Puerto Rico Bankruptcy: Governor Rejects Deal With Bondholders

Puerto Rico’s governor is rejecting a tentative deal that would cut the bankrupt island’s debt by $24 billion because it fails to ease pension cuts she says place too heavy a burden on retirees.

The restructuring deal, which cuts the island’s debt to $11 billion, was announced Sunday and would need the approval of U.S. District Judge Laura Taylor Swain, who is overseeing the bankruptcy, and the island’s lawmakers.

“If the bondholders receive better treatment in the bankruptcy process, so should retirees,” Gov. Wanda Vázquez said in rejecting the deal. “This is an issue of basic justice.”

The deal cuts the value of Puerto Rico’s general obligation bonds and commonwealth-guaranteed debt by 40% and brings together competing bondholder groups that had been feuding over whether debt sold in 2012 and 2014 was still valid. The deal cancels $6 billion of that debt to end the legal battle over the issue. An earlier deal in June would have cut that debt by 60%.

As of 9:45 a.m. EST, Puerto Rico general obligation bonds with an 8% coupon were trading at 74.3 cents compared with 69.6 cents Feb. 4, and 2041 general obligation bonds with a 5% coupon were trading at 78.2 cents, up from 73.9 cents on Friday.

“The new and more favorable agreement is a win for Puerto Rico,” José Carrión, chairman of the Financial Oversight and Management Board, said in a statement. “It lowers total debt payments relative to the agreement we reached last year, pays off debt sooner, and has significantly more support from bondholders.”

A group of investors holding debt issued after 2012 issued a statement saying the settlement “represents meaningful compromises on the part of all parties and is in the best long-term interests of the people of Puerto Rico.”

Matt Rodrigue of Miller Buckfire & Co., the financial adviser for the Lawful Constitutional Debt Coalition, said hailed the provisions that not only reducs the island’s debt, but provide for a shorter repayment timeline that keeps payments at no more than 9.16% of revenue.

The deal gives investors $10.7 billion in new 20-year bonds – half in general obligation bonds and half in sales tax bonds -- and $3.8 billion cash to retire $17.8 billion in outstanding debt. It also reduces the island’s debt service to $1.5 billion annually.

Puerto Rico’s economy has been mired in recession for more than a decade, and economist José Caraballo told the Associated Press he fears the deal could lead to a reduction in basic government services as the island struggles in the aftermath of a series of earthquakes and lingering damage from Hurricane Maria.

“The risk of a second bankruptcy and a prolonged recession is bigger than before,” he said.