Puerto Rican officials, meeting with creditors on Friday, proposed a broad debt exchange program meant to ease the island’s painful cash crisis by slowing down the payments it owes on its $72 billion debt.
But as much as the plan had a financial purpose, it also had a political one: It was intended at least in part to help persuade skeptical members of Congress that the island’s government was working in good faith to resolve its financial crisis and deserved Washington’s help.
Puerto Rico, which has already defaulted on some bonds, has large bond payments due this spring — payments it says it will not be able to meet without a reprieve from bondholders and some assistance from Washington, ideally in the form of access to bankruptcy court that the island, as a United States commonwealth, does not now have. Congress has been weighing that possibility, along with other forms of assistance, but Republicans, in particular, have been unenthusiastic, fearing that the island has not put itself on a secure financial footing that would help it avoid a similar financial crisis in the future.
The plan announced Friday is the island’s response to those concerns.
In a statement released Friday evening, the group of island officials working on the plan said it had held six meetings with various groups of creditors throughout the day, “representing the holders of all of the major tax-supported credits.”
Expressing hope that a deal could be reached, the statement said: “We believe the proposal we presented is fair, balanced and reflective of the commonwealth’s actual capacity to pay our creditors over the long term.”
It was unclear Friday afternoon whether creditors were tempted by the offer. They had signed confidentiality agreements before being permitted to hear the details. The deal would most likely help some creditors, whose bonds could be worthless if the island defaults on them. But it might be less attractive to those whose bonds would have priority in a legal fight — the kind of fight that Puerto Rico would have a better chance of winning in bankruptcy.
The terms, first reported in The Wall Street Journal, called for the island’s creditors to exchange securities they now hold — mostly municipal bonds— for one of two new classes of bonds, both of which would delay payments of principal and interest.
The delay would give Puerto Rico’s government adequate cash to keep providing essential services while it takes promised steps to restore economic growth.
The first class of new bonds would not begin repaying principal for five years, and would by then pay investors 5 percent interest — a relatively low rate that is intended to reflect the higher security of the new bonds.
The second class of new bonds would not begin to repay principal for 10 years. And it would pay interest according to how well the island’s economy responds to the government’s economic reform measures, according to a person with knowledge of the proposal who confirmed the general terms but was not authorized to speak publicly about them because of confidentiality rules.
“Your second bond is dependent on future events occurring,” this person said. “If there is great prosperity and economic growth, then maybe you’ll get paid back.”
Puerto Rico proposed to distribute the two classes of bonds according to the existing hierarchy of its creditors. Those who now hold the island’s highest priority bonds — its general obligation bonds — would get larger shares of the first class of new bonds. That would reduce their losses in the exchange. Their holdings of the second class of bonds would offer the hope of further recovering their losses if the Puerto Rican economy eventually recovers and flourishes.
But the exchange would still mean a loss, even for the general-obligation bondholders, and they have been arguing that the Puerto Rican constitution entitles them to be paid first out of all available resources.
The current holders of Puerto Rico’s lesser-priority bonds would get relatively smaller amounts of the first class of bonds in the exchange. The island’s debt involves almost 20 governmental issuers, and varied features like guarantees. In many cases the legal priorities are not clear. The bondholders are varied, with multiple conflicting interests.
“It is without a doubt the most complicated financial puzzle I have ever encountered,” the person with knowledge of the proposal said. “This is chaos. A process has begun, but every professional person associated with this process knows that it cannot happen fairly without restructuring authority being granted by the Congress of the United States.”
Puerto Rico is legally excluded from filing for relief under Chapter 9 of the bankruptcy code, the one that insolvent cities, counties and other municipal governments use to adjust their debts.
On Tuesday, a subcommittee of the House Natural Resources Committee is scheduled to consider how some form of bankruptcy might work for Puerto Rico, in tandem with a federal oversight board.