Puerto Rico’s Debt Restructuring Process

The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

The Puerto Rico Oversight, Management, and Economic Stability Act of 2016 (PROMESA) enables Puerto Rico to restructure its debt and achieve fiscal responsibility.

When PROMESA was enacted, Puerto Rico faced an unsustainable burden of more than $70 billion in debt and more than $55 billion in unfunded pension liabilities with no legal path to restructure its liabilities and stabilize its finances. Puerto Rico had lost access to capital markets.

The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

PROMESA provides mechanisms for restructuring this debt:

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  • PROMESA’s Title III follows roughly the U.S. bankruptcy law. Puerto Rico’s creditors are separated into groups based on the different legal rights of their claims, such as the kind of bonds they own or other claims, such as pensions. The Oversight Board negotiates plans of adjustments to lower Puerto Rico’s debt to sustainable levels, subject to a confirmation process by the federal court. Some creditor groups might reject the plan, but once the court confirms the plan it becomes binding on all groups, even those who rejected it.
  • PROMESA’s Title VI requires that all groups of creditors accept the plan before the court can confirm it, and is primarily aimed at financial debt, not pensions or other types of claims.
The Oversight Board represents Puerto Rico in the debt restructuring process and negotiates with one overarching goal: to reach consensual agreements in the best interest of all stakeholders that will end Puerto Rico’s bankruptcy under PROMESA.

The Oversight Board, together with the Government of Puerto Rico, so far restructured about 80% of Puerto Rico’s outstanding debt, lowering total liabilities from more than $70 billion to a sustainable $37 billion, which will save Puerto Rico more than $50 billion in debt service payments. The debt restructuring process continues.

The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

  1. Claims include ~$2b PRIFA and ~$450m CCDA and MBA
  2. Includes GO/PBA claims of ~$19b, estimated GUCs of $2.75b, and ERS claims of ~$3b
  3. Still under negotiation
  4. General Obligation claims excluding CVI
  5. Represents pro forma debt service, including COFINA, as a percent of FY21 own-source revenues. Excludes HTA debt service in both Pre-PROMESA and Post-Plan for purposes of comparability. HTA debt to be issued and structured pursuant to HTA Plan of Adjustment and received on the basis of non debt policy revenues Post-Plan refers to FY23 forecasted percent of debt policy revenues

Completed Debt Restructurings

On January 18, 2022, Judge Laura Taylor Swain of the U.S. District Court for the District of Puerto Rico confirmed the Plan of Adjustment for the Commonwealth of Puerto Rico to restructure $33 billion of liabilities against the Commonwealth of Puerto Rico, the Public Building Authority (PBA), and the Employee Retirement System (ERS); and more than $55 billion of pension liabilities to sustainable $7 billion. The Plan of Adjustment became effective on March 15, 2022, concluding a major chapter in the largest public sector bankruptcy in U.S. history.

The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

The Plan of Adjustment for the Commonwealth:
  • Reduces the Commonwealth’s total debt service payments (including COFINA senior bonds) by more than 60%, from $90.4 billion to $34.1 billion, saving Puerto Rico more than $50 billion in debt service payments.
  • Reduces the burden of debt payments from 25 cents of every dollar in taxes and fees collected by the government before PROMESA to less than 7 cents
  • Protects and preserves pensions through the establishment of a pension reserve trust that is forecasted to receive $10 billion in contributions over 10 years
  • Enrolls teachers and judges in Social Security for first time, only remaining civil servants without access
  • Restores more than $1.2 bn of 50,000 employee contributions to Sistema 2000 notional pensions
  • Provides AFSCME/SPU union members with signing bonuses and increased healthcare
  • Settles hundreds of litigations otherwise costing tens of millions of dollars in legal fees
  • Provides payment in full for small government vendors with small claims and certain public employee claims
In February 2019, the U.S. District Court approved the Plan of Adjustment for the Puerto Rico Sales Tax Financing Corporation (COFINA), the first debt restructuring completed under PROMESA’s Title III.
  • 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.
  • In May 2017, the Puerto Rico Government and the GDB signed a Restructuring Support Agreement (RSA) with a significant portion of GDB creditors to restructure GDB’s debt under PROMESA’s Title IV. The RSA was amended in April 2018.
    • Reduced about $5 billion of debt by more than $2 billion, to about $3 billion, reducing the face value of claims by 45%.
    • Debt payments are secured by GDB cash flow from certain legacy assets without recourse to the Puerto Rico Government.
    • Effect of the restructuring cushions municipalities by offsetting the loans they owed to the GDB by the full amount of their deposits at GDB.
    In August 2019, the Puerto Rico Aqueduct and Sewer Authority (PRASA) and the Government of Puerto Rico reached an agreement with the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Agriculture (USDA) to a consensual modification of about $1 billion of outstanding loans under PROMESA’s Section 207.
  • 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.
  • The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    Debt restructurings in progress

