Puerto Rico government, creditors start discussions on debt restructuring
By : LUIS J. VALENTÍN & ROSARIO FAJARDO
Edition: July 16, 2015 | Volume: 43 | No: 27
In what is certain to be a long process, the Puerto Rico government officially began this week discussions with creditors to renegotiate some, or perhaps all, of the island's $72.2 billion debt load, after holding a presentation Monday in New York.
The meeting with creditors was kicked off by Jim Millstein, a former U.S. Treasury chief restructuring officer whose Millstein & Co. has been retained by the Alejandro García Padilla administration as lead restructuring adviser. Government Development Bank (GDB) President Melba Acosta presented a bleak outlook of Puerto Rico's prospects amid the significant fiscal and economic challenges that the island has been facing for nearly a decade.
Former International Monetary Fund (IMF) officials Anne Krueger and Andrew Wolfe also participated in the event, with Krueger delivering a presentation about their recently published report on Puerto Rico's fiscal and economic condition.
"We aren't in a position today to talk about the modification of any particular issuer's debt. That's going to be something that evolves out of the economic recovery and fiscal adjustment plan," Millstein said, adding that an "issuer-by-issuer approach" would be followed moving forward with negotiations.
Both Millstein and Acosta urged for a process in which Puerto Rico and its creditors have a "dialogue" at the negotiating table for the benefit of all stakeholders, without going to court.
"If this turns out to be a donnybrook [meaning a heated or disorderly process], with various creditors litigating with one another as well as with the commonwealth and the various issuers, it would have a negative effect on the economy, and therefore…on tax collections, which at the end of the day are the source of bond repayment," Millstein said.
The GDB president added that once the government finalizes a five-year fiscal stability and economic recovery plan, "we expect to sit down to negotiate a consensual adjustment of that part of the debt necessary to ensure that we have adequate time and resources to turn Puerto Rico's economy around so that we can honor our financial commitments over the long term."
Negotiations with creditors could be contentious
While government officials and advisers continue their strong push to stay away from a lengthy and litigious process, this could prove very difficult to achieve.
In the days leading up to Monday's meeting, there was a flurry of activity among creditors seeking strategic alliances regarding their positions on the renegotiations, according to CARIBBEAN BUSINESS sources.
"This is part of the process. Both sides are working on their various strategies and lining up their chess pieces, so to speak," a source said.
Early last week, Acosta said: "Bondholders are grouping themselves by issuer. But the idea isn't having 20 different negotiations, but rather negotiate with a general group with representation of each issuer's [creditor] group."
One of the hardliners allegedly seeking allies and stronger leverage in the discussions is U.S. fund manager OppenheimerFunds, which has a big $4.5 billion exposure in Puerto Rico's debt, sources added. The company has come out strongly against a renegotiation and any breach of payment. Last week, OppenheimerFunds said the commonwealth does have the ability to pay its debt, contrary to what the governor announced in recent weeks, calling his statements "political cover...for unpopular spending cuts."
"While we note an apparent shift in the administration's willingness to pay, for most of its debt Puerto Rico doesn't have a legal framework that would enable it to alter its debt-service obligations. The legal frameworks that do exist—such as those related to [general obligations] GOs and [Sales Tax Financing Corp.] Cofinas, the Rochester complex's largest individual holdings—favor the bondholders," the company said in a statement last week.
"Our team's commitment to protecting the interests of our shareholders—as we did in challenging the constitutionality of the [Puerto Rico Public Corporation Debt Compliance & Recovery Act]—is unwavering. Our public statement from June 30 affirmed this commitment; in part, it read: "We expect Puerto Rico to act within the tenets of the law, including the Commonwealth's Constitution, and are ready to defend the previously agreed to terms in each and every bond indenture," OppenheimerFunds added.
Moreover, the Deal reported that some creditors are hiring their own advisers, such as Davis Polk & Wardwell and Quinn Emanuel Urquhart & Sullivan, as legal counsels.
On the other hand, government officials recently warned about publicity campaigns against Puerto Rico as it seeks to renegotiate its debt. "For $250 million [Doral Bank] implemented an incredible campaign against Puerto Rico, imagine for $72 billion. The campaigns that loom won't be easy," La Fortaleza Chief of Staff Víctor Suárez said.
Long-term fiscal & economic plan
As for when the government will decide which debt to renegotiate, both Millstein and Acosta said the long-term fiscal stability & economic recovery plan would have to be finalized first. The plan is one of the key duties of the Economic Recovery Working Group—a task force created by García Padilla and also charged with beginning discussions over debt renegotiation and naming a financial control board, among others. The group is expected to deliver its plan before Aug. 31, after which it will have to be approved by both legislative chambers.
Moreover, Millstein said an "entity-by-entity basis" approach to be used during the looming debt-renegotiation process would be based on the five-year plan. "We will look at each of the entities, and determine if a debt adjustment is necessary. And that's something that will grow out of the economic recovery and fiscal adjustment plan," he added.
For instance, while he mentioned the ongoing restructuring negotiations between the Puerto Rico Electric Power Authority and its creditors, from which they expect "a successful consensual outcome," Millstein added that one issuer that may avoid a renegotiation process could be the Puerto Rico Aqueduct & Sewer Authority (Prasa).
"We think Prasa should be able to meet its existing financial commitments without modifications," he said, although assuming the utility's cash-flow projections hold and it increases water rates, "as they are currently forecasted to do." This would allow Prasa to access capital markets on the basis of such revenue stream, Millstein explained.
http://www.caribbeanbusinesspr.com/prnt_ed/puerto-rico-government-creditors-start-discussions-on-debt-restructuring-11424.html
In what is certain to be a long process, the Puerto Rico government officially began this week discussions with creditors to renegotiate some, or perhaps all, of the island's $72.2 billion debt load, after holding a presentation Monday in New York.
