Puerto Rico and its creditors have returned to the bargaining table this week as newly-elected governor Ricardo Rosselló seeks to reset negotiations after an acrimonious two years between the island and its bondholders.
Mr Rosselló, who was elected in November last year to the US territory’s highest public office, said in an interview with the Financial Times on Thursday that he wanted to take a “philosophical shift” from the prior administration’s handling of creditor negotiations and “show there is a willingness to pay”.
“There will be real fiscal oversight and we are willing to sit down,” he said. “We are taking steps to make bold reforms. It is not a political bumper sticker any more. What we are asking for is runway to establish these reforms and have Washington recognise that they have a role to play.”
The governor has acted swiftly since he was sworn in on January 2, passing executive orders that will force Puerto Rican government agencies to cut operating expenses by 10 per cent this fiscal year and reduce political appointees by a fifth.
The belt-tightening is aimed at restarting a constructive dialogue with creditors, the governor’s team says, as they ready for the largest ever restructuring in the $3.7tn municipal bond market.
Puerto Rico owes creditors roughly $69bn and has defaulted on a large swath of its debts since 2015, including bonds backed by the US commonwealth’s constitution.
The island of 3.4m people has been stymied by a near decade of economic decay, which has depleted it of one of its most important resources: its people. The population has declined by more than 8 per cent from 2010, a greater deterioration than any other state.
Last year, in a rare showing of bipartisan support, the US Congress passed the Puerto Rico Oversight, Management and Economic Stability Act — known as Promesa, Spanish for promise. The law installed a control board of seven congressional appointees who must sign off on the island’s budget as well as agree to terms of any restructuring.
The law also provides Puerto Rico with access to bankruptcy-like processes, which were not available to the US territory, and halted all litigation against the island until February 15. The board has said it is “favourably inclined” to extend the stay on litigation until May 1.
Despite the rapprochement from the governor, creditors are galvanised for what may be rancorous deliberations.
The $69bn debt burden is split among a complex set of issuing groups with competing claims, including more than $17bn of bonds backed by the island’s sales taxes and $13bn general obligation bonds, considered sacrosanct by municipal bond investors.
The prior administration, under former governor Alejandro García Padilla, had asked bondholders to take a haircut of between 19 and 40 per cent. The García Padilla administration’s last proposal envisaged debt service of $1.3bn by fiscal 2019 before rising to $2bn by 2029.
The control board on Wednesday flummoxed investors and bondholder advisers when it projected that Puerto Rico could spend just $800m in 2019 servicing its obligations. In the 2019 fiscal year, the island will owe creditors $3.9bn. The board forecast a $7bn average annual fiscal deficit between its 2019 and 2026 fiscal years and recommended a 10 per cent cut to pension benefits.
Mr Rosselló, who has often been viewed as more sympathetic to investors, said on Thursday that he was not yet ready to comment on the debt haircut that he would seek, noting that the forecasts from the control board “show[ed] where they see” it. He added that his administration had ranked bond issuing entities by priority.
Puerto Rico has retained Rothschild and Dentons to advise it on financial and legal matters, and Mr Rosselló said that he was “willing to look at different structures” to address the shortfalls.
Already, Mr Rosselló is confronted with a looming liquidity squeeze in February, when more than $1.3bn of debt service is due. “We are aggressively looking for solutions,” he said, as the threat of a government shutdown in his first 100 days in office hangs over him.