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Puerto Rico offers plan to restructure its debt

A man waves a Puerto Rican flag during an event in San Juan in May. (Alvin Baez/Reuters)

Puerto Rico has proposed a plan to ease its crushing debt burden that would give major creditors new bonds worth an average of 54 percent of their existing ones, but also would give bondholders an unusual way to receive additional money if the commonwealth’s economy grows at unexpectedly rapid rates.

The proposal was made Friday at a meeting between advisers to the Puerto Rican governor and advisers to creditors that hold $49 billion of the island’s more than $72 billion worth of debt, according to a person briefed on the proposal. The proposal comes as Congress and the Obama administration are wrestling over what legislation could help Puerto Rico restructure its debt, force recalcitrant creditors to sign onto a plan, and ensure that the island maintains fiscal discipline so that it does not end up in a similar fix in the future.

The plan presented Friday, and which the creditors are weighing, would cut Puerto Rico’s debt service from 36 percent of the commonwealth’s budget to 15 percent, a level equal to that of Hawaii, which has the highest rate of any U.S. state. Creditors must now choose whether to accept the deal, negotiate, or pursue lengthy litigation while waiting for possible congressional action.

Under the proposal, Puerto Rico would issue $26.5 billion worth of new “base bonds” to replace $49 billion in existing bonds issued by 17 government entities. Investors holding the highest quality bonds would be able to exchange their existing bonds for new ones at a more favorable rate.

The territory would not pay any interest or repay any principal for 18 months, and for 3


years after that would pay only interest, starting at 3 percent and rising every year to 5 percent. After that, the territory would pay $1.7 billion a year to service and repay the debt.

Puerto Rico also would issue $22.7 billion in new “growth bonds” so that if its economy grew at a rate of more than 4.5 percent a year and if its tax revenue grew faster than forecast in the deal, then bondholders would get 25 percent of the higher tax revenue.

The bond is similar to ones that Argentina and Ukraine have issued.

Those payments would not begin sooner than 10 years from now and could continue for no more than 35 years. But if Puerto Rico’s economy, which has been shrinking for the past 10 years, does not exceed forecasts, then the bondholders would receive nothing.

The “base bonds” would replace some of the territory’s highest quality bonds, backed by streams of tax revenue. The existing bonds include $17 billion general obligation and public building authority bonds; $17 billion issued by COFINA, a government corporation backed by sales tax revenue; and $15 billion issued by the Government Development Bank, the highway and transportation authority (supported by gasoline taxes) and smaller government entities.