Puerto Rico would shed about $24bn of debt and move closer to exiting bankruptcy under an agreement with bondholders, according to a deal announced on Sunday by the United States commonwealth’s federally created financial oversight board.
The agreement would reduce $35bn of bonds and claims to about $11bn, after bondholders agreed to lower repayments for general obligation (GO) bonds and Public Building Authority (PBA) bonds, the oversight board said in a statement on its website.
The Caribbean island began a form of municipal bankruptcy in May 2017 to restructure about $120bn of debt and liabilities. Just months later, residents had to endure devastating hurricanes and more recently the strongest earthquake in more than a century.
Under the new agreement, bondholders would face average value reductions of 29 percent for GO bonds and 23 percent for PBA bonds, which is lower than initial haircuts of 36 percent to 65 percent that were included in the September plan of adjustment.
GO bonds are issued by a municipality on the basis that it will be able to repay those bonds using taxation or revenue from other projects. PBA bonds are issued to raise financing for the construction of government buildings.
According to the plan, Puerto Rico will repay its debt over 20 years rather than the 30-year schedule in an earlier plan. It would then pay a maximum $1.5bn in annual debt service on the new securities and the island’s $12bn of outstanding sales-tax debt, down from $4.2bn the island paid in 2017.
The oversight board also agreed to end its legal challenge to cancel $6bn of debt sold in 2012 and 2014, which it previously argued were issued in violation of Puerto Rico’s constitutional debt limit.
Oversight Board Chairman Jose Carrion said the deal “lowers total debt payments relative to the agreement we reached last year, pays off commonwealth debt sooner and has significantly more support from bondholders, further facilitating Puerto Rico’s exit from the bankruptcy that has stretched over three years.
Creditors would receive $10.7bn in new debt, split between GO bonds and sales tax-backed junior lien bonds (which are also known as second mortgage loans placed on properties), along with $3.8bn in cash, the board said.
However, the deal faces opposition from Puerto Rico Governor Wanda Vazquez because it does not roll back proposed pension cuts.
Pensions remain an issue for the governor and others as the board has been seeking a maximum 8.5 percent cut for retirees who receive more than $1,200 in monthly benefits.
“My position during this process has been that if bondholders receive better treatment in a new deal, pensioners must also receive better treatment,” Vazquez said in a statement.