Puerto Rico Rides Muni-Bond Rally to Bankruptcy Deal

Puerto Rico moved closer to resolving the largest municipal-debt default in U.S. history after creditors owed roughly $11.7 billion backed a settlement framework, the most Wall Street support yet amassed for a restructuring of the territory's core public debts.

The proposed settlement released Tuesday would reduce roughly $18.8 billion in general obligation debt to roughly $ 7.4 billion, lowering interest payments to bondholders to levels that Puerto Rico's financial supervisors believes it can support after years of population loss and economic decline.

Some bonds covered by the deal have gained value in recent months, buoyed by fixed-income investors' appetite for high-yielding municipal debt and expectations that Puerto Rico's court-supervised bankruptcy is nearing its end. The agreement marks the culmination of months of private talks between finance officials and creditors to assess the long- term damage to Puerto Rico's economy stemming from Covid-19.

Investment firms that participate would exchange their claims for a mix of cash, restructured bonds and tradable securities known as contingent value instruments that only pay out if sales-tax collections exceed certain projections.

A sustained rally in high-yield municipal bonds, including Puerto Rico's, helped to ease the deal, according to bondholders and advisers involved in negotiations. Yield-hungry investors have been drawn to risky municipal bonds in part due to the U.S. Federal Reserve's commitment to ultralow rates.

Also fueling the rally are expectations that federal support for Puerto Rico will increase with the White House and both houses of Congress under Democratic control, according to analysts and investors.

The stronger the market demand for Puerto Rico bonds, the less restructured debt needs to be issued to compensate bondholders, and the stronger the incentive for them to sign on to a settlement.

Any restructuring requires approval from the federal judge overseeing Puerto Rico's bankruptcy case and still faces obstacles, including objections by Gov. Pedro Pierluisi and other elected leaders to reducing pension benefits of public employees.

The agreement was finalized under the financial oversight board that has been supervising Puerto Rico's finances since the territory defaulted on its general obligation debt. Former President Donald Trump in his final months in office made seven appointments to the oversight board, a combination of his own selections and holdovers appointed by his predecessor, Barack Obama.

If approved, the deal would curtail the legal battles that have raged since Puerto Rico filed for bankruptcy in 2017, costing taxpayers in the territory more than $858 million in fees and expenses for lawyers, bankers and other professionals as of last month. Some rulings stemming from that litigation have undermined longtime assumptions among investors about the safety of some types of municipal bonds.

Puerto Rico's bankruptcy came after years of heavy borrowing and service cutbacks that affected everything from schools to electricity service and pushed many residents, who are U.S. citizens, to depart for the mainland, sapping the tax base and squeezing budgets.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

  (END) Dow Jones Newswires
  02-23-21 0819ET
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