March 28, 2017 / 1:26 PM / 3 years ago

Puerto Rico's major bondholders critical of fiscal turnaround plan

NEW YORK (Reuters) - Groups of Puerto Rico’s creditors issued a rare joint letter late on Monday opposing a plan designed to steer the island out of financial crisis, stoking friction between the U.S. territory, its investors and the board tasked with managing its finances.

In a letter to the federally appointed oversight board, creditors with exposure to $12 billion in Puerto Rican debt said the turnaround plan, approved by the board on March 13, violates the Puerto Rico financial rescue law known as PROMESA by ignoring legal protections on some public debt.

The letter was signed by holders of constitutionally guaranteed general obligation (GO) debt; a group holding junior COFINA debt backed by sales tax revenue; and Assured Guaranty Corp, which insures $3.4 billion of Puerto Rican bonds.

Lawyers representing the UBS Family of Funds and the Puerto Rico Family of Funds said on Tuesday that their clients, who hold roughly $652 million in accreted value of COFINA bonds, “strongly share and support many of the objections and concerns” stated in the bondholders’ letter to the oversight board.

The plan “simply ignores one of the enumerated requirements that Congress imposed” under PROMESA, “namely, that it respect the relative lawful priorities” of debt, the letter said.

With Puerto Rico trying to restructure its debt before the May 1 expiration of PROMESA’s freeze on litigation, the letter illustrates a wide gulf between both sides.

Although Puerto Rico’s relationship with bondholders has always been rocky, Monday’s letter also pits creditors against the oversight board, a bipartisan group appointed last year to help facilitate restructuring talks and oversee the island’s finances.

Attempts by Reuters to reach representatives of the oversight board for comment were unsuccessful.

Puerto Rico faces $70 billion in debt, a 45 percent poverty rate and rampant emigration. The turnaround plan green-lighted by the board contemplates only $800 million a year to pay debt — a fraction of what the island owes — even after imposing strict austerity measures.

In Monday’s letter, creditors said the plan runs afoul of PROMESA by prioritizing government services ahead of general obligation debt in violation of the island’s constitution. COFINA creditors said it would also unlawfully transfer sales tax revenue, on which they have a lien, into the island’s general fund.

The plan “contains many unexplained numbers and assumptions that creditors need to understand before meaningful negotiations can occur,” the stakeholders said. They added that the plan will “undermine” Puerto Rico’s efforts to regain access to capital markets.

Senior COFINA debt carrying a 5.25 percent coupon that matures in 2057 was bid at 63.5 with a yield of 8.45 percent on Tuesday, down from Monday’s bid price of 63.69. 74529JAR6=MSRB, according to Thomson Reuters data.

The 6 percent 2042 subordinated COFINA bond traded off its highs of the day to 42.43, but up from Monday’s last bid of 41.11, yielding 14.695 percent, according to Thomson Reuters data.

After the plan’s approval, Puerto Rico’s benchmark 8 percent 2035 GO bond plunged nearly 10 full points to a bid of 63. The bond, in default, has not traded since March 22.

Reporting By Nick Brown and Daniel Bases; Editing by Dan Grebler and Tom Brown

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