    The Oversight Board continues in negotiations to complete the restructuration of HTA and PREPA. The PREPA and HTA restructurings are key factors in continuing to improve the economic activity on the Island and the Oversight Board is targeting for both to be completed in the near future.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    In May 2022, the Oversight Board filed with the U.S. District Court the proposed Plan of Adjustment to restructure about $6.4 billion of claims against the Puerto Rico Highway and Transportation Authority (HTA).
    • Cuts HTA’s outstanding debt by more than 80%, to $1.2 billion.
    • Saves Puerto Rico more than $3 billion in debt service payments.
    • Settles about $2.2 billion of outstanding loans held by the Debt Recovery Authority, the successor-in-interest following the Government Development Bank’s debt restructuring in 2018, which receives no consideration under the HTA plan but receives a Contingent Value Instrument (CVI) issued under the Commonwealth Plan of Adjustment confirmed by the U.S. District Court on January 18, 2022.
    • Reduces $265 million in unsecured claims to $25 million to be paid in cash.

    The Oversight Board, together with the Fiscal Agency and Financial Advisory Authority (AAFAF) and Puerto Rico Electric Power Authority (PREPA) had reached an agreement with certain bondholders in May 2019.

    The agreement would have cut PREPA’s debt by more than 32% and awarded Puerto Rico’s households and businesses significant protections, including preventing electricity bills from rising should electricity demand decline in coming years.

    However, the implementation of the agreement through a Plan of Adjustment for PREPA required legislation. The Puerto Rico Legislature unfortunately rejected some of the key terms of the agreement as unacceptable and did not adopt the required legislation.

    Court supervised mediation to reach a new agreement is underway.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    The Context

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    Debt

    Ever since Governor Alejandro García Padilla declared Puerto Rico’s debt unpayable in 2015, Puerto Rico’s inability to pay its debt has hampered the economic recovery and affected the lives of every resident and the success of every business.

    PROMESA opened a path to end this crisis. The law gives Puerto Rico an opportunity no U.S. state has: a formal process similar to municipal bankruptcy to restructure its debt to levels it can afford. The Oversight Board filed a Plan of Adjustment with the U.S. District Court for the District of Puerto Rico that reduces the debt by 80% and saves Puerto Rico more than $50 billion in debt service payments.

    Puerto Rico’s debt was issued by more than a dozen public entities, ranging from the central government itself and the public employee retirement system to separate public corporations such as the Puerto Rico Electric Power Authority and the University of Puerto Rico.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    Creditors

    More than 165,000 creditors have filed proofs of claim. Creditors range from mutual funds and hedge funds to individual residents of Puerto Rico and retirees eligible to receive a government pension, among others.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    Comprehensive review of the debt

    The process of resolving Puerto Rico’s fiscal crisis depends in large measure on accurate information about the size and nature of the debt. That is why the Oversight Board commissioned an investigation of the massive debt in 2017. Under section 104(o) of PROMESA, the Oversight Board was authorized to “investigate the disclosure and selling practices in connection with the purchase of bonds issues by a covered territory.” The Oversight retained the independent investigations firm Kobre & Kim LLC to conduct the investigation of the debt. In August 2018, the Oversight Board presented the more than 600-page Kobre & Kim report about the debt and factors that contributed to Puerto Rico’s fiscal crisis. Link to report.
    • The report investigated Puerto Rico’s debt going back to 2006. It investigated how much debt was issued and the use of the proceeds. It dug 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 the debt ultimately 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.
    Comprehensive-review-of-the-debt.jpg

    Based on the Report, the Oversight Board, along with the Unsecured Creditors Committee challenged the legitimacy of $6 billion of Commonwealth debt in the U.S. District Court for the District of Puerto Rico. Ultimately, the issues as to the “validity” of the debt was settled with the Plan of Adjustment.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.

    Towards the future…

    With the period of financial crisis for Puerto Rico is coming to an end, much of Puerto Rico’s economic future and sustainability are in the elected Government’s hands. Puerto Rico’s future will depend on its commitment to fiscal responsibility to create sustainable, long-term economic growth and avoid the past practice of overspending.

    The Plan of Adjustment established a Debt Management Policy to prevent Puerto Rico from repeating past mistakes that led to the accumulation of its unsustainable debt.

    • New debt may only be used to finance capital improvements, not operating deficits.
    • Refinancing debt is only permitted if it saves Puerto Rico money and the principal outstanding is not increased. Refinancing without savings is only allowed in direct response to a natural disaster or other similar emergency.
    • New debt may not have a maturity greater than thirty years, and refinancing debt may not extend the repayment terms of existing debt (with a few exceptions, such as for public housing).
    • All new debt must begin to be repaid within 2-5 years of issuance.

    The Data Room is currently an online repository for documents supporting the Disclosure Statement that accompanies the Plan of Adjustment for the Commonwealth, ERS, and PBA (as amended or modified from time to time, and including all exhibits thereto, the “Plan”). The Oversight Board created the Data Room to provide creditors with additional information and documents in connection with the approval of the Disclosure Statement.  The Data Room is available to all creditors of the Commonwealth, ERS, and/or PBA and their representatives.