The Financial Oversight and Management Board (FOMB) announced today the terms of a debt restructuring agreement with certain bondholders, a major step towards an amended Plan of Adjustment for the Commonwealth of Puerto Rico to resolve $35 billion of debt and non-debt claims.
The terms of the agreement reflect negotiations with creditors who were parties to the restructuring agreement the Oversight Board reached last year and follows months of court-supervised mediations after the Oversight Board’s assessment of the cumulative effect of the COVID-19 pandemic, the ongoing recession, and a series of natural disasters over the last several years on Puerto Rico and its economy.
The new agreement with general obligation (GO) bondholders and Public Building Authority (PBA) bondholders in summary:
• Reduces $18.8 billion of Commonwealth debt held by GO and PBA bondholders by 61%, to $7.4 billion.
• Reduces total debt service payments by 62%, from $90.4 billion under the original contractual debt agreements before PROMESA to $34.1 billion under the new debt restructuring agreement (including principal and interest from the COFINA bonds).
• Provides GO and PBA bondholders with $7.4 billion in bonds and $7 billion in cash, lifting the weight of unsustainable debt from future generations.
• Includes a contingent value instrument (CVI) that gives GO and PBA bondholders incremental value only if the Puerto Rico economy grows more than projected in the 2020 Certified Fiscal Plan for Puerto Rico.
“We achieved a fair, sustainable, and consensual agreement that puts Puerto Rico on a path to recovery and is an important tool to lift the weight of bankruptcy from the people and businesses of Puerto Rico,” said Oversight Board Chairman David Skeel. “I firmly believe this is the best outcome we could achieve in today’s economic uncertainty, not only for the people of Puerto Rico but also for creditors who have an interest in Puerto Rico’s long-term viability and creditworthiness.”
The agreement reduces the maximum annual debt service payments to $1.15 billion for current interest bonds, compared to payments as high as $4.2 billion without restructuring. The annual debt service in the restructuring agreement reached before the pandemic was $1.5 billion, and the new agreement would free up more than $300 million per year for government services. The annual payments add up to a total of $34.1 billion over the life of the debt under the new agreement, a 62% reduction from the $90.4 billion Puerto Rico would have to pay under the original contractual debt agreements before PROMESA.
Without PROMESA, 30 cents of every dollar in taxes and fees the government collects from the people of Puerto Rico would go to creditors, according to the FOMB. This new agreement reduces the annual payments to less than 8 cents of every dollar the government collects.
The new agreement’s cash and debt consideration to bondholders provides a 27% average reduction for GO bondholders and a 21% average reduction for PBA bondholders,in addition to reducing their claims by many years’worth of interest payments.