Puerto Rico bankruptcy judge approves adjustment plan

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U.S. District Court Judge Laura Taylor Swain on Tuesday afternoon approved Puerto Rico’s central government bond and bond adjustment plan, setting the stage for the Commonwealth to emerge from bankruptcy after more than four years of intense negotiations over its massive debts.

The action sets terms for the restructuring of approximately $33 billion in debt – the largest bankruptcy in municipal market history – including general obligation bonds of the Commonwealth government and its Public Building Authority, Convention Center District Authority Employee Retirement System and Obligations.

It also affects, but does not completely define, the terms of the rum tax obligations of the Highways and Transportation Authority, Public Finance Corp. and the Puerto Rico Infrastructure and Finance Authority. With the judge’s approval of the plan, the Supervisory Board must still obtain approval of the adjustment plans for the Puerto Rico Electric Power Authority, HTA and PFC.

Puerto Rico Bankruptcy Judge Laura Taylor Swain approved an adjustment plan approximately 4.75 years after Puerto Rico entered bankruptcy.

In the plan, Public Building Authority bonds guaranteed by the Commonwealth government generally earn better payouts than general Commonwealth bond bonds.

For PBA bonds, the plan provides fixed recoveries of 80.4% for pre-2011 bonds, 79.6% for certain 2011 bonds, 74.8% for certain 2012 bonds, and 80.4% for certain pre-2011 bonds. 2013.

For GO bonds, the plan offers fixed recoveries of 77.6% for pre-2011 and 2011A bonds; 73% for 2011C bonds; 76.5% for GDP bonds 2011D, 2011E and 2011; 74.4% for the 2012 bonds; and 67.8% for the 2014 bonds.

The plan also allocates lump sum recoveries of 14% for Employee Retirement Scheme obligations and 0% for Public Finance Corporation obligations. The latter is from the Commonwealth Government. The board is in the process of negotiating a separate adjustment plan for the public finance company that could allow these obligations to be paid from another source.

Retailers in Puerto Rico are allowed to vote for a taxable election. If most of the eligible class votes yes, they get what gives them bonds with a higher coupon but are taxable by the US federal government. Since they live in Puerto Rico, residents do not pay federal income tax and would not have to pay this tax.

Along with fixed recoveries, the plan allows for additional payments if sales and use tax revenue exceeds levels under the council’s 2020 tax plan. This would take the form of contingent value instruments.

The plan offers terms under which the Highways and Transportation Authority ‘recoveries’ in the Commonwealth would accrue in part to HTA bondholders. Likewise, it offers terms under which rum taxes that have been transferred to the Commonwealth would revert in part to the Puerto Rico Infrastructure and Finance Authority’s rum tax obligations.

The plan affects payments of other Commonwealth bonds. The scheme does not reduce benefits for current retirees, but it freezes the accrual of defined benefits for employees in the teachers’ pension system and judges’ pension system. It also eliminates cost of living adjustments for JRS registrants.

The plan allocates 20.4% to general unsecured (non-bond) claims.

Regarding GO and PBA debt, the agreement reduces Puerto Rico’s debt to $7.4 billion from $18.8 billion. It’s worth bearing in mind that GO and PBA bondholders will be paid both in new GO bonds and in cash, so the $7.4 billion figure doesn’t capture all of their payment.

When the Puerto Rico Sales and Use Tax Agreement (COFINA) is included in the GO and PBA Debt Agreement, total debt service will be reduced to $34.1 billion from $90 .4 billion dollars. These figures do not include the lesser amounts paid for ERS, CCDA, HTA and PRIFA debts.

The adjustment plan will come into effect when its many preconditions are met. Puerto Rico attorney John Mudd said if there was no appeal, it would be this summer. However, he said he expected there would be calls.

Normally, appeals would be made to the US First Circuit Court of Appeals, located in Boston.

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