Debt
PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act, was signed into law by President Barack Obama in June 2016 to allow Puerto Rico to restructure its debt and achieve fiscal responsibility.
PROMESA established the Financial Oversight and Management Board for Puerto Rico to assist the Government of Puerto Rico and its instrumentalities in managing their finances.
In 2016, Puerto Rico faced an unsustainable burden of more than $72 billion in debt and more than $55 billion in unfunded pension liabilities with no legal way to restructure the liabilities or reduce debt payments. Puerto Rico Governor Alejandro Javier García Padilla had declared the debt could not be paid.
One of PROMESA’s stated goals is for Puerto Rico to regain “adequate access to short-term and long-term credit markets at reasonable interest rates to meet the borrowing needs of the territorial government.” To achieve access to capital markets, Puerto Rico needs to restructure its debt to sustainable levels. PROMEA provides a mechanism for the Oversight Board to negotiate with creditors on behalf of Puerto Rico to adjust the debt.
The debt was issued by more than 90 public entities, ranging from the central government itself and the public employee pension trusts to the Puerto Rico Electric Power Authority and the University of Puerto Rico. The size of these claims ranges from less than $40 million to more than $18 billion.
Puerto Rico’s largest pension system was about 1% funded, whereas New Jersey and Illinois, two of the states with the lowest funded ratios, are in the 30% range. That is why pensioners are considered unsecured creditors. Had the Commonwealth not started paying for pensions out of the general operating budget, pensioners would have stopped receiving pension checks by now.
Every year, the central government alone made on average $2.7 billion in debt payments to creditors, reaching a high of $4.2 billion.
Since 2016, the Puerto Rico Government has not made any debt payments because the U.S. District Court for the District of Puerto Rico, which has jurisdiction over PROMESA and the debt restructuring process, implemented a moratorium on debt payments while the Oversight Board and the Government are working on reaching agreements with creditors to reduce the debt to sustainable levels.
The Creditors
More than 165,000 creditors have filed proofs of claim. Creditors range from individual Puerto Ricans to mutual funds, from retirees eligible to receive a government pension to global hedge funds.
Comprehensive Review of the Debt
In August 2018, the Oversight Board presented a more than 600-page investigative report about the debt and the factors that contributed to Puerto Rico’s fiscal crisis, the result of an independent investigation by the Kobre & Kim LLC. (link)
- The report investigates Puerto Rico’s debt going back to 2006. It investigates how much debt was issued and the use of the proceeds. It digs deep into debt issuance and selling practices; the range of debt instruments; how Puerto Rico’s debt practices compare to those of states and large municipal jurisdictions; and how it contributed to Puerto Rico’s structural budget deficit.
- The independent investigator reviewed approximately 260,800 documents consisting of approximately 2.7 million pages and interviewed 120 witnesses, including former and current senior government officers, underwriters, rating agencies, and outside professionals and advisors.
Mechanisms to Adjust the Debt
Title III of PROMESA follows roughly the U.S. bankruptcy law. The Oversight Board negotiates plans of adjustments approved by the U.S. District Court for the District of Puerto Rico, applied to all claims including non-consenting creditors.
- PROMESA requires that a Plan of Adjustment must be feasible and in the best interest of all creditors. That means it provides creditors, including bondholders and retirees, with what they can reasonably expect under the circumstances.
- The debt payments need to be feasible for Puerto Rico. That means the Government’s income and expense projections that are the basis for how the Oversight Board determined the payments to creditors must be realistic and attainable.
Title VI of PROMESA is an out of court action that requires that two-thirds of each creditor class accepts the terms.
PROMESA does not provide the Oversight Board with the ability to “erase” Puerto Rico’s debt. PROMESA gave the Oversight Board the mandate and the authority to renegotiate Puerto Rico’s debt and reduce debt payments to a sustainable level. The Oversight Board renegotiates Puerto Rico’s debt with one overarching goal: to reach a consensual agreement with the largest possible number of stakeholders and in the best interest of Puerto Rico.
