Some Puerto Rico bonds still pay in full and on time
6 min read
More than eight years after the Puerto Rico Electric Power Authority stopped paying its bonds and with most other Puerto Rico municipal issuers having since restructured their bonds, eight Puerto Rico bonds continue to pay in full and on time.
These issues, with $5.31 billion outstanding, continue to pay on time and in full: University Plaza Project (AFICA-OPP), Guaynabo (AFICA-Guaynabo), Children’s Trust Fund, Municipal Finance Agency, Housing Finance Authority, University of Puerto Rico, Puerto Rico Aqueduct and Sewer Authority, and Puerto Rico Highways and Transportation Authority Teodoro Moscoso Bridge.
Some analysts saw overarching reasons why some Puerto Rico municipal bonds have continued to pay.
Puerto Rico Clearinghouse Principal Cate Long said developments in the middle of the last decade affected which bonds have defaulted.
The administration of Gov. Alejandro García Padilla hired Proskauer Rose in 2014 to create a local bond bankruptcy law. While the federal courts ultimately invalidated the effort, Proskauer lawyers in the process”looked very closely at the bond documents for each class and weighed the difficulty of attempting to invalidate versus how much debt savings they could possibly realize.
“Proskauer assessed bond types for restructuring that had high par values and didn’t have strong protections,” Long said. “Proskauer utilized that research after the Oversight Board hired them in 2017 and that influenced the board’s choices for restructuring.”
Long said it was noteworthy that the Oversight Board “focused almost exclusively on the big boxes in the debt stack in the Title III [bankruptcy] court.”
Four of those not in trouble — the University Plaza Project, Guaynabo, Municipal Finance Agency, and the University of Puerto Rico — were smaller and their bonds are generally locally held, one Puerto Rico bondholder who declined to be identified said, so for the Oversight Board to put them into bankruptcy would be politically risky.
The other four were “very specific issues,” the bondholder noted.
“PROMESA created broad restructuring authority for Puerto Rico’s debt and delegated the responsibility for utilizing these tools to the Oversight Board,” said Kent Hiteshew, who helped create PROMESA when he was part of the Obama administration.
“Debt restructuring is only available to ‘covered’ governmental entities that are subject to board-approved fiscal plans and budgets,” he added. “It was never anticipated that these restructuring powers would be applicable to the debt of conduit issuers separately secured by project or federal government revenues.”
In addition to these broad explanations, there were explanations specific to each issue.
The Puerto Rico Aqueduct and Sewer Authority ($2.966 billion outstanding) was able to increase rates to stabilize its finances, beginning with a 60% hike in water rates in 2013. The authority also implemented cost-cutting measures in the first half of the decade and smaller rate increases in the latter part of the decade.
“As a covered governmental entity under Title II [of PROMESA], PRASA was able to achieve a consensual restructuring without reliance on PROMESA’s federal court-supervised Title III provisions due to the sizable amount of subordinated federal loans and a refinancing of its outstanding bonded indebtedness,” Hiteshew said.
The authority “implemented significant debt service relief through two consensual modification[s],” the Puerto Rico Oversight Board said. In 2019 the authority modified about $1 billion in federal loan debt obligations and in 2020 and 2021 it refinanced $3.2 billion of bonds.
Long said, “PRASA had a very secure gross revenue lien that the Oversight Board likely knew they could not invalidate.”
Muni Credit News Publisher Joseph Krist agreed. The authority is “the type of issuer that meets the special revenue treatment that is one of the few clear precedents in Chapter 9 case law,” he said.
The University of Puerto Rico ($289 million outstanding) issued revenue bonds secured by tuition fees, student fees, rental, and other charges for the occupancy of UPR’s facilities, net bookstore receipts, and other revenue sources.
Despite UPR being under financial pressure when it became eligible for bankruptcy protection under PROMESA in 2016, it has continued paying.
For universities, “it is a death knell to declare bankruptcy,” said Moody’s Associate Managing Director Susan Fitzgerald. Federal law permanently denies federal financial aid to students who attend colleges or universities that go through Chapter 9 or similar bankruptcies.
Since the Puerto Rico central government’s entrance into bankruptcy in 2017, Puerto Rico’s Fiscal Agency and Financial Advisory Authority and bond trustee U.S. Bank, NA, have agreed to successive standstill agreements under which FAFAA and UPR continue to make payments and the trustee refrains from calling a default on the bonds.
While restructuring the bonds was discussed, it has not happened. In October, El Nuevo Día’s website reported that Puerto Rico Secretary of the Treasury Francisco Parés said the university must restructure the debt and quoted FAFAA Executive Director Omar Marrero as saying the debt might be able to be refinanced, as was done with PRASA’s debt.
“The Oversight Board endeavors to reach consensual solutions for each debtor before resorting to PROMESA Title III or Title VI restructurings, though these options remain if UPR’s pension or other debt issues cannot otherwise be fully resolved,” said board spokesman Matthias Rieker.
As for the Puerto Rico Highways and Transportation Authority Teodoro Moscoso Bridge issue ($99 million bond debt outstanding), “The revenue source is from a particular facility rather than the system as a whole so that revenue source was essentially ring-fenced,” Krist said.
Long said the bond’s strong lien explained its ability to go through the HTA bankruptcy unimpaired, while other HTA bonds did not.
The Municipal Finance Agency ($183 million outstanding) bonds are backed by ad valorem taxes on all taxable property with municipalities.
Under PROMESA the Oversight Board can restructure debt of defaulted Puerto Rico government instrumentalities in default, but the board noted AFICA, the Children’s Trust Fund, the Municipal Finance Authority, and the Housing Finance Authority are not considered commonwealth entities.
Similarly, Krist explained, “the municipal taxes which fund the debt service on the [MFA] bonds were outside of the bankruptcy.”
Long said, “My guess is the lien adequately secures the bonds.”
In September, FAFAA said it was exploring refinancing the debt, and did not rule out using a forced restructuring.
As for the future, Long said, “It may not be possible for the Oversight Board to invalidate the lien on the MFA bonds but overall, many municipalities have debt burdens which are not sustainable.”
University Plaza Project (AFICA-OPP) ($51 million outstanding) and Guaynabo (AFICA-Guaynabo) ($4 million outstanding), were issued by conduit AFICA and are backed by lease payments, the FAFAA said.
The University Plaza bond payments come from lease payments made by the University of Puerto Rico to a nonprofit entity that developed the plaza project, with the nonprofit responsible for bond payments, FAFAA said.
The Guaynabo bonds have a similar arrangement. A nonprofit entity developed commercial real estate facilities used by Guaynabo. Debt service comes from lease payments. The nonprofit is the actual entity transferring the debt service to bondholders.
“The loan agreement pledges the revenues to the bonds and there is no direct connection to the commonwealth [government] in terms [of] a pledge for the bonds,” Krist said.
Children’s Trust Fund ($1.54 billion outstanding) bonds are secured by receipts from the 1998 tobacco settlement between the states and the signing tobacco companies.
“This credit is non-recourse to the government of Puerto Rico and the government has no financial or legal obligation,” FAFAA said.
Long said Puerto Rico gave up its rights to the revenue stream as part of the Master Settlement Agreement.
Housing Finance Authority ($191 million outstanding) debt service payments come from annual allocations of funding provided by the U.S. Department of Housing and Urban Development, FAFAA said. The credit is non-recourse to HFA.
