The administration of Gov. Pedro Pierluisi is aiming to complete all pending debt restructurings – including the Puerto Rico Electric Power Authority, Highways and Transportation Authority, University of Puerto Rico and the Puerto Rico Industrial Development Co. – by the end of calendar 2022 amid ongoing efforts to take the newly confirmed commonwealth plan of adjustment effective by a March 15 target date, Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Omar Marrero told Reorg in an interview on Wednesday afternoon, Jan. 19.

“We really want to be able to finish all of the restructurings in the current year. All of it. We can make it happen,” he said. “Obviously, PREPA is the most complex, but that doesn’t mean we cannot get it done,” Marrero said. He said HTA will be easier than PREPA because of the deal framework in place, adding that execution of the HTA restructuring “will be critical.”

Focus on Plan Effective Date

Marrero said the commonwealth is committed to completing the pending steps to take the plan effective by the March 15 target date. “March 15 is doable, and we have to do it,” he said. “We’re working with that date in mind and not considering any other options.”

Marrero outlined some of the steps that are pending, starting with certification of an updated commonwealth fiscal plan by month’s end and amending the fiscal year 2022 budget in February. AAFAF has already started the process of setting aside payments and documenting and finalizing the securities contemplated in the plan – both the new government obligation, or GO, bonds and the contingent value instruments, or CVIs – prior to Judge Laura Taylor Swain’s order “because we were already quite optimistic about confirmation of the plan subject to certain modifications.”

Marrero said interagency coordination involving the Puerto Rico Treasury Department, Office of Management and Budget, Employees Retirement System, the oversight board and other agencies was launched a couple of weeks ago to work through the closing checklist that includes putting cash transfers in motion, establishing accounts, and the “accounting clawback” of certain funds already allotted to government agencies.

“This is just another closing, albeit a little more sophisticated and complex,” he said.

“So there is a significant amount of work that we’ll be doing in the next 45 days around those main agencies with the support of external consultants and lawyers,” he said. “We’re going to have folks camping out at Treasury, OMB and ERS to make sure we are doing this right. We are cognizant that the world and markets are watching us, and we just have to execute and implement.”

Issues related to the tax status of the new GO bonds and CVIs are being spearheaded on AAFAF’s side by its bond counsel, Nixon Peabody. “The CVI has its complexities that they have been studying,” Marrero said. The AAFAF chief signaled that the government parties have already sought a ruling from the U.S. Internal Revenue Service regarding the proposed tax-exempt status of the new GO bonds and CVIs “because that is a very important issue.”

Requests for proposals issued in connection with the execution of the plan and the issuance of required securities were finalized and headed to AAFAF’s board of directors for approval, he said.

Post-Plan Balance Sheet

Marrero celebrated the commonwealth plan confirmation as one of the “final nails” needed to emerge from bankruptcy and “expedite the exit” of the PROMESA oversight board so the commonwealth can “regain its fiscal autonomy.”

Walking through the plan’s “very significant” debt reduction numbers, the AAFAF chief said the plan leaves the commonwealth with a “clean and deleveraged” balance sheet of $7.4 billion in debt service that allows Puerto Rico to pay its bond creditors and puts the island government in a “very healthy” fiscal position. “We are comfortable with this debt service and firmly believe it is feasible,” Marrero said.

The AAFAF chief highlighted that the plan cuts $34 billion of claims to $7 billion in pro forma debt at the commonwealth, a 78% reduction, and results in a significant decrease in the debt per capita and debt to GNP for Puerto Rico. Before the restructuring, 28 cents of every dollar was spent on debt service, according to Marrero, noting that number falls to 8 cents going forward after the plan goes effective. The 7.6% of own-source revenue earmarked for debt service puts Puerto Rico under the 9.2% average among the top-10 indebted states.

Marrero pointed to the debt management policy embedded in the plan that imposes a debt limit on Puerto Rico of 7.94%, providing “a little leeway to access the markets mainly for any disaster-related or emergency-related needs.” Asked if that cap could present challenges, Marrero indicated that it should not be looked at in a “static” manner since it is 7.94% of the prior year’s revenue.

“This is the key here. We have to implement structural reforms. We have to implement initiatives to grow our tax base. That’s the reality,” he said. “To the extent we focus on growing that tax base, we will generate more revenues and have more leverage. So it’s not the cap – we have to be focused on growing the pie.”

Marrero said the only way to achieve fiscal responsibility, one of the key mandates of PROMESA, is to have the cap and the plan’s guardrails on the use of bond proceeds that bar scoop-and-toss and deficit financing and limit maturities.

