Negotiations on Puerto Rico’s central government and electric power authority debts have extended for several years, leaving participants with clashing views of the length of time they have taken and the lack of resolution of the island's debts.
A Feb. 10 deadline looms for the Oversight Board to at least submit a bond deal resolution proposal and several participants expect progress in the coming year.
Since the signing of PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act, Puerto Rico has been hit or at least shaken by Hurricane Maria, political protests forcing the exit of Ricardo Rosselló, earthquakes, and the COVID-19 pandemic.
These combined with the
Municipal bankruptcies take long periods of time. While the Detroit bankruptcy took just 17 months, many observers say that was exceptional. The longest U.S. municipal bankruptcy was San Bernardino, Calif., which took nearly five years.
“We’re finally at a point where both [bankruptcies] will pick up speed,” said Karol Denniston, partner at Squire Patton Boggs law firm. Denniston was involved in the GDB and COFINA deals but is no longer involved in the current negotiations.
Bondholders will soon reach “deal exhaustion,” Denniston said. “There’s a recognition that the process has been expensive and unwieldy,” and that will help to get parties to try to settle.
On Jan. 19, Oversight Board Chairman David Skeel said the board had already made substantial achievements in debt restructuring. He cited the Government Development Bank and the Puerto Rico Sales Tax Finance Corp (COFINA) deals and the Puerto Rico Aqueduct and Sewer Authority refinancing.
Skeel said in February 2020 the board had struck deals it was about to execute with the court for both the central government and PREPA. Then the COVID-19 virus struck.
The earlier agreements can be the basis for negotiating new agreements, Skeel said. He was hopeful both deals could be completed this calendar year.
The time elapsed on the deals is not a problem, Skeel said. There’s a sense of urgency to get things done now.
In late October new Oversight Board member Justin Peterson said he wanted to quicken the march toward a debt deal. On Oct. 6 a large group of central government bondholders complained to the court about the process’s extension and asked the court to put sharp deadlines on the Oversight Board. While Judge Laura Taylor Swain didn’t approve the deadlines, she placed the Feb. 10 deadline for the board to at least submit a bond deal proposal.
Where the process has been
The process of restructuring the Puerto Rico Electric Power Authority and central government debts stretch back several years. Restructuring discussions concerning PREPA’s debt started in summer 2014. President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act on June 30, 2016.
Central government debt negotiations between the board and bondholders probably started in the fall 2016, though parties have not explicitly said when these started. The board put the central government into Title III bankruptcy on May 3, 2017 and PREPA into bankruptcy in early July 2017.
This past October bondholders negotiating with the board, the Plan Support Agreement Creditors, expressed their frustration to Swain: “More than four years after PROMESA’s enactment, Puerto Rico and its people remain exactly where they were: languishing in bankruptcy, without financial transparency or access to the capital markets. Bondholders of the commonwealth’s highest priority, constitutionally guaranteed debt, meanwhile have not been paid in over four years, while the government has continued to timely pay the vast majority of junior, unsecured creditors.”
The Oversight Board’s “failure to move the plan process forward threatens a core component of the [Oversight Board]’s settlement with the Plan Support Agreement Creditors (i.e., progress towards consummation of a transaction by which the commonwealth would exit bankruptcy and begin repaying its creditors on a reasonable timeframe),” the bondholders continued. “That inaction is also putting Puerto Rico’s future at risk, and, at this time, requires the court’s intervention.”
In July someone usually far from the bondholders’ general outlook, Jubilee USA Network Executive Director Eric LeCompte, foreshadowed the bondholders’ October position, when he told The Bond Buyer that all the debt restructuring should have been completed.
Also in July Puerto Rico Attorney John Mudd said the central government restructuring should have been completed.
When former Board member José Ramón González gave notice in August of his departure from the board after four years on it, he said, “We have not accomplished all the Oversight Board needs to accomplish or even all I was hoping to accomplish.” However, he said “we have taken significant steps forward on a path toward recovery.”
