Puerto Rico bond deal opposed by local government, bondholders
In a surprise move February 9th, embattled Puerto Rico Governor Wanda Vazquez (NPP, R) expressed disapproval over a recently proposed agreement which purports to have brokered a more favorable payment agreement between the US territory and its bondholders than previous agreements of its type. The proposed settlement would reduce the islands’ bond debt from approximately $35 billion to $11 billion, representing a reduction of nearly 70%. Such an agreement would exclusively address debt held by bond holders, and would have no direct effect on the additional $39 billion of Puerto Rican debt not held by bond holders. Moreover, the proposed agreement would see the US territory’s debt service obligations shortened by ten years relative to the previous proposal, as well as structuring debt service payments such that they not exceed 9.16% of the islands’ governmental revenue.
The proposed settlement has been hailed as a mutually beneficial agreement by the Puerto Rico Financial Oversight and Management Board, a federally established group tasked with overseeing the islands’ debt restructuring process. In a press release, the Oversight Board argued the settlement—if enacted—would allow for the islands to properly begin the process of economic revitalization. In announcing her disapproval of the proposed settlement, Governor Vazquez cited concerns surrounding the issue of pension reductions, saying “If the bondholders receive better treatment in the bankruptcy process, so should the retirees. This is an issue of basic justice”. This is not the first public disagreement between the committee and Governor Vazquez, who recently expressed her belief that Puerto Rico’s debt must be repaid if the islands wish to remain credible in the eyes of Washington, DC.
The enactment of the proposed settlement is not contingent on Vazquez’ support, but it must pass the territory’s legislature, then be approved by Judge Laura Swain, the judge assigned to oversee the Puerto Rico debt restructuring cases, with a resume that includes presiding over the cases of Bernie Madoff and Steven Cohen. If approved, the settlement would constitute the largest municipal bankruptcy in American history, dwarfing the current record holder—Detroit—by approximately $50 billion.