By Andrew Scurria
Puerto Rico's financial supervisors struck a deal with creditors owed $3 billion that sets out a path for restructuring $35 billion in debt obligations tied to the central government and scaling back debt payments over the next 30 years by half.
The U.S. territory's oversight board said the agreement marks an acknowledgment by bondholders "that Puerto Rico's difficult financial situation requires a meaningful reduction in its debt burden to a sustainable level."
The proposed settlement, announced Sunday, covers $18 billion in bonds that were guaranteed with Puerto Rico's full faith and credit, including the largest junk-rated sale of municipal debt ever, a $3.5 billion issuance in 2014.
The board said it would submit a debt-adjustment plan in Puerto Rico's court-supervised bankruptcy for approval within 30 days, foreshadowing a potential high-stakes battle over repayment terms.
Gov. Ricardo Rosselló's top finance adviser, Christian Sobrino, said the government doesn't support the proposal because it is premised on a fiscal plan that cuts pension benefits.
The proposal takes advantage of legal arguments that bonds sold since 2012 pushed Puerto Rico's debt load above the ceilings contained in its constitution and therefore shouldn't be paid back.
Investors holding general-obligation bonds that have been challenged could settle their claims for between 35 and 45 cents on the dollar, or they can continue litigating for more after Puerto Rico exits bankruptcy.
General-obligation bondholders whose claims aren't in dispute would receive at least 64 cents on the dollar and potentially more depending on the outcome of the postbankruptcy litigation.
Susheel Kirpalani, a lawyer representing hedge funds that signed on to the agreement, said it provides bondholders "the opportunity to realize equitable recoveries based on their relative priority and rights."
Other government claimants, such as suppliers and lower-ranking unsecured creditors, would recover 9 cents on the dollar.
"These were tough negotiations and we are confident we reached the best deal possible for Puerto Rico to move on from decades of incurring debt we could not afford," the board's executive director, Natalie Jaresko, said.
The proposal must still be voted on by creditors and approved by the judge overseeing Puerto Rico's bankruptcy to take effect. It would reduce principal and interest payments on Puerto Rico's full-faith-and-credit bonds over the next three decades to $21 billion from $43 billion. Creditors would receive $12 billion in restructured debt and $2 billion in cash.
By driving down debt claims, the board is hoping to free up money for investment in dilapidated infrastructure and to entice private capital back to Puerto Rico, which was devastated by two hurricanes in 2017.
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
June 16, 2019 20:08 ET (00:08 GMT)
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