NEW YORK (Reuters) - A war of words rather than talk of reconciliation is the latest indication that Puerto Rico and its creditors are getting nowhere fast in their negotiations to restructuring the island’s $70 billion in debt before mediation is due to end on Friday.
A group of general obligation debtholders accused the government on Wednesday of breaking confidentiality rules after Elias Sanchez, a close adviser to Governor Ricardo Rossello, said Puerto Rico was waiting for creditors to make a restructuring offer.
Creditors issued a statement saying the offense ”befits a government getting comfortable in default.”
Rossello, through a lawyer, fired back the same day with a letter to the island’s federally appointed financial oversight board, saying Sanchez “was simply reiterating” the government’s desire “to receive constructive proposals from creditors.”
Puerto Rico has until May 1 to reach a debt-reduction deal under a financial rescue law dubbed PROMESA, or enter an in-court restructuring process akin to U.S. bankruptcy.
Far from discussing how to split up Puerto Rico’s limited financial pot, parties are seen struggling to agree on the size of the pot in the first place.
The island’s fiscal turnaround plan, approved last month by the oversight board, projects $800 million a year available to pay debt, less than quarter of what Puerto Rico owes in next fiscal year.
In this week’s mediation, creditors are discussing how much that number would have to move to get them to the table, said creditor-side sources, who declined to be named because talks are private. One source pegged the figure around $1.3 billion; another said about $1.8 billion.
“How can we negotiate when we haven’t even got past the deficiencies with the fiscal plan?” said a third.
Puerto Rico’s benchmark 2035 GO bond price has plunged since approval of the turnaround plan, which forecasts bigger haircuts than creditors expected.
The dramatic discord is at least partly rooted in the elephantine gap between investors’ expectations for Puerto Rico’s oversight board, and its reality.
Creditors began lobbying for the board after Rossello’s predecessor, the left-of-center Alejandro Garcia Padilla, called Puerto Rico’s debt “unpayable” in 2015, and later pushed a plan to slash repayments by about half.
Creditors got what they wanted: In mid-2016, with restructuring talks dead, U.S. Congress created the board through PROMESA.
In January, the moderate Rossello replaced the populist Garcia Padilla in the governor’s mansion.
Creditor enthusiasm for the changes turned to shell-shock, however, when the board in January began pushing debt cuts even more draconian than Garcia Padilla‘s. “The board has been the biggest disappointment,” a creditor source told Reuters in March.
One government official said Rossello felt pigeonholed by the board, forced to either push bigger-than-expected cuts, or resist the board’s projections and be viewed as having no plan.
Others see Rossello as using the board as a political cover for drastic cuts. “That’s exactly what the board is for,” said one of the creditor sources.
One logistical challenge to a deal is how to recoup upside for creditors if Puerto Rico grows. In a corporate bankruptcy, bondholders can take a company’s equity.
The closest municipal analog might be so-called growth bonds, with payouts dependent on future growth.
But two creditor sources told Reuters they do not want growth bonds, which they see as too hard to enforce in a municipal setting. “How do you ever decide when a municipality is in the money?” one of the sources said.