On September 27, 2019, three years after Congress passed PROMESA and two years after the most severe Hurricane in more than 100 years devastated Puerto Rico, The Financial Oversight and Management Board for Puerto Rico filed its proposed Plan to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, the Public Building Authority (PBA), and the Employee Retirement System (ERS); and more than $50 billion of pension liabilities.
Proponents are confident that the Plan provides not only a framework to reduce the Commonwealth’s debt to sustainable levels, but a path to exit bankruptcy. It reduces the Commonwealth’s $35 billion of total liabilities –bonds and other claims – by more than 60%, to $12 billion. Combined with the restructuring of Sales Tax related debt (COFINA) earlier this year, the Plan reduces the Commonwealth’s annual debt service to under 9% of own-source revenues, down from roughly 30% of government revenues prior to PROMESA. This articles reviews the Plan and some of the possible obstacles to confirmation going forward.
- As part of the Plan, the Oversight Board reached agreements with the Official Committee of Retired Employees of the Government of Puerto Rico (COR), the Lawful Constitutional Debt Coalition (LCDC) and QTCB Noteholder Group (QTCB) representing certain general obligation bondholders, and the Public Servants United of Puerto Rico (SPU)/AFSCME Council 95.
- Oversight Board published a comprehensive independent analysis of the Government of Puerto Rico’s pension systems, as required under Section 211 of PROMESA. The report by evaluates the fiscal and economic impact of the pension cash flows, including the pension liabilities and funding strategy, sources of funding, existing benefits and their sustainability, and the system’s legal structure and operational arrangements.
- The Plan provides, on average, a more than 60% blended reduction from bondholders.
- The Plan establishes an independent pension reserve trust to ensure benefits can be paid regardless of the Commonwealth’s economic or political situation. It includes an 8.5% pension reduction for retirees earning over $1,200 per month, so 60% of retirees would not face any cut.
- The Plan, combined with the completed COFINA debt restructuring, reduces the maximum annual amount of government net-tax supported debt service from $4.2 billion to $1.5 billion. The combined debt service of the Commonwealth and COFINA debt falls from $82 billion to $44 billion over a 30-year period.
- Local retail bondholders have the opportunity to receive taxable bonds with monthly interest payments.
- A 36% reduction for holders of General Obligation (GO) bonds issued before 2012.
- A 28% reduction for holders of Public Building Authority (PBA) bonds issued before 2012.
- A 87% reduction for holders of Employment Retirement System (ERS) bonds.
- The Plan provides the following settlement offers to holders of bonds issued after 2011, which debt has been challenged as unconstitutional, an issue currently pending before the United States Supreme Court:
- A 55% to 65% reduction for holders of challenged GO bonds and Commonwealth guaranteed claims
- A 42% reduction for holders of challenged PBA bonds
- The Plan builds on the Plan Support Agreement announced in June 2019 and negotiated with holders of approximately $3 billion in claims. As of the filing date, the Plan includes support from holders of approximately $4 billion in claims, representing 54% of claims from PBA bonds issued before 2012 and 22% of all GO and PBA claims, making the Plan Support Agreement effective. As contemplated in the Plan Support Agreement, the Oversight Board approved and certified the filing of a voluntary petition under PROMESA’s Title III for PBA, to enable the restructuring of the PBA claims through the Plan.
No Easy Path to Confirmation
The PROMESA restructuring has been hotly contested since inception, with key issues, such as the constitutionality of both a large portion of the bond debt and appointment of the Oversight Board itself, currently pending before the United States Supreme Court. While the filing of the Plan is a positive development towards moving the case towards final resolution, one can expect objections to be filed by key players in this saga such as, for example: (1) bond holders that enjoy the most guarantees and protections, i.e., backing from Puerto Rico’s Constitution and (2) the Official Committee of Unsecured Creditors, in pursuit of a larger pay out for the significant amount of unsecured debt that is involved. Additionally, hundreds of adversary proceedings have been filed, or will be, by various Trustees and Committees charged with pursuing the return of potentially billions of dollars to the Commonwealth for the benefit of creditors. This litigation may carry on for years to come. The world will be watching as this epic restructuring continues to unfold and make history in the process.