May 1, 2017 / 7:39 PM / 8 months ago

Puerto Rico bondholders shun island's debt-cutting offer

NEW YORK (Reuters) - Puerto Rico’s government presented a debt restructuring offer late on Friday that could repay as much as 77 percent of general obligation (GO) bonds and 58 percent of tax-backed bonds, but both bondholder groups quickly rejected it early on Saturday.

The plan comes ahead of a Monday deadline to reach a debt-cutting agreement before creditors can sue Puerto Rico over defaults. The U.S. territory, shouldering $70 billion in debt it cannot pay, could also file an in-court debt workout akin to U.S. bankruptcy.

The island’s largest and highest-priority debt classes, accounting for more than half the total, are GO debt guaranteed by Puerto Rico’s constitution, and so-called COFINA debt, backed by sales tax revenue.

Both groups believe their legal protections to be sacrosanct, and are litigating against each other for top priority.

Puerto Rico’s proposal would appear to treat GO debt more favorably, threatening COFINA holders with much smaller recoveries if they reject the plan.

Under its proposal, Puerto Rico would issue $16.75 billion of new senior bonds and $10 billion in “cash flow bonds,” essentially a growth bond, payable only if the island exceeds fiscal targets.

GO holders would get $9.8 billion of the senior bonds, recouping them a guaranteed 52 cents on the dollar, as well as $4.7 billion of the conditional cash flow bond, which could up their recoveries to 77 cents.

COFINA holders, meanwhile, would get $6.9 billion of the senior bond and $3.3 billion of the cash flow bond - a recovery of up to 58 percent - but only if they accept the deal. Otherwise, Puerto Rico would repay senior COFINA holders with $450 million in short-term notes, while junior COFINA holders would get nothing.

Matt Rodrigue, a financial adviser to senior COFINA holders, called the plan “absurd,” saying in an interview it disregards the priority of senior COFINA holders over junior ones, and could threaten the wellbeing of average Puerto Ricans because COFINA debt is widely held by locals.

“This is a misfire” by Puerto Rico’s government and its advisers, Rodrigue said.

Andrew Rosenberg, a lawyer for a key GO bondholder group, said in a statement the plan was “not a credible starting point for negotiations.”

Debt from Puerto Rican public agencies, like its highway and infrastructure authorities, would recover less than 30 cents on the dollar under the plan, and only in the form of conditional cash flow bonds.

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