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

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.
By Nick Brown
Puerto Rico governor wants new debt policy as creditor talks ramp up