| NEW YORK/SAN JUAN
NEW YORK/SAN JUAN Puerto Rico asked its creditors to take a huge "haircut" that would slash its total outstanding debt by about $23 billion in an opening salvo to resolve a crippling debt crisis, but creditors reacted with frustration, calling the offer "not credible," "not serious" and a "trial balloon."
With $70 billion in debt, a 45 percent poverty rate and a steady exodus of its population to the mainland, the U.S. territory is trying to crawl out of an economic swamp before substantial debt payments come due in May and July. Puerto Rico has already defaulted on some debt and is trying to persuade its creditors to take concessions.
"We do not view this proposal as a serious effort," said Nader Tavakoli, president and chief executive officer of bond insurer Ambac (AMBC.O), which insured $2.2 billion net par, or original face value, of bonds as of the end of November. Ambac recently sued Puerto Rico over a debt default.
The plan announced on Monday would reduce a $49.2 billion chunk of debt by about 46 percent, to $26.5 billion, by offering creditors payout reductions under a new, "base bond" with better legal protections. The cut to creditors was earlier reported by Reuters.
Creditors could have an opportunity to make up the difference in face value through a $22.7 billion "growth bond," whose payout would be dependent on future expansion, but there was skepticism about this structure.
While the base bond would be guaranteed and reflects the cuts in repayment, the growth bond would only be paid if the island's economy expands.
Height Securities analyst Daniel Hanson said there was no mechanism to ensure the commonwealth upholds its end of the deal and that growth is pursued along the lines envisioned, noting that these bonds were likely "not worth the paper they'd be printed on."
While in theory investors could recover par on their bonds "if the plan works out under the rosiest of assumptions," in practice the payouts from the growth bonds would be extraordinarily low, he said.
Hanson compared the plan to Ukraine's 2015 debt restructuring, which used growth warrants, "now widely acknowledged to be a pipe dream."
PROPOSAL CALLED A "TRIAL BALLOON"
A source close to major Puerto Rico creditors said reaction had been one of general frustration with the plan, which "doesn't feel like a credible offer." Shares of bond insurer Ambac fell, while MBIA (MBI.N) and Assured Guaranty, which also have exposure to Puerto Rico bonds, rebounded from earlier losses.
"It is extremely disappointing... that the commonwealth did not seek any input from its creditors," said Assured Guaranty's head of investor relations, Robert Tucker. The offer "appears to ignore bondholder protections provided by its constitution," he said.
MBIA's National Public Finance Guarantee Corporation said that "simply extracting concessions from its creditors will accomplish nothing without identifying solutions."
Under the proposal, different creditor groups would be treated differently, based on seniority.
Holders of general obligation (GO) debt backed by Puerto Rico's constitution would take a roughly 28 percent cut under the base bond, while holders of debt issued by the island's income tax authority (COFINA,) would take losses of about 51 percent, according to the plan.
The haircut to all other holders would average about 61 percent.
"This is a trial balloon," said Dan Fuss, vice chairman of Loomis Sayles, which holds GO bonds. "It's an opening in the overall discussion."
Fuss said the plan "is not going to fly" for GO bonds unless they are offered a higher coupon.
Issuers that would be included in the exchange are: the commonwealth and the Government Development Bank; Puerto Rico's Public Buildings Authority PBA; sales tax bonds COFINA; highway authority HTA; infrastructure financing authority PRIFA, industrial development company PRIDCO, the employee retirement system ERS, the university UPR, convention center CCDA and public finance bonds PFC, which defaulted in August.
Interest payment on the base bond would begin in 2018, reaching 5 percent a year by 2021, while payouts on the growth bond would begin 10 years after the close of the offer.
Puerto Rico's government warned "time is of the essence," and if a deal is not reached by May 1, the government may be "forced to declare a moratorium."
Puerto Rico has been hoping for help from Washington, where a Tuesday hearing at the House of Representatives Committee on Natural Resources will examine the need for a control or advisory board. The island has pushed for mechanisms such as access to the same bankruptcy protection that U.S. states have.
"Puerto Rico's economy is state-run, hopelessly stagnant and outstandingly ineffective," Rob Bishop, Republican chairman of the Natural Resources Committee, said on Monday, Bishop said that debt restructuring alone would not help the island. He said extending bankruptcy protection alone - "if that's the avenue one wishes to go - ... doesn't give a long-term solution nor does it solve the short term issues there."
(Additional reporting by Jennifer Ablan in New York; Editing by Jeffrey Benkoe, G Crosse and Leslie Adler)