The adjustment plan unveiled yesterday, the Board insisted, is not final. (GFR Media)

"This is the beginning of the end of Puerto Rico’s bankruptcy process."

With those words, Oversight Board chairman José B. Carrión defined yesterday what the central government's Plan of Adjustment represents. This document, in the opinion of the fiscal entity and if approved by Judge Laura Taylor Swain, would serve as a pillar for a new Puerto Rico, both in budgetary and economic matters.

Yesterday, after three years operating in Puerto Rico and under the umbrella of PROMESA, the Board seemed to have gone over the order of payments established by the Constitution and the organic law of the Office of Management and Budget for almost seven decades. And they did this by preserving almost intact  (92 percent) the pensions of 167,000 retirees, while creating a pension reserve trust to ensure their future; ensuring the payment of all public services as well as restoring retirement savings of certain public employees -that the government took-, while guaranteeing for five years, the contribution to workers health insurance and benefits under collective agreements.

In this rebalancing of payment priorities, however, the Board left for the bondholders of the Convention District Authority (CDA) and the Administration of Retirement Systems (ERS) virtually nothing and just a few cents for government suppliers and contractors who have not received a cent for years.

On the other hand and although in other judicial processes they were classified as unsecured creditors, the Board granted preferences to General Obligations (GOs) bondholders before 2012, granting them almost 64 cents on the dollar.

Immediate reaction

Governor Wanda Vázquez Garced endorsed the Board´s plan to adjust the island´s debt.

“The agreement between the COR and the FOMB is the culmination of two years of hard work and intense negotiations to protect as many retirees as possible from the cuts proposed by the FOMB, improve the treatment to the retirees that will be impacted, and give certainty to present and future pension payments,” said Friday COR Chairman, and former judge, Miguel J. Fabre Ramírez in a press release.

Similarly, Moody´s Investors Services, one of the leading credit-rating companies, described the document as "an important milestone" in Puerto Rico's debt restructuring process.

However, almost instantly, while the document was just beginning to arrive at the offices of lawyers and analysts in Puerto Rico and New York, sources anticipated that the solution proposed by the Board already had opponents, both among bondholders who would have given their initial endorsement to the agreement and other unsecured creditors.

 “Currently, pensioners’ losses are far less than bond creditors, as expected. The road to approval is long, and could result in changes to the current terms, similar to what played out in Detroit,” said Moody’s VP-Senior Analyst Genevieve Nolan in written statements.

The plan

Judge Swain has three documents before her since yesterday. The first is the 173-page central government Adjustment Plan (POA). The second document is the disclosure statement that the Board is required to share with all U.S. territory creditors, as provided by the Bankruptcy Code. The purpose of this disclosure statement is to provide enough information for creditors to decide whether or not to accept the proposed plan.

The third document was a petition to include the Public Buildings Authority (PBA) under PROMESA Title III.

"That request is only to restructure PBA bonds," Omar Marrero, executive director of the Fiscal Agency and Financial Advisory Authority (FAFAA), explained to this newspaper.

The Board filed the Title III petition for PBA yesterday as part of the Plan of Adjustment and this after Vázquez Garced sent a letter to the fiscal agency requesting such protection.

The central government's POA is the document that would modify debt obligations of the largest bankruptcy the U.S. municipal market has ever seen. The Board unanimously approved the adjustment plan during a meeting Thursday night and they filed this plan just two weeks before the U.S. Supreme Court is set to examine whether the appointments of Board members are unconstitutional or not.

The adjustment plan unveiled yesterday, the Board insisted, is not final. The document requires court approval and a voting process involving 40 classes of creditors, which could happen early in 2020.

What does the Board propose?

"Three years after Congress passed PROMESA and two years after the most severe Hurricane in more than 100 years hit Puerto Rico, after more than a decade of economic decline and fiscal disarray, after tens of thousands of Puerto Ricans left their island to find prosperity elsewhere, we have now reached a turning point," Carrión told participants in the public meeting.

Plan of Adjustment  proposes “to restructure $35 billion of debt and other claims againstthe Commonwealth of Puerto Rico, the Public Building Authority (PBA), and the Employee Retirement System (ERS); and more than $50 billion of pension liabilities.”

