Puerto Rico has offered a huge haircut to creditors that would reduce its debt by about $23 billion in the opening salvo to resolve its crippling $70 billion debt crisis, but the proposal was immediately slammed by one bond insurer.
With a 45 percent poverty rate and a steady exodus of its population to the United States, Puerto Rico is trying to crawl out of an economic swamp before substantial debt payments come due in May and July. The U.S. territory has defaulted on some debt and is trying to persuade creditors to take concessions.
The new plan announced on Monday would reduce a $49.2 billion chunk of debt by about 46 percent, to $26.5 billion, by offering creditors payout reductions under a new, so-called "base bond" with better legal protections. The cut to creditors was earlier reported by Reuters.
"We do not view this proposal as a serious effort," said Nader Tavakoli, president and chief executive officer of bond insurer Ambac, which insured $2.2 billion net par, or original face value, of Puerto Rico bonds as of the end of November. Ambac recently sued the U.S. territory over a recent debt default.
Tavakoli said it was "difficult to engage in discussions since Puerto Rico refuses to share basic information." The government is far behind on filing audited statements and has not yet released its 2014 fiscal statements.
Under the proposal made public on Monday, different creditor groups would be treated differently, based on seniority.
Holders of general obligation debt backed by Puerto Rico's constitution would take a roughly 28 percent cut under the base bond, while holders of debt issued by the island's income tax authority, COFINA, would take losses of about 51 percent, according to the plan. The haircut to all other holders would average about 61 percent.
The creditors would have an opportunity to make up the difference in face amount through a second "growth bond," whose payout would be dependent on future growth.
Interest payment on the base bond would begin in 2018, reaching 5 percent a year by 2021, while payouts on the growth bond would begin 10 years after the close of the offer.
The base bond is guaranteed, and reflects cuts in repayment while the growth bond is designed to make up the difference, but is only paid if the island's economy grows.
Monday's offer comes against the backdrop of a separate plan by Puerto Rico to cut expenses and increases revenues by some $34 billion over the next decade, but the island says it nonetheless needs concessions from creditors to attain economic growth.
Creditors, for their part, have been skeptical that Puerto Rico has done enough to rein in spending and right-size its government.
The exchange offer would provide creditors increased legal protections, including a guarantee on the debt via liens on income tax receipts, the island's sales and use tax, and as much as $325 million in petroleum products tax revenues.
"This proposal is a reflection of our commitment to work with our creditors on a sustainable solution that does not place the burden on one stakeholder group alone," Victor Suarez, the island's secretary of state, said in a statement.
Shares of bond insurers MBIA, Assured Guaranty and Ambac — which all have exposure to Puerto Rico bonds — fell in early trading, down 2.4 percent, 0.3 percent and 2.1 percent, respectively.