Puerto Rico governor wants new debt policy as creditor talks ramp up

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By Nick Brown

<span class="articleLocation”>Puerto Rico’s new governor wants to replace a
law that allows the U.S. territory redirect revenues earmarked
for bondholders to pay for essential services, the latest move
to court holders of $70 billion in debt ahead of high-stakes
restructuring talks.

Ramon Rosario, a spokesman for Governor Ricardo Rossello,
told reporters in San Juan on Tuesday the government planned to
introduce legislation on the so-called debt moratorium law by
Wednesday.

Rosario gave few details on the legislation, leaving an open
question on whether it would allow the government to keep
revenue streams it has already redirected or “clawed back.”

The moratorium was signed last year by then-Governor
Alejandro Garcia Padilla, who did not run for re-election.

As he prepares to embark on months of likely arduous talks
to restructure debt, Rossello seems willing to work with
creditors, promising to pay as much debt as resources allow
after belt-tightening measures like government consolidation.

But the governor will have to get on the same page with a
federal oversight board created last year under the Puerto Rico
rescue law known as PROMESA.

The board has to approve all restructuring deals, but has
met with skepticism from both the island’s government and some
creditors.

Rossello and the board share a holistic vision to save
Puerto Rico through a combination of debt restructuring,
spending cuts and revenue measures.

Still, Rossello has talked tough, saying he disagrees with
some of the board’s initiatives, rhetoric that could curry
political favor with many voters who see the board as an
unwelcome extension of U.S. imperialism.

Some creditors have privately criticized the board’s hiring
of attorney Martin Bienenstock because he previously represented
the island’s government in efforts to cut debt. “That annoyed
me,” one creditor source said, noting that the board has still
not hired an executive director. “The board needs to bring in
people that can knock some heads together, get people to move.”

PROMESA offers mechanisms for both out-of-court
restructuring talks and an in-court option akin to U.S.
bankruptcy.

Keeping talks out of court may be tough, given time
constraints. PROMESA imposed a freeze on lawsuits as a way to
foster consensual negotiations, but it ends on Feb. 15. The
board will likely extend the freeze, but only to May 1.

July 1 is also a benchmark for potential litigation,
particularly with holders of more than $15 billion of so-called
COFINA bonds which are backed by sales tax revenues.

Each fiscal year, Puerto Rico’s sales tax is earmarked for
COFINA debt until the year’s COFINA debt service is accounted
for, which takes a few months.

Puerto Rico must begin servicing COFINA debt on July 1, a
burden for a cash-strapped island that could spark a new round
of lawsuits if a COFINA restructuring deal is not complete by
then.

Getting to a deal with COFINA will not be easy. Advisers for
COFINA holders have been proactive in pushing restructuring
proposals during meetings with the government and the board in
recent weeks, according to a source close to the talks.

But the proposals likely will not gain much traction with
the government until the group’s bondholders settle internal
conflicts over how to divide payouts among different subsets of
COFINA bondholders, the source said.

Senior most COFINA holders, led by funds like Tilden Park
and GoldenTree, have proposed accepting 95 cents on the dollar,
but a more subordinated class, which includes OppenheimerFunds
and Franklin Advisers, is pushing for steeper haircuts for
seniors, in the neighborhood of 20 percent, according to the
source.

COFINA also faces a lawsuit from holders of Puerto Rico’s
$17 billion in general obligation bonds, which the island’s
constitution says it must pay before any other expenses.

With sales tax backing their debt, COFINA creditors say this
separate revenue stream leaves them exempt from clawback.
Attempts by general obligation holders “to challenge the Puerto
Rico statutes that created liens for COFINA bondholders are
self-serving and built on deceptive half-truths,” COFINA’s
senior bondholder group said in a statement on Tuesday.



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