The meeting with creditors was kicked off by Jim Millstein, a former U.S. Treasury chief restructuring officer whose Millstein & Co. has been retained by the Alejandro García Padilla administration as lead restructuring adviser. Government Development Bank (GDB) President Melba Acosta presented a bleak outlook of Puerto Rico's prospects amid the significant fiscal and economic challenges that the island has been facing for nearly a decade.
Former International Monetary Fund (IMF) officials Anne Krueger and Andrew Wolfe also participated in the event, with Krueger delivering a presentation about their recently published report on Puerto Rico's fiscal and economic condition.
"We aren't in a position today to talk about the modification of any particular issuer's debt. That's going to be something that evolves out of the economic recovery and fiscal adjustment plan," Millstein said, adding that an "issuer-by-issuer approach" would be followed moving forward with negotiations.
Both Millstein and Acosta urged for a process in which Puerto Rico and its creditors have a "dialogue" at the negotiating table for the benefit of all stakeholders, without going to court.
"If this turns out to be a donnybrook [meaning a heated or disorderly process], with various creditors litigating with one another as well as with the commonwealth and the various issuers, it would have a negative effect on the economy, and therefore…on tax collections, which at the end of the day are the source of bond repayment," Millstein said.
The GDB president added that once the government finalizes a five-year fiscal stability and economic recovery plan, "we expect to sit down to negotiate a consensual adjustment of that part of the debt necessary to ensure that we have adequate time and resources to turn Puerto Rico's economy around so that we can honor our financial commitments over the long term."
Negotiations with creditors could be contentious
While government officials and advisers continue their strong push to stay away from a lengthy and litigious process, this could prove very difficult to achieve.
In the days leading up to Monday's meeting, there was a flurry of activity among creditors seeking strategic alliances regarding their positions on the renegotiations, according to CARIBBEAN BUSINESS sources.
"This is part of the process. Both sides are working on their various strategies and lining up their chess pieces, so to speak," a source said.
Early last week, Acosta said: "Bondholders are grouping themselves by issuer. But the idea isn't having 20 different negotiations, but rather negotiate with a general group with representation of each issuer's [creditor] group."
One of the hardliners allegedly seeking allies and stronger leverage in the discussions is U.S. fund manager OppenheimerFunds, which has a big $4.5 billion exposure in Puerto Rico's debt, sources added. The company has come out strongly against a renegotiation and any breach of payment. Last week, OppenheimerFunds said the commonwealth does have the ability to pay its debt, contrary to what the governor announced in recent weeks, calling his statements "political cover...for unpopular spending cuts."
"While we note an apparent shift in the administration's willingness to pay, for most of its debt Puerto Rico doesn't have a legal framework that would enable it to alter its debt-service obligations. The legal frameworks that do exist—such as those related to [general obligations] GOs and [Sales Tax Financing Corp.] Cofinas, the Rochester complex's largest individual holdings—favor the bondholders," the company said in a statement last week.
"Our team's commitment to protecting the interests of our shareholders—as we did in challenging the constitutionality of the [Puerto Rico Public Corporation Debt Compliance & Recovery Act]—is unwavering. Our public statement from June 30 affirmed this commitment; in part, it read: "We expect Puerto Rico to act within the tenets of the law, including the Commonwealth's Constitution, and are ready to defend the previously agreed to terms in each and every bond indenture," OppenheimerFunds added.
Moreover, the Deal reported that some creditors are hiring their own advisers, such as Davis Polk & Wardwell and Quinn Emanuel Urquhart & Sullivan, as legal counsels.
On the other hand, government officials recently warned about publicity campaigns against Puerto Rico as it seeks to renegotiate its debt. "For $250 million [Doral Bank] implemented an incredible campaign against Puerto Rico, imagine for $72 billion. The campaigns that loom won't be easy," La Fortaleza Chief of Staff Víctor Suárez said.
Long-term fiscal & economic plan
As for when the government will decide which debt to renegotiate, both Millstein and Acosta said the long-term fiscal stability & economic recovery plan would have to be finalized first. The plan is one of the key duties of the Economic Recovery Working Group—a task force created by García Padilla and also charged with beginning discussions over debt renegotiation and naming a financial control board, among others. The group is expected to deliver its plan before Aug. 31, after which it will have to be approved by both legislative chambers.
Moreover, Millstein said an "entity-by-entity basis" approach to be used during the looming debt-renegotiation process would be based on the five-year plan. "We will look at each of the entities, and determine if a debt adjustment is necessary. And that's something that will grow out of the economic recovery and fiscal adjustment plan," he added.
For instance, while he mentioned the ongoing restructuring negotiations between the Puerto Rico Electric Power Authority and its creditors, from which they expect "a successful consensual outcome," Millstein added that one issuer that may avoid a renegotiation process could be the Puerto Rico Aqueduct & Sewer Authority (Prasa).
"We think Prasa should be able to meet its existing financial commitments without modifications," he said, although assuming the utility's cash-flow projections hold and it increases water rates, "as they are currently forecasted to do." This would allow Prasa to access capital markets on the basis of such revenue stream, Millstein explained.
http://www.caribbeanbusinesspr.com/prnt_ed/puerto-rico-government-creditors-start-discussions-on-debt-restructuring-11424.html
