The Obama Administration and House leaders agreed last Wednesday to provisions of a bill that would establish a process to restructure the Commonwealth of Puerto Rico’s massive $70 billion of municipal debt. The key provision of the legislation would be the establishment of a financial control board to oversee the debt restructuring process. The board would also oversee the management of the commonwealth’s finances. The bill is currently in the House Natural Resources Committee, and is expected to move through the legislative process in June. While the bill must still be approved by both the House and Senate, gaining support from the White House, Republican House Speaker Paul Ryan and House Democratic Leader Nancy Pelosi was a critical step in moving the bill forward.
A crucial provision of the bill for bondholders is that debt restructuring would need to honor existing bondholder rights and remedies, which vary according to the numerous types of debt the commonwealth has issued. For example, Puerto Rico’s general obligation bonds have constitutional protections, and bonds issued by the commonwealth’s Sales Tax Financing Corporation (COFINA) have specified priorities that other debt programs do not contain. As a result, the restructuring could have more in common with provisions of outstanding debt documents than with recent restructuring provisions proposed by the commonwealth, which appeared to be less concerned with bondholder protections and repayment priorities.
This compromise over the debt restructuring parameters was achieved in Washington at roughly the same time Puerto Rico’s governor was freezing the transfer of toll revenues used to pay debt for the Puerto Rico Highway and Transportation Authority. While the authority has sufficient reserves to make its upcoming July 1 debt service payments, it will not have sufficient revenues to pay future debt service if the toll revenues remain frozen. Freezing of the toll revenues has heightened muni investors’ concerns regarding the commonwealth’s management of its fiscal crises. In other situations, the commonwealth may have had the authority to divert revenues from bondholders, or may not have had sufficient pledged revenue to make a debt payment, but the freezing of toll revenues is a blatant violation of the authority’s bond covenants, which many would argue the commonwealth had no authority to void. Furthermore, the freezing of the toll revenues also appears to conflict with the terms of the restructuring provisions approved in Washington on Wednesday.
Source: Bloomberg, Bond Buyer