Board´s Executive Director Natalie Jaresko. (GFR Media)

Despite Governor Wanda Vázquez Garced's rejection, the Financial Oversight Board is moving swiftly to file the amended plan of adjustment (POA) for the central government on or before February 28 with the expectation to open a path out of bankruptcy this year.

This was confirmed yesterday by the Board´s Executive Director Natalie Jaresko who said that the new debt Restructuring Support Agreement for the General Obligations and Public Buildings Authority (RSA-GOs/PBA) represents more savings for the government while protecting public services and pensions.

At a press conference - and while the Fiscal Agency and Financial Advisory Authority (FAFAA) reiterated the Vázquez Garced administration opposition - Jaresko argued that the new agreement with central government bondholders is better than the risk to continue challenging part of the constitutional debt.

Similarly, according to Jaresko, if Puerto Rico leaves the bankruptcy process behind, the Treasury will benefit, but also the island´s economy and businesses since today they pay more or cannot access capital because they operate having a bankrupt government as their backdrop.

FOMB and Vázquez Garced: opposing sides

Jaresko acknowledged that to implement the central government's adjustment plan, it will be necessary to file a bill with the Legislative Assembly. But she then insisted that the agreement is the right way out of bankruptcy.

Jaresko said she hopes the governor and the Legislature “will review and understand the real value these agreements” bring to Puerto Rico.

In this sense, but without hinting at what they are discussing, Jaresko indicated that she holds conversations with the governor regularly. She revealed she recently met with House of Representatives President Carlos "Johnny" Méndez and will do the same with Senate President Thomas Rivera Schatz to discuss the deal reached.

FAFAA issued a written statement indicating that while the agreement the Board announced Sunday includes a substantial public debt (General Obligations) reduction, it also includes more legal protections and guarantees that bondholders would have over the next 20 years. The agency added that statutory liens on certain items, the issuance of new subordinated Cofina bonds and new reserve funds to ensure repayment of the restructured debt are included in those guarantees.

For FAFAA, as part of the process of drawing up this new agreement, the Board has refused to improve the situation of pensioners and added that given those reasons, “the government of Puerto Rico has decided not to support the new agreement, in its current terms.”

Vázquez Garced's opposition to RSA-GOs/PBA would be the third disagreement between the governor- now a candidate for governor - and the fiscal entity.

Last week, Vázquez Garced asked for a review of the Restructuring Support Agreement (RSA) for the Puerto Rico Electric Power Authority (PREPA), and the legislative leadership assured that it will not give way to any deal that would lead to a rate increase. Over the weekend, the governor also confronted the Board over emergency funds following last month's earthquakes.

Support from the Mediation Team

Jaresko stressed that the PROMESA Title III process has "limited" job creation in the private sector and keeps the government without access to the capital market.

Yesterday, even the government's opposition seemed inconsistent, an amended report filed by the Title III Mediation Team – appointed by Judge Laura Taylor Swain- supported the agreement.

According to the Mediation Team report, exiting bankruptcy before the end of 2020 - is “in the best interest of all parties,” and that includes the people of Puerto Rico, the government, the Board, all creditors and, if possible, the Employees Retirement System (ERS). Since the report supports the Board´s schedule, the federal court could approve the plan in a confirmation hearing set for October.

On Sunday, the Board announced that it had reached a final agreement (RSA-GOs/PBA) with the Lawful Constitutional Debt Coalition (CDL), the "Go Group", the Group of Constitutional Debtholders, QTCB and Fir Tree Capital to restructure some $18.757 billion in GOs and PBA bonds.

According to the Board´s documents, the government will cut the principal owed on GOs and PBA bonds to about $14.478 billion.

Jaresko sought to justify the agreement by focusing on three particular points. First, a reduction from 30 to 20 years to pay the debt. Those 10 years, according to the Jaresko, would save the Treasury some $5 billion.

The second point she highlighted is that the interest rate will be around 5 percent, while current bonds are close to 8 percent. And the third element she remarked is that the agreement would allow the government to reduce by 64 the amount separated for debt payment, from some $4.2 billion to about $1.5 billion.

The pact was supported by most of the Board members, however, bankruptcy expert David Skeel said he voted against it because it had many "loose ends".

They will insist on invalidating POBs

The second piece of the Board's adjustment plan, according to Jaresko, rests on invalidating some $3 billion in Pension Obligation Bonds (POBs), issued by the ERS, and to reduce bonds payable on income subject to the "clawback" clause, such as Highway & Transportation Authority (HTA) and Convention District Authority (CDA) bonds, which total another $16 billion.

GO and PBA bondholders (including bonds previously identified as void by the Board) would receive 72 cents on the dollar, while their counterparts in the HTA and CDA, as well as the general unsecured claims represented by the Unsecured Creditors Committee (UCC), would receive, in the aggregate, about three cents of every dollar they lent to the government or billed for services and goods to the Treasury.

From opponents to allies

In addition to achieving a major cut in central government debt payments, the Board celebrated the support from at least four credit and saving unions in Puerto Rico, and especially that of over thirty investment funds, including Aurelius Capital Management, a firm that questioned the Board's legitimacy to the point of bringing its litigation to the U.S. Supreme Court. GOs/PBA investment funds, such as Autonomy Capital, FCO Advisors and Monarch Alternative Capital, among others. that just three years ago alleged that COFINA bonds were illegitimate also support the new RSA.

Broadly speaking, in the RSA-GOs/PBA, bondholders agree to swap their claims against the central government if they have three guarantees: that the Board would drop the litigation seeking to invalidate some $6 billion in GOs; that they receive some $3.809 billion in cash, including $400 million in attorneys' and advisors' fees; and that they receive, in equal shares, two types of bonds: GOs and subordinated COFINA bonds.

Pension cuts will not change

Although Jaresko stressed that cuts to bondholders would be greater than those negotiated last September, she made it clear that there is no room to modify other agreements such as the one signed with the Official Committee of Retirees (COR, Spanish acronym).

Jaresko recalled that the proposed 8.5 percent cut will only affect one out of every four pensioners and that it will apply to pensions over $1,200 a month. Social Security income was excluded from that figure.

According to Jaresko, achieving a greater adjustment among bondholders will make it possible to establish the Pension Payment Trust, a restricted item within the General Fund that would ensure the payment of that obligation.

Likewise, Jaresko said, the deal makes it more feasible to honor the agreement with public employees to return about $1.3 billion in savings under the System 2000.

For the government, however, this is not enough.

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