The Financial Oversight and Management Board for Puerto Rico (Oversight Board) announced Sunday that it had reached an agreement with bondholders regarding the terms of a plan of adjustment that would resolve $35 billion worth claims against the Commonwealth of Puerto Rico.  If approved by the Bankruptcy Court, the deal would reportedly reduce the struggling island’s outstanding bond debt to less than $12 billion, a reduction of more than 60%.[1]

This “Plan Support Agreement” comes on the heels of the Bankruptcy Court’s approval of a plan of adjustment for the Puerto Rico Sales Tax Financing Corporation (COFINA) in February, which implements a resolution of the Commonwealth’s obligations with respect to its sales tax-backed COFINA bonds, as well as agreements with respect to pension claims and with unions on collective bargaining and retirement.

A key feature of the Plan Support Agreement stems from a request by the Oversight Board in January to invalidate $6 billion worth of general obligation bonds on the grounds that the bonds issued in 2012 and 2014 violated the terms of Puerto Rico’s constitution and therefore were never valid.  Pursuant to the agreement announced on Sunday, GO bonds issued pre-2012 would receive 64 cents on the dollar, while the 2012 and 2014 GO bonds will have the option to accept 45 cents on the dollar and 35 cents on the dollar, respectively, or to continue to litigate the validity of their claims to seek a recovery on par with the pre-2012 bonds.  Payments to creditors will be a mix of $11.377 billion worth of new Commonwealth bonds plus another $2 billion in cash.

Currently, the Plan Support Agreement has the support of creditors who hold approximately $3 billion in total GO and PBA claims.  To incentivize more creditors to join, the Plan Support Agreement provides that certain fees are available to creditors who execute a joinder to the PSA as compensation for restricting trading.

The Oversight Board expects to file a Plan of Adjustment within the next 30 days and emerge from Title III at the beginning of 2020.  But the Plan is subject to Court approval, and objecting parties will have an opportunity to convince Judge Swain that this is a bad deal.  The Commonwealth’s government – which is separate from the Oversight Board – has already announced its opposition to the settlement because it is “premised on a fiscal plan that cuts pension benefits.”[2]

We will continue to monitor the Commonwealth’s Title III proceeding as it attempts win approval of a Plan of Adjustment and emerge from Court supervision early next year.