Puerto Rico's Debt and the Restructuring Process
Complete Debt Restructurings
- Reduced $18 billion of COFINA debt by $6 billion, to $12 billion.
- Reduced debt service payments by 32%, saving the people of Puerto Rico approximately $17.5 billion that will now be available to support the financial needs of the central government.
- Reduced about $5 billion of debt by more than $2 billion, to about $3 billion, reducing the face value of claims by 45%.
- The debt payments are secured by GDB cash flow from certain legacy assets without recourse to the Puerto Rico Government.
- Effect of restructuring cushions municipalities by offsetting the loans they owed to the GDB by the full amount of their deposits at GDB.
- Lowers PRASA’s debt service payments on the U.S. Government program loans by about $380 million over the next 10 years.
- Eliminates approximately $1 billion in guaranty claims against the Puerto Rico Government.
- Provides PRASA with access to $400 million in new federal funding through various clean water programs over the next five years to support PRASA’s ongoing effort to improve water quality and safety for the people of Puerto Rico.
Debt Restructurings in Progress
Commonwealth
In September 2019, the Oversight Board filed with the U.S. District Court its proposed Plan of Adjustment to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, the Public Building Authority (PBA), and the Employee Retirement System (ERS); and more than $50 billion of pension liabilities. The Oversight Board amended the Plan of Adjustment in February 2020.
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Reduces the Puerto Rico Government’s debt and other claims by almost 70%, from $35 to about $11 billion.
- Reduces total debt payments (incl. restructured COFINA debt payments) by 56%, from over $90 billion to less than $40 billion.
- Ensures sustainable and affordable annual debt service of less than 9% of government own-sourced revenues by reducing the maximum annual debt service by 64%, from $4.2 billion to $1.5 billion.
- Reduces public employee’s pensions by 8.5% for pensions above $1,200 per month.
- Restores payments to retirees who lost their employee contributions in the System 2000 government defined contribution plan.
- Keeps collective bargaining agreements for public employees in effect for five years, reflecting labor terms in the Certified Fiscal Plan for Puerto Rico.
In March 2020, the Oversight Board asked the U.S. District Court to put the confirmation process of the Plan of Adjustment on hold to allow for a comprehensive assessment of the effect of the COVID-19 pandemic on Puerto Rico and its economy.
In October 2020, the Oversight Board resumed debt adjustment negotiations with creditors, proposing an amended Plan of Adjustment that reflect the severe effect of the pandemic on Puerto Rico’s long-term economic outlook.
- Reduces the Puerto Rico Government’s debt and other claims by 86%, from $35 to about $5 billion.
- Reduces total debt payments (incl. restructured COFINA debt payments) by 67%, from over $90 billion to about $30 billion.
- New $1 billion Contingent Value Instrument. That means creditors would get up to $1 billion more in total should Puerto Rico’s economy perform better than the Certified Fiscal Plan’s projection based on sales tax revenue
- Increased threshold for the 8.5% reduction in public pensions to those above $1,500 per month, compared to a $1,200 threshold in the Plan of Adjustment filed in February.
PREPA
In May 2019, the Oversight Board, the Government of Puerto Rico, and the Puerto Rico Electric Power Authority reached a Restructuring Support Agreement (RSA) with bondholders and bond insurer Assured Guaranty Corp. to adjust PREPA’s debt.
- Reduces PREPA’s $10 billion in debt by more than 30%, to about $7 billion
- Saves Puerto Rico residents who depend on PREPA for electricity about $3 billion in debt service payments over the next 10 years
- Fixed transition charge provides greater certainty for PREPA, residents and businesses by protecting them from rising rates if electricity demands declines.
In March 2020, the Oversight Board asked the U.S. District Court to put the confirmation process for the RSA on hold to allow a comprehensive assessment of the effect of the COVID-19 pandemic on Puerto Rico and its economy.
The Oversight Board has resumed debt adjustment negotiations with creditors.