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(Xavier J. Araújo Berríos)

If the agreements on paper become a reality, the administration of Ricardo Rosselló Nevares will have completed the first restructuring of a portion of the Island’s public debt by next September, a transaction that will have to be approved by the Oversight Board (OB) and, in due course, the federal district court.

The agreement between certain bondholders and the Government Development Bank (BGF, by its Spanish acronym) will also include the municipalities and other agencies, in their capacity as depositors, and would make it the first to be produced and completed under tittle VI of the PROMESA federal law.

Yesterday, Rosselló Nevares applauded the restructuring support agreement (RSA) —which final terms were reached last Saturday, according to sources of El Nuevo Día— saying that this goes in the best interests of bondholders and depositors, among them, municipalities and corporations.

“This agreement is an example that the Government is regaining the credibility it had lost in recent years. We feel satisfied with this agreement that will work toward the best interest of the people of Puerto Rico,” Rosselló said during a press conference in the gardens of La Fortaleza.

Rosselló delivered his statements together with the executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA), Gerardo Portela; the president of the Government Development Bank (BGF), Christian Sobrino, and representatives for some of the bondholders, among them, leaders from the cooperatives’ sector, and businessman and president of the Patio Bondholders organization, Rafael Rojo.

The RSA attained during the weekend would be the second voluntary agreement with Puerto Rico creditors. The first was with the Puerto Rico Electric Power Authority (PREPA), but this —despite its modification this year— was approved before PROMESA came into effect. 

The bondholders

“It has been arduous work, of great responsibility. However, I must also stress the fact that it was the work of a team, one that sought genuine and viable alternatives, and the openness at the table must also be noted; the work has been transparent,” said the executive president of the Camuy Cooperative and spokesperson for the Alianza Cooperative, Michelle Franqui.

“While we are voluntarily accepting to take on significant losses, of up to 45% of the savings of Puerto Ricans who worked, it’s because before bondholders, we are Puerto Ricans, and we recognize the state of circumstances in Puerto Rico,” said Rojo.

Meanwhile,  Bradley Meyer, an executive with Ducera Partners, a firm that acted as financial adviser for the organized hedge funds group (Ad Hoc-BGF), said in a written statement that the negotiations were held in a “responsible, transparent, and collaborative” manner.

“The Ad Hoc group (BGF) is keenly awaiting for the final documentation and the quick implementation of the RSA under Tittle VI of PROMESA,” the executive added.

To bondholders, the agreement reached by Ducera and Davis Polk & Wardwell is more beneficial than the initial agreement struck in May 2016. At the time, when the BGF was unable to meet its obligations, the parties reached a preliminary agreement, accepting 47 cents to the dollar.

Under the new agreement, cuts to the principal will be offset more or less with interest rates and there will not be a moratorium on interests or principal payments, so bondholders will start collecting on their new claim as soon as the transaction is completed.

Product of bad practices

Although the Government and the creditors seemed to applaud having found common grounds, the terms of the transaction leave no party in victory.

“What (is considered) bad practices of the past, today we are trying to remedy in a way that does not so adversely affect the finances of local bondholders, foreign or external investment, and also maintain a balance with the municipalities and other holders in the bank,” said Sobrino in reference to the agreement which, in principle, managed almost half of the creditors’ endorsement.

Actually, the Government’s announcement is nothing more that the confirmation of losses by entities and individuals who trusted the former fiscal agent and loaned it money.

In the case of depositors —among them, municipalities, public corporations, the University of Puerto Rico— the agreement could be deemed as resembling “the ‘corralito’ (funds’ freeze) in Argentina.” This, because depositors will also have to accept the idea that they’ll not recover a good share of their savings or income, including in some cases municipal property taxes or Sales and Use Tax (IVU, by its Spanish acronym) paid by citizens.

“Even while this was a consensual agreement, we didn’t necessarily need to get to this level,” Sobrino said with a certain tone of surrender when stating that, through 70 years, the BGF was the institution that made possible a good portion of the Island’s investment in infrastructure.

A “fair” agreement

“It (the agreement) seems fair to us for bondholders but also for Puerto Rico,” Portela told El Nuevo Día.

According to Portela, the FAFAA, along with advisers Rothschild & Co., Bank of America, and Ankura Consulting —who act as advisers for the BGF—articulated a solution that caters to the particular needs of every type of bondholders.

“This innovating structure, gives the bondholder the flexibility to choose its exposure profile,” Portela explained.

But, the official held that, while municipalities will not receive the totality of their deposits with the bank, they may swap their savings for new bonds and sell them, if necessary.

“For municipalities, this could be favorable because the instrument could fetch a positive price in the secondary market,” Portela said.

In summary, the swap poses the most severe cuts for those needing immediate liquidity in the short-term.

This is because, despite the bigger cut to the principal, the bondholder will get higher yields than the bonds they currently hold.

Those willing to wait for longer to recover their principal will see a smaller cut on their principal, but also a lower interest rate.

In figures, there will be three series of bonds that will entail losses in principal of 45, 40, and 25 cents for every dollar, but with interest of 7.5%, 5.5%, and 3.5%, respectively.

If the agreement were analyzed based on an average cut to the principal, this would be of around 31 cents for every dollar.

The bonds would mature in 23 years.

On the other hand, as opposed to the five year moratorium intended with constitutionally guaranteed bondholders, the BGF bondholders would start collecting the moment the transaction is completed.

The bill and the OB

In order to issue the new bonds but, mostly, to segment the repayment source, two trusts will have to be created.

That, Portela said, will require a bill of law which is currently in the works.


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