Despite the Financial Oversight and Management Board’s (FOMB) intention to submit an Adjustment Plan for Puerto Rico’s constitutional debt prior to the end of the year, the island’s recent economic and political crisis changed the course of the negotiations and it could be after the November elections when a new agreement may be submitted.
In a status report sent to U.S. District Judge Laura Taylor Swain, the FOMB indicated that it has continued formal negotiations with secured debt creditors, but given the situation the island is going through, it is premature to establish a calendar on the plan’s consideration.
The Oversight Board requested that it be granted until Oct. 25 to evaluate the assumptions of the fiscal plan and report on the progress of discussions with the government. “The board maintains that only a brief respite is required to complete the due diligence and discern on the possible direction of the discussions. Specifically, with the participation of the creditor parties, the board will realize in a short time if it is possible to reach a modified adjustment plan,” said the FOMB.
The Oversight Board also assured that during the “brief respite,” they will be able to determine, together with the Financial Advisory Authority and Fiscal Agency (Aafaf by its Spanish acronym), if the general elections should be completed before reaching an agreement on the plan. This could complicate the situation, since the negotiations would take place within the framework of new FOMB members being nominated by the White House –who may have different fiscal visions– and a new central government that could be less collaborative. In recent months, three of the seven Oversight Board members have announced their resignations.
“Political and legislative calendars, including the ongoing electoral process and the closing of legislative sessions, affect the time associated with the government and legislative approvals to the issuing debt in accordance with an adjustment plan, whose approval is considered desirable due to its impact on the negotiation value of the debt,” emphasized the FOMB.
In February of this year, the board received the support of 58 percent of General Obligations (GO) and the Public Buildings Authority (PBA) creditors, which gave way to the filing of a new Adjustment Plan. However, the Covid-19 pandemic exacerbated the economic crisis and keeps latent the need for less onerous negotiations.
The current plan seeks to reduce government debt and other claims from $35 billion to $11 billion, which if approved would represent a 70 percent cut. In addition, it would lower the government’s largest debt service by an additional $5 billion and shorten the repayment period to 20 years.
Also, the plan promotes an average reduction of 29 percent for GO bondholders and 23 percent for PBA bondholders. They would receive $10.7 billion in new debt, half in GO bonds and the other half in junior lien bonds from the Sales Tax Financing Corp. (Cofina by its Spanish acronym).
Aafaf Seeks to Refinance HFA Bonds
Meanwhile, Aafaf Executive Director Omar J. Marrero Díaz announced that the entity, the Housing Financing Authority (HFA) and the Public Housing Administration (PHA) will seek to refinance the outstanding bonds of the HFA with the goal of generating debt service savings.
“In our role as financial advisor to the Government of Puerto Rico and its instrumentalities, we have determined that it is in the best interest of HFA, PHA and the people of Puerto Rico to take advantage of current market conditions and seek opportunities for reductions in the debt service of the existing public debt,” he said.
Currently, HFA has some $300 million in outstanding bonds issued under the Capital Fund Program of the U.S. Department of Housing and Urban Development (HUD), maturing between 2020 and 2027. HFA originally issued these bonds in 2003and 2008, the proceeds of which were lent to the PHA and in accordance with the purposes of the federal program, were used to pay the costs of improvements and modernization of public residential projects throughout the island.
The proposed refunding would be achieved through the issuance of new bonds under HUD’s Capital Fund Program. The issuance of the new bonds has been approved by the Oversight Board and HUD. In addition, Standard & Poor’s has assigned an AA-credit rating to the proposed refunding bonds. The final size, timing and structure of the anticipated transaction are subject to market conditions and other factors.