Puerto Rico Rides Muni-Bond Rally to Bankruptcy Deal -- Update
By Andrew Scurria
Puerto Rico moved closer to resolving the largest municipal-debt
default in U.S. history after creditors owed roughly $11.7 billion
backed a settlement framework, the most Wall Street support yet
amassed for a restructuring of the territory's core public
The proposed settlement released Tuesday would reduce roughly
$18.8 billion in general obligation debt by around three-fifths to
roughly $7.4 billion, lowering interest payments to bondholders to
levels that Puerto Rico's financial supervisors believe it can
support after years of population loss and economic decline.
"We achieved a fair, sustainable, and consensual agreement that
puts Puerto Rico on a path to recovery and is an important tool to
lift the weight of bankruptcy from the people and businesses of
Puerto Rico," said David Skeel, chairman of the financial oversight
board that steered negotiations.
Some bonds covered by the deal have gained value in recent
months, buoyed by fixed-income investors' appetite for
high-yielding municipal debt and expectations that Puerto Rico's
court-supervised bankruptcy is nearing its end. The agreement marks
the culmination of months of private talks between finance
officials and creditors to assess the long-term damage to Puerto
Rico's economy stemming from Covid-19.
Investment firms that participate would exchange their claims
for a mix of $7 billion in cash, $7.4 billion in restructured bonds
and tradable securities known as contingent value instruments that
only pay out if sales-tax collections exceed certain projections.
Large bondholders including GoldenTree Asset Management LP and
Autonomy Capital are backing the settlement, along with bond
guarantors Assured Guaranty Ltd. and MBIA Inc.
A sustained rally in high-yield municipal bonds, including
Puerto Rico's, helped to ease the deal, according to bondholders
and advisers involved in negotiations. Yield-hungry investors have
been drawn to risky municipal bonds in part due to the U.S. Federal
Reserve's commitment to ultralow rates.
Expectations that federal support for Puerto Rico will increase
with the White House and both houses of Congress under Democratic
control are also fueling the rally in debt from the territory,
according to analysts and investors. The S&P Municipal Bond
Puerto Rico Index has returned 5.65% over the past year even after
a post-pandemic selloff, outperforming other baskets of risky
municipals maintained by S&P Dow Jones Indices.
The stronger the market demand for Puerto Rico bonds, the less
restructured debt needs to be issued to compensate bondholders, and
the stronger the incentive for them to sign on to a settlement.
While Puerto Rico debt was largely held before its bankruptcy by
traditional municipal holders and individual investors, many bonds
migrated over time into the hands of hedge funds that bought at
depressed prices in hopes of profiting from a deal.
Any restructuring requires approval from the federal judge
overseeing Puerto Rico's bankruptcy case and still faces obstacles,
including objections by Gov. Pedro Pierluisi and other elected
leaders to reducing pension benefits of public employees.
The agreement was finalized under the oversight board that has
been supervising Puerto Rico's finances since the territory
defaulted. Former President Donald Trump in his final months in
office overhauled the board's membership, installing several of his
own selections at a critical juncture in the restructuring.
Justin Peterson, a Trump appointee and former bondholder adviser
who joined the board in October, called the settlement a
"significant milestone in ending bankruptcy for the people of
Puerto Rico" that "would not have been possible without the
flexibility of creditors in reaching a deal."
If approved, the deal would curtail the legal battles that have
raged since Puerto Rico filed for bankruptcy in 2017, costing
taxpayers in the territory more than $858 million in fees and
expenses for lawyers, bankers and other professionals as of last
month. Some rulings stemming from that litigation have undermined
longtime assumptions among investors about the safety of some types
of municipal bonds, although Puerto Rico's struggles have been
viewed in some quarters as an isolated incident within the
typically staid tax-exempt market.
The bankruptcy came after years of heavy borrowing and service
cutbacks in Puerto Rico that affected everything from schools to
electricity service and pushed many residents, who are U.S.
citizens, to depart for the mainland, sapping the tax base and
squeezing budgets. The territory's financial troubles have strained
its relationship with Washington and slowed the release of federal
aid following the devastating 2017 hurricane season.
The board said it expects to file a debt-adjustment plan
incorporating the deal in federal court next month. Creditors will
have the chance to vote before it can be approved.
Write to Andrew Scurria at firstname.lastname@example.org
(END) Dow Jones Newswires
February 23, 2021 09:26 ET (14:26 GMT)
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