Puerto Rico Oversight Board reaches deal with Ambac, FGIC

The Puerto Rico Oversight Board reached a deal for an improved treatment of the Puerto Rico Infrastructure and Finance Authority rum tax bonds with two bond insurers, which had been key opponents of the central government debt deal.

The board announced the deal with Ambac Assurance and Financial Guaranty Insurance Company Tuesday morning in a written statement and by posting the Plan Support Agreement to the Municipal Securities Rulemaking Board’s EMMA website. It also submitted a sixth amended proposed Plan of Adjustment for the central government’s debt, which reflects the new agreements, to the United States District Court for Puerto Rico, moving the restructuring negotiations closer to being resolved.

The insurers pledged to support the terms in the Plan Support Agreement, the board’s proposed central government Plan of Adjustment, and the approval of the Disclosure Statement. Whitehaven Credit Opportunities Master Fund also signed the PSA.

“With this sixth amended Plan of Adjustment, the Oversight Board has reached agreements with all monoline bond insurance companies involved in the Commonwealth Plan of Adjustment,” said board Executive Director Natalie Jaresko. “The agreement to settle the PRIFA claims provides additional support to the Plan of Adjustment prior to confirmation hearings and brings Puerto Rico another step closer to the end of its bankruptcy."

The insurers settled their claims against a diversion of rum tax revenues, also known as “clawback,” and any other claims they have for PRIFA debts. Puerto Rico's government began in December 2015 diverting rum tax revenue pledged to the Puerto Rico Infrastructure Authority rum tax bonds for use by the central government. According to Reuters, Ambac and FGIC insured more than $863 million these bonds’ outstanding principal as of December 2015.

In the deal, the PRIFA bondholders/insurers receive $260 million in cash, inclusive of restriction fees and consummation costs, the board said. The agreement includes a contingent value instrument based on possible exceedance of Puerto Rico’s 5.5% Sales and Use Tax relative to 2020 Fiscal Plan projections and of Puerto Rico’s General Fund rum tax collections relative to the 2021 Fiscal plan projections.

The board said if one looks only at the fixed cash payment the deal represents a roughly 90% reduction of the PRIFA claims.

“In big restructurings like these, it’s usually the first to settle that get the best terms," said Municipal Market Analytics Partner Matt Fabian. "So this is probably the best they could hope for. If nothing else, it’s a step towards mitigating their Puerto Rico exposure, which should be their ultimate goal.”

The PSA defines exceedances of the general fund rum tax collections as being over $200.4 million, the smallest metric, in fiscal 2023 to over $215 million, the largest metric, in fiscal 2051.

In mid-July, the board reached agreement with the Unsecured Creditors Committee — another key party needed to reach the $35 billion debt restructuring — on a $575 million settlement, up from $125 million originally proposed by the board. Bankruptcy Judge Laura Taylor Swain had given the board and the insurers more time to come to Tuesday's announced agreement.

The next step is a court hearing Thursday to finalize the board's proposed Disclosure Statement and Confirmation Procedures motion. The Disclosure Statement explains the terms and conditions of the Puerto Rico central government debt restructuring to the bondholders, pensioners, and other creditors who will vote on the final debt restructuring, expected in the fourth quarter The Confirmation Procedures motion sets out the main dates and deadlines leading up to the anticipated confirmation of the Plan of Adjustment.