Population decline, a contracting economy, natural disasters, and changes in tax status and available credits under the US tax code created a poor outlook for the Commonwealth of Puerto Rico. In response to the ongoing fiscal and humanitarian crisis in Puerto Rico, in 2016 President Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). PROMESA promised a path forward to restructuring the Commonwealth’s debt and implementing fiscal reform to cultivate a sustainable economy, fiscal responsibility, and market access.
Nixon Peabody has practiced in Puerto Rico for 30 years (in municipal finance since 1998), and served as bond counsel on the restructuring of more than $34 billion of outstanding debt, which was exchanged for $7.4 billion in new general obligations bonds and $8.7 billion in new general obligation contingent value instrument notes.
This restructuring reduced the island’s total funded debt obligations from $34.3 billion to approximately $7.4 billion, which reduced its maximum annual debt service more than 70%. As a result, the Commonwealth now looks forward to a future of opportunity and growth.
Driving the largest municipal restructuring in US history
Virginia Wong led the NP bond counsel team, which worked diligently to address the numerous challenges that arose during this transaction.
The underlying financing documents required negotiation and approval by not only the Financial Oversight Board, but also representatives of four municipal bond insurers and numerous institutional investors. And the restructuring involved the issuance of general obligation bonds, contingent value instruments, and the establishment of more than 50 custodial trusts, resulting in more than 400 deliverables at issuance. We advised on the new authorizing legislation as well as a new debt policy governing the issuance of debt by the Commonwealth going forward.
These challenges required teamwork and cooperation. To successfully implement the restructuring, we partnered with the AAFAF; the Commonwealth Department of Treasury; the Commonwealth Secretary of Justice; the Commonwealth’s financial advisor, Ankura; the Commonwealth’s restructuring counsel, O’Melveny & Meyers; local counsel, Pietrantoni, Mendez & Alvarez; and the counsel and advisors to the FOMB, the municipal bond insurers, and institutional creditors.
By fostering a culture of collaboration, we made history and accomplished the largest municipal restructuring in US history.
Teamwork Makes the Dream Work
The primary tax team, Mitch Rapaport, Carla Young, and Joel Swearingen reviewed more than 30 years of Puerto Rico bond issues and dozens of Puerto Rico governmental entities in order to issue a tax-exemption opinion on the new GO bonds.
Angelica Valencia supervised the issuance of the GO Bonds and quarterbacked the entire transaction, coordinating the execution and delivery of the documents for closing.
Sebastian Torres-Rodriguez served as our liaison with Puerto Rico’s government officials in addition to working on the deal. He previously worked as a Senior Legal Advisor at the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) representing the Government on matters related to PROMESA, including debt restructuring and public finance. And he was general counsel to the Puerto Rico Sales Tax Financing Corporation during the issuance of its restructured sales tax bonds in 2019.
Our team’s unwavering pursuit of excellence, collaboration, and consistency literally paid off—Puerto Rico’s government has formally exited bankruptcy.
“This is the most complex and comprehensive public debt restructuring in the history of the United States… [I]t allows Puerto Rico to return to the capital markets, eliminates uncertainty, and restores investor confidence in Puerto Rico, which will in turn promote investment, economic development, and job creation.” Omar Marrero, Puerto Rico Secretary of State/Lt. Governor
Creating Positive Impact
Relying on our deep relationships, industry knowledge, and experience, our bond counsel team was able to carry out the largest municipal restructuring in US history.
This deal closing means that Puerto Rico’s government has formally exited bankruptcy and will resume payments to bondholders for the first time since 2016. And on top of this, there would be an immediate $7.78 billion cash payment to holders of some of the bonds.
With NP by its side, Puerto Rico now has a path to access the credit markets and develop balanced annual budgets, and the impact of our work will be felt for years to come.