PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act, enables Puerto Rico to restructure its debt and achieve fiscal responsibility.
When PROMESA was enacted 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 path to restructure the government’s liabilities and stabilize its finances. Puerto Rico had lost access to capital markets. PROMESA established the Financial Oversight and Management Board for Puerto Rico and provides a mechanism for the Oversight Board to negotiate with creditors on behalf of Puerto Rico to adjust the debt to sustainable levels.
One of PROMESA’s 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.”
Puerto Rico’s $72 billion of 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 size of these claims ranges from less than to more than $18 billion.
Without restructuring, the central government alone would have set aside on average $2.7 billion in debt payments to creditors each year. Before PROMESA, 30 cents of every dollar the government collected in taxes and fees went to pay the debt.
Since 2016, the Puerto Rico Government has not made any debt payments. PROMESA allows the Puerto Rico Government to halt debt payments while the Oversight Board is working on agreements with creditors to reduce the debt to a sustainable level.
Puerto Rico’s public pension liabilities total about $55 billion. The largest pension system was about 1% funded. Even states with severely underfunded public pension systems, including New Jersey, Kentucky, and Illinois, still maintain a more than 30% funded ratio.
That is why, under PROMESA, pensioners are considered unsecured creditors. Pensioners would have stopped receiving pension checks if the pension payments were not included in the Fiscal Plan for Puerto Rico and the Government did not start paying retirement benefits out of its general operating budget.
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.
Comprehensive review of the debt
In August 2018, the Oversight Board presented a more than 600-page investigative report about the debt and factors that contributed to Puerto Rico’s fiscal crisis, the result of an independent investigation by the firm Kobre & Kim LLC.
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.
Mechanisms to adjust the debt
PROMESA provides mechanisms for restructuring this debt, mainly through two Titles of the law: Title III and Title VI.
- 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.
PROMESA gave the Oversight Board the mandate and the authority to renegotiate Puerto Rico’s debt and reduce debt payments to a sustainable level.
Puerto Rico's debt and the restructuring process
The Oversight Board renegotiates Puerto Rico’s debt with one overarching goal: to reach consensual agreement in the best interest of Puerto Rico with the largest possible number of stakeholders.
Complete debt restructurings
The Oversight Board has made substantial progress in adjusting Puerto Rico’s debt, the largest debt restructuring in the history of the municipal bond market.
Together with the Government of Puerto Rico, the Oversight Board already completed the restructuring of more than a third of the debt and is in negotiation to complete the restructuring of the Commonwealth and PREPA debt.
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 VI. 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%.
- 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
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 $55 billion of pension liabilities.
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 February 2021, after careful analysis of the impact of the pandemic, the Oversight Board filed an amended Plan of Adjustment.
The filed Plan of Adjustment:
- Reduces the outstanding Commonwealths debt and other claims by almost 80%, from $35 billion of existing claims to $7.4 billion in new debt.
- 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 almost $60 billion in debt service payments.
- Reducing maximum annual debt service payments the government would have to make from as much as $4.2 billion to $1.15 billion per year.
- Before PROMESA, the government paid 30 cents of every dollar it collected in taxes and fees to creditors. Under this plan it would be less than 7.5 cents.
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 $10 billion debt.
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.