So what now?
New Gov. Pedro Pierluisi has indicated his interest in accelerating the debt restructuring process, Denniston noted. Pierluisi also said he will personally attend board meetings and this will help.
Another bankruptcy attorney who asked for anonymity noted that Detroit was completed in a relatively short timeframe because the judge and mediator worked closely together and deliberately moved quickly. They put substantial pressure on major creditors and this expedited affairs.
In the Puerto Rico bankruptcy it is probable that Judge Swain and Mediator Barbara Houser are not communicating much, this attorney said.
Whereas in private sector Chapter 11 bankruptcies, creditors can submit their own proposed plan of adjustments to the court if the debtor doesn’t propose an acceptable one, in Chapter 9 municipal bankruptcy this is not the case, the attorney said. PROMESA is like Chapter 9 in this way and only the board can propose plans of adjustment. Because of this, the board has less pressure to submit a plan of adjustment to the court.
The Puerto Rico case is a complicated one with many sorts of creditors, this attorney said. It is different from historic Chapter 9 cases because hedge funds that bought the debt at sharp discounts are heavily involved in negotiations. Yet there are also bond insurers with large exposures that are liable for 100 cents on the dollar. He said these facts make it harder to reach a settlement.
“Other Chapter 9 bankruptcies we’ve seen over the last two decades pale in comparison to the complexity of Puerto Rico,” Moody’s Investors Service chief Puerto Rico analyst and Assistant Vice President Pisei Chea said.
The anonymous bankruptcy attorney said the board needs to get at least one class of creditors to support the plan of agreement for the court to approve it. The court probably will not approve the plan unless there is more than narrow creditor and pension holder support for it.
“How much longer [the central government bankruptcy will go] is anybody’s guess,” Attorney Mudd said. “If the board files the plan of adjustment on Feb. 10, depending on whether there is a settlement with bondholders, this could take more than six months to be approved … . We must remember that there will be discovery as to the disclosure statement and the plan. If it is filed shortly after Feb. 10, the approval could sedge into 2022.”
Puerto Rico observer Cate Long said, “It’s difficult to predict how long the bankruptcy will go but the recent motion of the [Oversight Board] to schedule oral arguments for the pension bond adversary cases during confidential mediation suggests certain board members have little interest in reaching a consensual deal by the Feb. 10 deadline set by the Title III court.
“If there is no deal and the plan of adjustment is [submitted to the court] without including more debt service, then there will be massive litigation during the confirmation process and likely many appeals,” Long continued.
What of COFINA?
One possible spanner in the works for the central government restructuring is resolution of four appeals of the COFINA bond deal. The United States Appeals Court for the First Circuit heard oral arguments on them in early August and hasn’t issued a ruling on them yet.
Some of the litigants want just themselves to be paid on the terms of the original COFINA bonds. Some involved in the case have said this might lead to all those subordinate COFINA bondholders who voted against the proposal also being paid in full and this might cost the commonwealth $360 million to $400 million.
In the context of the more than $50 billion originally promised in the COFINA and other central government bonds, that would not be a catastrophic blow to the commonwealth.
However, some litigants want the deal totally undone and some of the commonwealth’s attorneys have argued that undoing just some of the restructured bond terms would force the undoing of all of them. Since the original COFINA bonds had a par value of $17.6 billion, this could have big impacts on the rest of the debt negotiations.
Mudd said the COFINA appeals, “have a chance but a slim one. Appellate courts affirm the decision below in 90% of the cases but it is not a sure thing. A reversal could turn back the commonwealth case or affect it depending on what the decision says.”
Long said if the appeals court sided with the COFINA subordinate bondholder litigants, the award would be narrowly circumscribed and not bring down the entire deal. It would be impossible for the court to unwind the whole deal.
Skeel, who is part of the defending party Oversight Board, said the board was hopeful the litigants’ arguments would be rejected. “The appeal is really a request to unscramble an egg that has already been cooked.”
