rico revenue bond and central government bond deals Wednesday.
The insurers announced they had signed a plan support agreement for about $4.6 billion of Highways and Transportation Authority and Convention Center District Authority bonds with the Puerto Rico Oversight Board.
The insurers retained the right to withdraw their support for the general obligation and Public Building Authority bonds plan support agreement announced March 8 unless they got an acceptable deal on the HTA and CCDA bonds. The insurers reached a preliminary deal on the revenue bonds on April 12.
The board will incorporate the terms of the HTA and CCDA plan support agreement and the previously announced Employees Retirement System bonds into a new Amended Plan of Adjustment for Puerto Rico bonds, the board said.
“This agreement is another significant step towards resolving Puerto Rico’s bankruptcy process,” said board Executive Director Natalie Jaresko.
In a written statement Thursday morning, Assured Guaranty reaffirmed its support of the GO and PBA plan support agreement.
“Together, the HTA/CCDA PSA, the GO/PBA PSA, and the previously agreed restructuring support agreement for the Puerto Rico Electric Power Authority represent a comprehensive solution covering the vast majority of Assured Guaranty’s Puerto Rico exposures and almost all of our small remaining exposure is to credits that have not missed any principal or interest payments,” Assured Guaranty President Dominic Frederico said.
NPFG said it was pleased to have reached the agreements with the Oversight Board.
"With National’s significant Puerto Rico exposures now having agreements to resolve their debt, we look forward to working with the government parties on the implementation of these consensual restructurings as soon as possible, as well as to the end of Puerto Rico’s bankruptcy," NPFG said.
Part of the central government plan of adjustment announced March 8 was the Plan Support Agreement for the island’s general obligation and Public Building Authority bonds, announced in February. The plan of adjustment required the continuation of the PSA and that required support of holders of 70% of the PSA debt. The two insurers held 15% of the debt and if they withdrew their support the plan of adjustment could have collapsed.
The insurers originally had the option of withdrawing their support until April 1, a deadline that was subsequently pushed back several times as the insurers pressed the Puerto Rico Oversight Board for acceptable terms for the Highways and Transportation Authority, Convention Center District Authority, and other revenue bonds they insure.
To go into effect, the agreement announced Wednesday would have to be voted on by the creditors and approved by the United District Court for Puerto Rico.
In the HTA and CCDA bond agreement, holders of HTA bonds would receive $1.245 billion of current interest, capital appreciation, and convertible capital appreciation bonds. Additionally, they would receive $389 million of cash.
The bonds would have an average interest of 5.0% and maturity up to 40 years.
For the HTA privatization is an alternative to the revenue bond restructuring.
CCDA bondholders would receive $112 million of cash. These CCDA and HTA terms exclude additional cash bondholders may receive from a Contingent Value Instrument.
The HTA has about $4.17 billion of revenue bonds outstanding and the CCDA has about $410 million of revenue bonds outstanding.
Since the beginning of the central government’s bankruptcy in spring 2017, it has diverted or “clawbacked” revenues for the HTA, CCDA and other semi-autonomous authority bonds. In the agreement signed on Wednesday, the insurers and the board agreed on a way of restoring some of this money.
If the island’s Sales and Use Tax revenues performs better than projected by the board’s May 2020 certified fiscal plan, some of the money might make it back to the holders of the HTA, CCDA, and other revenue bonds. According to the deal, in years one through 22 the first $100 million of the outperformance would go to holders of the GO bonds. The next $11.1 million would go to the creditors who lost to the “clawback.” After the $111.1 million the clawback creditors (revenue bond holders) would get 10% of the available payment.
The “clawback” creditors would get a greater share in years 23 to 30. This potential addition mechanism is called a Contingent Value Instrument. All these payments are subject to additional restrictions.
The board said the HTA and CCDA deals provide a “template” for treating other clawback claims of Puerto Rico Infrastructure Finance Authority rum tax and Metropolitan Bus Authority bonds.
Puerto Rico Gov. Pedro Pierluisi said Wednesday’s settlement had “positive economic terms” for Puerto Rico. However, he reiterated the debt restructuring should not put additional cuts on pension benefits or new burdens on the islands working class. The current board-proposed plan of adjustment includes a cut to pension benefits.
The board said the HTA and CCDA deal is supported by holders and/or insurers of more than 85% of the HTA 1968 bonds, nearly 50% of the HTA 1998 senior bonds, and nearly 40% of CCDA bonds.
There is about $4.17 billion of HTA bonds outstanding and $410 million of CCDA bonds outstanding.
Ambac Assurance and Financial Guaranty Insurance Company were not parties to Wednesday’s deal. They may continue their legal challenges to the board’s treatment of their Puerto Rico revenue bonds in Puerto Rico’s bankruptcy.
