Warring creditor groups in Puerto Rico's ongoing debt restructuring have reached an agreement that could resolve one of the most contentious disputes in the more than $70 billion bankruptcy case.
A proposed settlement would provide approximately $10 billion of debt relief and would resolve substantial risks to the Commonwealth, according to the executive summary.
It would also end a more than yearlong court battle between two top tier creditor groups, which have been fighting over who has first rights to the island's sales-tax revenue for bond payments. Those groups are the owners of general obligation bonds and owners of bonds issued by Cofina, which are supported by sales tax revenue.
The groups announced the plan in separate statements on Monday.
The two have agreed to set up a trust that would take in Puerto Rico's 5.5 percent sales and use tax for 40 years and then pay out to the separate bondholder groups, Mark Palmer, a BTIG analyst who covers bond insurers, wrote in a note on Monday. "The trust would then make an exchange offer for all GO bonds and allowed general unsecured claims (GUCs)," the note said.
Cofina bondholders would receive 52.5 percent of the sales tax revenue, while general obligation bondholders would get 46.2 percent.
"The supporting parties have come together for the first time in years to forge an agreement on a settlement framework that provides for a consensual path to a successful restructuring. The settlement framework reached by this diverse group of stakeholders would significantly decrease the duration and cost of Puerto Rico's bankruptcy, while also providing for substantial deleveraging," the Ad Hoc Group of General Obligation Bondholders said in a statement.
Other supporting parties in the settlement are the Bonistas del Patio, which represents island residents who own bonds, and the bond insurers Assured Guaranty, Ambac and MBIA. In total, the supporting parties hold more than $11 billion of Puerto Rico's debt.
Cofina's bondholders would share $12.1 billion, which amounts to recoveries of 93 percent to 95 percent for the senior bondholders and 42.2 percent to 43.2 percent for the subordinate bondholders, or about 64 percent combined. General obligation bondholders would get $10.7 billion, a recovery for them of 58.6 percent.
Sources familiar with the matter told CNBC that the general obligation creditors would be able to pursue additional claims from the Commonwealth for the amount not covered by the payments from the trust.
The government of Puerto Rico and Puerto Rico's Financial Oversight and Management Board were not part of the talks, and both parties rejected the terms.
The seven-member Oversight Board, which oversees the beleaguered island's finances, said the economic terms of the creditor proposal did not align with the fiscal plan it certified on April 19, calling it "completely unaffordable".
"In the Board's view, the proposed terms would create large and recurring structural deficits over the long-run as compared to the long-term primary surpluses projected in the certified New Fiscal Plan, which are highly dependent on the Government's full implementation of said Fiscal Plan, with no aspect as critical to long-term economic growth as prompt enactment of the proposed labor reform," the Board said in a written statement.
The Cofina Coalition, made up of those who hold approximately $4 billion of senior and subordinate Cofina bonds, supports the proposed settlement but said it also believes that there are other avenues for an agreement to be reached.
"While members of the Coalition support the COFINA-GO settlement framework, the group also proposed alternative settlement terms – again with significant principal haircuts to COFINA – in mid-April to other constituencies that include the Commonwealth Agent and the Official Committee of Retirees," a written statement from the Coalition said.