Puerto Rico Funds, Money

The Financial Oversight and Management Board for Puerto Rico announced late Monday that it reached an agreement in principle with Assured Guaranty Corp., Assured Guaranty Municipal Corp., and National Public Finance Guarantee Corporation to settle claims against the Commonwealth of Puerto Rico over monies historically conditionally appropriated to certain Commonwealth instrumentalities (clawback claims), including the Highway and Transportation Authority (HTA) and the Puerto Rico Convention Center District Authority (CCDA), and to restructure the debt of HTA and CCDA.

The agreement also provides a template for treatment of other similarly situated creditors at the Puerto Rico Infrastructure Financing Authority (PRIFA) and the Metropolitan Bus Authority (MBA).

The agreement in principle will be incorporated into the Plan of Adjustment that the Oversight Board filed on March 8, 2021 to reduce the debt of the Commonwealth of Puerto Rico to affordable and sustainable levels. The Plan of Adjustment reduces the Commonwealth’s debt from $35 billion in outstanding claims by approximately 80% to $7.4 billion in future debt and the Plan will save the government almost $60 billion in debt service payments when including COFINA debt service.

“The agreement we reached over the weekend is yet another significant step towards a consensual Plan of Adjustment that can take Puerto Rico out of bankruptcy,” said the Oversight Board’s Chairman David Skeel. “Mediation under the leadership of Judge Barbara Houser continues to be successful in reaching agreements with as many creditors as possible to avoid time-consuming and costly litigation. The agreement was made possible by the extraordinary work of our executive director Natalie Jaresko, and of our staff and advisors.”

“We will continue this path to reach fair agreements with diverse stakeholders to lower Puerto Rico’s debt to sustainable levels and allow Puerto Rico to recover and prosper,” Skeel said.

The agreement in principle addresses the HTA, CCDA, and clawback claims as follows:

• Commonwealth Contingent Value Instrument (CVI): Clawback creditors receive a CVI based on potential outperformance of Puerto Rico’s 5.5% Sales and Use Tax (5.5% SUT) based on the projections in the 2020 Certified Fiscal Plan. This CVI will include distributions from the Clawback CVI in the existing Plan of Adjustment, plus an additional payment on account of outperformance from 40% of the 5.5% SUT. The CVI will be implemented and distributed consistent with a revised Commonwealth Plan of Adjustment that will be filed with the U.S. District Court for the District of Puerto Rico.

• CCDA: CCDA is expected to commence a proceeding under PROMESA, and its plan of adjustment or qualified modification would be confirmed on the same timeline as the

Commonwealth Title III case. CCDA bondholders will receive $112 million in cash, inclusive of restriction fees and consummation costs, from accounts associated with the hotel room tax historically conditionally appropriated by Commonwealth Law to CCDA. This represents fixed reduction of the amount of CCDA claims by approximately 75%.

• HTA: The Oversight Board intends to file a Plan of Adjustment for HTA by January 31, 2022 that would enable HTA to exit bankruptcy in 2022. From HTA, bondholders will receive $1.2 billion in newly issued bonds and $389 million in cash, inclusive of restriction fees and consummation costs. This represents fixed reduction of the amount of HTA claims by approximately 70%.

The agreement in principle does not affect the Commonwealth’s maximum annual debt service payments of $1.15 billion, as set forth in the Commonwealth Plan of Adjustment, saving as much as $3 billion each year in debt service compared to the contractual agreements prior to PROMESA.

The agreement in principle follows a finalized agreement last week with bondholders of the Employee Retirement System (ERS), another element of the Commonwealth Plan of Adjustment, pursuant to which Puerto Rico will save approximately $2.4 billion.

Negotiations continue with general unsecured creditors and other holders of clawback claims.

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