Reviewing executed debt restructurings across Puerto Rico’s debt stack, Marrero said the government and oversight board have shown the willingness and ability to reach consensual deals, having restructured over $23 billion of existing indebtedness through the various mechanisms available under PROMESA, resulting in a 30% reduction in debt across the Government Development Bank, PRIFA-Ports bonds, COFINA and the Puerto Rico Aqueduct and Sewer Authority. The pending Title III restructurings of PREPA and HTA involve bond debt of roughly $9 billion and $6 billion, respectively.

Looking ahead to the overall debt stack after PREPA and HTA are restructured under the terms of current support agreements with creditors of the two public corporations, Marrero noted that the commonwealth’s pre-PROMESA debt load of $70 billion will have been reduced by more than 50% to $34 billion. In a prepared presentation, AAFAF provided the following summary of the commonwealth’s pre-PROMESA and post-plan obligations.

The AAFAF chief also said Puerto Rico will emerge from Title III with a simplified debt stack with at least four fewer issuers, noting that one of the “main complexities” of the bankruptcy was the wide range of credits, “which allowed previous administrations to further complicate the debt profile.”

Marrero highlighted that the central government was able to come away with a new structure in the hard debt to be issued. “It’s not just plain vanilla GOs but also the CVIs, which allows upside or outperformance payments to creditors while allowing Puerto Rico to mitigate downside risk when there is pressure on the budget,” he said.

Marrero said he anticipated solid demand for the CVIs on the municipal market and forecast the use of similar structures in future municipal restructurings on the mainland. “I believe so. Granted, this is something novel. This is totally new,” he said. “We are cautiously optimistic. People will do their math, see how it works and the metrics we are using, and I think there will be confidence that there is real value and a real upside at the same time we have the opportunity to mitigate risk.”

Marrero added the expectation that CVIs are “something that will be used by other jurisdictions in the U.S. municipal market,” he said.

Restored Market Access

Marrero touched on restored access to the capital markets at reasonable rates, which, along with four straight years of balanced budgets, is a condition for the oversight board’s mandate to end, stating that confirmation of the plan enables Puerto Rico to comply with the former requirement. “The confirmation ends the bankruptcy and allows us to comply with an express requirement of PROMESA, which is renewed access to the capital markets. With this we are able to go back.”

He also mentioned previous refinancings at the Puerto Rico Aqueduct and Sewer Authority and Housing Finance Authority. “But this is the first time for the central government, and with this restructuring we are able to go back in compliance with that requirement of PROMESA.”

Marrero said both the oversight board and the government believe that by going to the market to restructure the commonwealth debt, Puerto Rico is “getting access and complying with that requirement.” He noted that while the new GO bonds will not be callable for 10 years, the government is not precluded from making a tender offer within the 10-year period, pointing to a similar move at PRASA. “If the market allows it at favorable terms, we could make a tender offer and refinance if it makes sense,” he said.

Amending the current fiscal 2022 budget to reflect the debt service and other payouts contemplated in the plan of adjustment – which include payments related to pensions, labor accords and support bonuses – would count toward the first of four balanced budgets.

Cloud of Uncertainty Clears

Marrero anticipated that exiting bankruptcy will spur investment in the island, noting that many investors shied away from Puerto Rico after it fell into default and into the long Title III restructuring process. “This will get us out from under the cloud of uncertainty, the cloud of bankruptcy around Puerto Rico,” Marrero said. “Now they see this improved counterparty risk, improved political risk and improved legal risk.”

Exiting bankruptcy will also foster economic growth in the private sector and ease loan processes, Marrero asserted, adding that he anticipates that the island’s improved debt profile will improve credit metrics for public corporations and private sector operators in Puerto Rico.

Under Marrero, AAFAF has consistently looked for opportunities to tap the municipal market for savings at certain non-Title III instrumentalities, including PRASA and the Housing Finance Authority, amid the pendency of Puerto Rico’s bankruptcy proceedings. He said the commonwealth’s exit from Title III would improve the landscape for such financing.

“It makes our lives easier not only in terms of the counterparty risk that those government instrumentalities represent but also from a regulatory perspective,” Marrero said, citing the stringent controls imposed by the Federal Emergency Management Agency on recovery funds for Puerto Rico that were driven by the bankruptcy process.

Fiscal Autonomy

Marrero acknowledged that nearly six years after the enactment of PROMESA, confirmation of the plan represents a key step toward Puerto Rico’s push to regain fiscal autonomy, stressing the importance of that aim “even though we have been able to collaborate” with the oversight board.

