Thursday, July 27, 2017

[Editorial] Back From the Dead—Again

By on May 18, 2017

When Caribbean Business caught wind of a term sheet hammered out between the Government Development Bank (GDB) and several of its creditor constituencies days prior to the announcement by Gov. Ricardo Rosselló, images from the horror classic “Carrie”—hand thrust from the grave—came to mind. In an unexpected turn, the moribund bank targeted for liquidation by the GDB’s restructuring brigades was resuscitated to work out a deal that could deliver options palatable to all its creditors.

The term sheet is structured in a way that allows bondholders to choose from three separate tranches that combine levels of reduction in the face value of credits and the coupon value; we have yet to see how the combination of those two parameters and the maturities of those credits brings their new credits close to net present value. In so doing, there is a formula that is more proactive and less litigious. More importantly, it stands as evidence that creditors and the government can come together to build consensus.

The term sheet to the proposed Restructuring Support Agreement (RSA) is a deal months in the works that benefited from the cooperation of the Rosselló administration—namely GDB President Christian Sobrino and Fiscal Agency & Financial Advisory Authority Director Gerardo Portela—who, together with legal and financial reps, hammered out the terms with restructuring brigades from the creditor camp. No small feat in these contentious times.

As this newspaper was going to press, the term sheet had the support of 45% of GDB bondholders; it needs to surpass a first threshold of 50% for Qualified Modifying status, which would allow the RSA to be presented for certification by the Financial Oversight & Management Board (FOMB).

If the FOMB certifies the RSA to go down a path to Title VI, the deal would need to obtain the support of 66% of creditors—then, it is back to certification by the FOMB and filed in the district court.

Is this is a done deal? No, far from it, because nothing is ever simple in deals under the Puerto Rico Oversight, Management & Economic Stability Act (Promesa).

The hybrid law—it should have been called Sorpresa—intended to provide Puerto Rico with a path to orderly restructuring, which was eliminated when the U.S. Congress removed access to Chapter 9 of the U.S. Bankruptcy Code for the island in 1984. The various Titles in Promesa were drafted to essentially restructure debt; whether it is done under Title III, similar to a bankruptcy process, or under Title VI for consensual deals has been the bone of contention thus far. On top of that, several monoline bond insurance companies that are on the hook for billions in Puerto Rico debt, have filed for injunctive relief. They allege the Rosselló administration is not respecting the payment priorities of separate credits established in Promesa. And Congress thought it had solved Puerto Rico’s debt crisis; far from it.

The truth is that the conga line of lawsuits, say Wall Street sources who have been down this road before, could cost Puerto Rico close to 5% of the total debt load in litigation alone—that comes to about $3.5 billion.

So, global law firms are chomping at the bit as the Promesa sweepstakes gets underway. To achieve the GDB term sheet against the backdrop of that feeding frenzy is huge because, at the very least, it is evidence of an attempt at a consensual deal and an example of cooler heads prevailing.

This newspaper believes it is a far better alternative than the route to immediate litigation and an example that should be sought in restructuring other credits. Puerto Rico can ill afford the billions in litigation down the road to Title III.

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