The $35 billion is broken down into four major items: $13.7 billion in GOs bonds; $4.6 billion in PBA bonds; $10 billion in obligations subject to clawback; and $7.3 billion in other unsecured obligations such as the government's debt with suppliers or court rulings.

As El Nuevo Día anticipated, the Board has created what could be called two large payment groups: one for current and future pensions and the other to pay bondholders and other creditors.

Pensions

The Board's proposal contemplates paying pensions under the "PayGo" system, which requires almost $2.6 billion each year. According to the Board, the court would not agree to pay the full amount owed to a group of creditors while others lose what they invested and therefore, the Board and COR agreed to modify certain pensions.

Of the total 167,000 retirees, 60 percent - or six out of 10 - will see no cuts in their pensions. Those while monthly pensions of more than $1,200 would see a cut of up to 8.5 percent above the minimum compensation. Preliminarily and in general terms, the Board believes that retirees with the highest pensions within the ERS could see an adjustment of up to $50 monthly. Social Security income will no longer be considered in the adjustment, as previously proposed by the Board.

According to the Board, projections in the fiscal plan suggest that in certain years, the government will have a budget deficit. To prevent this from affecting pensions, a pensions reserve fund will be created and would receive an injection of $175 from funds available. If the government manages its budget well, part of the surpluses achieved will go to the trust.

Public Employees

If the court approves the Board's proposal, another $1.3 billion from the General Fund will be transferred to active public employees retirement accounts listed under Sistema 2000.

According to Board executive Ana Matosantos, the adjustment plan intends to correct what has affected public employees who contributed to their retirement plan for years, and their money was used to pay current pensions.

The agreement reached with United Public Servants (SPUPR), Matosantos added, also give a signing bonus to those workers if the plan is approved.

"We expect that teachers reconsider," Matosantos said, indicating that those public servants´ vote did not ensure any protection for their pensions nor will they have an economic incentive for supporting the plan.

Bondholders

According to director José R. González, the adjustment plan is designed so that Puerto Rico can comply with debt obligations in the long term and avoid repeating excesses that led to bankruptcy.

González stressed that if the adjustment plan is approved, the government will see a reduction in payments to bondholders.

As if it were a relief to mortgage holders, cutting the debt principal would reduce bonds payments from about $4.2 billion - or 29 percent of revenues - to $1.5 billion per year, or the equivalent of 9 percent of revenues.

But that reduced payment will depend on reaching the following cuts: in the case of GOs the Board considers valid, the cut will be 36 percent and those of the PBA would see a 28 percent cut. Meanwhile, Pension Obligations (POBs) bondholders issued by the ERS would see an 87 percent cut.

The proposal for GOs and PBA bonds that the Board recognizes as valid is based on the agreement reached with the Lawful Constitutional Debt Coalition (LCDC).

However, given that the Board seeks to annul the GOs bonds issued between 2012 and 2014 and certain PBA bonds, the entity offers these creditors an agreement to avoid a legal battle.

If challenged GO bondholders reach an agreement, they would see a cut between 55 percent and 65 percent on every dollar they lent to the government, while PBA bondholders would see a 42 percent cut. If these creditors accept the offer, they would be paid from a litigation fund included the adjustment plan. If they prevail in court, they would be paid according to their counterpart in the CDL.

The Government

After the filing of the adjustment plan, the government representative to the Board, Elí Díaz Atienza, made it clear that the government will do its part to make the document a reality.

"There are great benefits in the cut to the debt and in restoring benefits,” said Díaz Atienza adding that the intention of the government is to try to mitigate, through the budget, the adverse effect of the pension cuts.

Díaz Atienza said the governor is having conversations with all sectors affected by the adjustment plan to learn about the impact and take the necessary measures. For Marrero, the adjustment plan is an opportunity for the government to regain fiscal independence and to leave the Board as soon as possible.

By mid-October, the Board´s Executive Director Natalie Jaresko will begin a day of meetings with different groups to discuss the adjustment plan, starting in Aibonito and Barranquitas.


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