“We can now go to Washington and say we delivered,” he said. “We went there in 2016 requesting a tool to be able to restructure. We have done that, and now we want to regain our fiscal autonomy and focus on economic development,” he said.

“The big message we are delivering to the market and D.C. is that we delivered. We complied with PROMESA, we restructured our debt, and we are now paving the way to fiscal responsibility. That should spark an interest in Congress to take a new look at the design [of PROMESA],” he said, stating that giving Puerto Rico more fiscal autonomy would be “proper” and “beneficial” for the people of the island.

“Now that the central government has restructured its debt, this is a great opportunity to say, ‘Let’s put some guardrails on the oversight board’s power over Puerto Rico’s finances, let’s be less stringent on section 205 recommendations.’ That is a part of the conversation,” Marrero said, adding that amendments to PROMESA are being considered in the U.S. House Natural Resources Committee, which has primary jurisdiction over territorial matters in Congress.

Acknowledging that work needs to be done to shore up the Puerto Rico government’s structures and resources around fiscal discipline, Marrero said one of the administration’s priorities is “amplifying the bandwidth” of AAFAF, Treasury and OMB, in part to ensure tasks currently being headed by the oversight board are properly transferred to the commonwealth “with all the bells and whistles that we need to have in place.” Key to that effort is curbing reliance on outside consultants and raising pay scales to attract professionals to the public sector, he said.

Looking Back, Looking Ahead

Marrero said one of the biggest achievements of Pierluisi was his “ability to deliver the political will, something that in the Puerto Rico arena is hard to do.” The governor’s prioritization of the plan in his first year in office “is why I was able to stay on to help ensure the process wasn’t derailed and that we could celebrate what we are celebrating here today,” he said.

The AAFAF chief said he was thankful he could be “an instrument to bring people together and make them understand the importance of getting this done.” He said that being able to reach an agreement with lawmakers, “given the complexities and political realities in the Legislature, is something I’m proud of,” positioning the passage of the Act 53-2021 plan legislation as a “huge” message to the markets and the world that “we are serious and want to bring this to an end.”

“You can get to the numbers to carry out a transaction. The problem is how to execute, particularly in government, where it takes so much energy to get things done,” Marrero said, noting that Puerto Rico’s restructuring has stretched through hurricanes, earthquakes, multiple government transitions and the Covid-19 pandemic. “Being able to provide stability across all those events and make sure our team was able to remain focused to get us here is a big achievement.”

He celebrated being “able to do this all” without having to cut pension benefits to current retirees. “Few people thought that was possible at the beginning, but we were convinced that based on the case law in Jefferson County, Stockton County and Detroit that we would be able to craft a legal strategy by which we were able to restructure our debt without having to cut benefits for current retirees without affecting the feasibility of the plan,” Marrero said.

Asked how close the plan came to derailing because of the pension-related impasse between the government and oversight board, Marrero said there was no way to get the Title III exit legislation enacted if monthly benefits were impaired. “The writing on the wall was quite clear,” he said, explaining that “zero pension cuts” were required for the legislation to go forward.

Marrero pointed to language proposed, but ultimately abandoned, by the oversight board that would have left the door open for Judge Swain to impose pension cuts even if the plan presented by the debtors did not call for such cuts as a key hurdle to the legislation. “At that moment, I really thought we wouldn’t be able to get the legislation and that there would be an indefinite postponement in the restructuring process. So I was really concerned about that and losing the narrow window of opportunity that we had. That was critical,” he said.

Regarding a potential debt restructuring at the University of Puerto Rico, Marrero said many options are under evaluation. “We don’t see a huge problem at the UPR,” he said, identifying protecting the public university system’s accreditation and federal aid as the main area of concern. “Whatever mechanism that allows us to restructure the debt and put the UPR on a more sustainable path without jeopardizing accreditation or federal aid and programs is being looked at.”

Marrero, who also serves as Puerto Rico’s secretary of state, signaled that he would stay on at AAFAF through the current year. “I’m not going anywhere right now. We’re implementing the plan of adjustment. We still have PREPA, HTA, PRIDCO and UPR. The governor and I are both focused on getting the restructuring done,” he said, adding that he is also committed to ensuring AAFAF has a solid internal organization with sufficient personnel and structure in place to continue its work streams.

“In the meantime, we still have a lot of work to do, so we’re not going anywhere,” he concluded.

Fuente: Reorg

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