Puerto Rico sees $1.2 bln a year in debt service spending

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By Nick Brown

<span class="articleLocation”>Puerto Rico’s blueprint for escaping its fiscal
crisis paints a rosier picture of its economic future than an
earlier forecast by the federal board overseeing the U.S.
territory’s finances, but still presages big haircuts for
creditors.

The fiscal turnaround plan, unveiled by the island’s
government on Wednesday morning, sees $1.2 billion a year
available to service the island’s debt, 50 percent higher than
the $800 million the board projected in January.

Yet Governor Ricardo Rossello’s team arrived at the higher
figure despite falling short of certain of the board’s
recommended spending cuts. That’s because his model forecasts
higher baseline revenues and lower expenses, pegging the overall
10-year funding gap at $56 billion, lower than that board’s
$67.5 billion projection.

The plan needs approval by the board, which is under no
obligation to rubber-stamp it and can develop its own model. The
board has said it wants to approve a plan by March 15.

“The most important thing at this point is how the board
responds to the assumptions made by the Rossello plan, including
a lower baseline fiscal gap,” said Keefe Bruyette & Woods
analyst Chas Tyson.

The governor’s projections take into account cost-saving
reforms through laws and executive orders he has signed this
year, said Gerardo Portela, director of Puerto Rico’s Fiscal
Agency & Financial Advisory Authority, in an interview on
Wednesday.

A requirement of the federal Puerto Rico rescue law known as
PROMESA, the plan will form the basis of upcoming debt
restructuring talks with holders of some $70 billion in bonds.

If consensual talks fail, Puerto Rico can enter a
court-supervised workout, akin to U.S. bankruptcy.

It needs a restructuring to fend off economic strife in the
form of a 45 percent poverty rate, unemployment more than twice
the U.S. average, and borderline insolvent public pensions and
healthcare systems.

Rossello would save another $550 million a year in
healthcare spending and $63 million in pension costs, below the
board’s annual savings targets of $1 billion and $200 million,
respectively. Rossello has stressed the need to protect the
island’s most vulnerable residents.

Public retirement systems are underfunded by $45 billion,
thought to be the largest gap ever for comparably sized U.S.
public pensions.

Thanks to its territory status, Puerto Rico gets
proportionately less federal Medicare funding than U.S. states.
Rossello has said he plans to lobby the U.S. Congress to
increase that funding, a move he says would boost the island’s
annual debt service capacity to $2.7 billion.

“We’re very confident we’ll get at least some of that
funding,” Elias Sanchez, the governor’s liaison to the oversight
board, said in a phone interview on Wednesday.

Even with the more robust debt service capacity Rossello
envisions, Puerto Rico bondholders will be asked to take big
cuts. The $1.2 billion figure represents a 69 percent discount
on the $3.8 billion or so the island owes next fiscal year.

The governor’s proposal cites the possibility of a debt
restructuring that could include new tradable securities or cash
flow bonds, or a structure that ties creditor recoveries to
economic growth.

The island is asking the board to lobby Congress for an
extension of PROMESA’s freeze on lawsuits against Puerto Rico
over debt defaults. The freeze ends on May 1, and the island
says it needs more time to negotiate consensual deals with
creditors without the specter of litigation.

The plan’s focus on boosting revenue instead of austerity
seems politically motivated, said investor David Tawil, whose
fund, Maglan Capital, traded out of its positions in GO debt in
part over political uncertainty.

“I wonder whether this plan is an opening salvo from the
governor to the board … or whether the board will take offense
to this plan, because it ignores the guidance they’ve previously
provided,” Tawil said.

The presence of the board is a source of tension in Puerto
Rico, where many locals view it as an unwelcome extension of
U.S. imperial control.



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