Brian Tumulty, the bond buyer
Puerto Rico’s debt structuring is progressing and could be upheld by a federal judge in the first half of 2021 despite three vacancies on the Financial Management and Oversight Board.
“Hopefully we will confirm a plan in the first half of 2021,” Chairman David Skeel said. “I wouldn’t guarantee it or anything like that, but it’s definitely my hope.”
Skeel predicted that the Commonwealth will have significantly reduced its debt, noting that the three pieces already completed have reduced the debt from around $28 billion to around $20 billion. These three cover the Government Development Bank, the Water Company and the Commonwealth Sales Tax debt. The bond agreement of Puerto Rico Sales Tax Restructuring Corp. (COFINA), however, is being challenged in the United States Court of Appeals for the First Circuit.
“The board will be in place until Puerto Rico has four consecutive balanced budgets,” Skeel said. “Puerto Rico won’t have a balanced budget until it restructures its debt and so it’s really important that we move forward.”
The restructuring of the remaining debt includes approximately $35 billion of central government debt and is often referred to as an adjustment plan. That plan suffered a setback from the COVID-19 pandemic which led the Supervisory Board to revise down the proposed payouts to bondholders it published in February.
Federal Judge Laura Taylor Swain set February 10 as the deadline for the Supervisory Board to file “an informative motion presenting a list of terms disclosing the material economic and structural characteristics of a modified adjustment plan.”
The judge also ordered the filing of a proposed disclosure statement that would include a timeline for the confirmation process, including solicitation and voting.
In the meantime, Skeel said he had no way of knowing how long it would take President Trump to fill the three board vacancies from lists provided to the White House by congressional leaders.
If Trump does not fill the vacancies by noon on January 20, that task would fall to President-elect Joe Biden.
Trump named Justin Peterson of DCI Strategies to the oversight board in October.
Peterson, who served as counsel for creditors in Puerto Rico, replaced Arthur Gonzalez, who previously served as chief judge of the U.S. Bankruptcy Court for the Southern District of New York.
Gonzalez was chosen as the voting member by former President Obama, who named the six other original voting members from lists provided by four House and Senate Republican and Democratic leaders.
Skeel, a professor of corporate law at the University of Pennsylvania and an initial board member since August 2016, was nominated by Republican Senate Majority Leader Mitch McConnell and nominated by Obama.
Skeel told The Bond Buyer in an interview that he informed McConnell he was ready to serve another term.
Two other original board members, Andrew Biggs and Ana Matosantos, also continue to serve even though their three-year terms have expired. They are legally allowed to continue serving until replaced.
All three members are committed to continuing to serve to keep the Oversight Council operating with a quorum, Skeel said. “There has been no indication that this will cease to be the case anytime soon,” he said.
Biggs, like Skeel, was appointed in 2016 by McConnell who, as Senate Majority Leader, has the prerogative to appoint two members.
But if Democrats win two Senate races in Georgia on Jan. 5 and gain majority control of the chamber, McConnell would have the prerogative to appoint a single member of the Oversight Council.
Senate Democratic Leader Chuck Schumer would instead have the option of nominating two nominees to the oversight board if Trump did not act first.
Skeel described as “a hiccup” a meeting of the supervisory board two weeks ago in which the new board member suddenly left the meeting, depriving the remaining three members of the quorum needed to take any formal action.
Peterson left the recent meeting to prevent the remaining members of the council from changing the wording of a proposal that could have approved central government debt restructuring without any further action from the council.
The motion recommended negotiations with creditors “in accordance” with the terms found in the exhibits “with a view to presenting a modified adjustment plan as soon as possible”.
Skeel said he expects the disagreement to be resolved soon.
“I spoke to everyone on the board,” he says. “We don’t always agree on everything. We agree on a lot of things. Skeel said he expects “something along the lines of what was on the table at this meeting” to be approved by the board soon.
“I think people sometimes focus on the hiccups and not on the things we’ve accomplished,” he said. “We introduced a tremendous amount of new transparency into Puerto Rico’s finances that didn’t exist.”
The Puerto Rico Electric Power Authority is also transforming the island’s power generation and distribution system while reworking its $9 billion debt. PREPA’s restructuring fell behind schedule, and over the summer the Internal Revenue Service ordered the utility to repay five quarterly federal grants it received through the Build America Bonds program.
