Back From the Dead?
BY PHILIPE SCHOENE ROURA & LUIS J. VALENTÍN
If Economic Development & Commerce Secretary and Government Development Bank (GDB) President Alberto Bacó Bagué has his way, he would revive the ailing bank with a series of strategic moves—he is preparing a study of the institution and promises audited statements by Dec. 25—that aim to revitalize the severely decapitalized GDB.
What was once the fiscal agent for Puerto Rico in charge of managing the external financing of the island’s public corporations and instrumentalities, is on life support right now, thanks largely to a culture of deficit financing that has prevailed across several administrations.
Liquidity that dropped from $5 billion in 1989 to $160 million in 2016 has the bank in a straitjacket—its charter law was changed to restrict further lending and it has been stripped of its role as the fiscal agent—as detractors continue to call for its liquidation.
Despite the harrowing statistics and a chorus of naysayers in the Alejandro García Padilla administration, Bacó, who took over as the GDB chairman & president on Aug. 1, remains convinced that the bank can be revitalized with a game plan that includes a future leaned toward economic development and significant private-sector participation, a revamped governance and “creative” ways through which to capitalize the troubled institution.
“It became an ATM for works that could not obtain financing in the private sector. It did not run with a concerted plan—with metrics. And you cannot run an institution that way,” Bacó told Caribbean Business on the heels of his first board meeting, which took place last week. “The first thing I asked for was authorization to conduct a study and strategic plan to map a vision for the bank—to answer why the institution is important in this economy. And I can articulate many reasons why the institution is extremely important in this economy right now. I could do that right now—but the right way to do that is to go to the executives, to the community and trace a plan that can measure the strengths and the weaknesses—opportunities that exist.”
Bacó is convinced that the bank is essential to Puerto Rico’s economic development—he is hopeful that the study he is putting together and expects to unveil within eight weeks will help him make the case before an audience of federal control-board members who are scheduled to be selected by Sept. 15, according to the stipulations in the Puerto Rico Oversight, Management & Economic Stability Act (Promesa). His mission to save the bank is a crusade steeped in hardship because the GDB faces a confluence of factors working against its survival.
The Promesa spotlight
Title II of Promesa provides for the oversight of fiscal plans, debt sustainability analysis and the scrutiny of assets, funds or resources of territorial instrumentalities. Although Bacó’s “Lazarus Plan” to resuscitate the moribund bank could benefit from a study, it is essential that he present audited statements for two years: fiscal years 2015 and 2016. “The audited financial statements for the past two years that are not ready and have not come out have to be presented before Dec. 25 of this year,” Bacó told Caribbean Business. “This is a very clear goal that I have established from the very beginning.”
Bacó is well-aware that the write-off of 40% of certain debts owed by the central government and instrumentalities to the GDB is impeding the delivery of those statements. “The auditors could reserve a [lesser] quantity, but we will see the circumstances from now until December,” he said in a rather dismissive fashion. “I expect to have moved forward. In negotiations with creditors…I will have a strategic plan on how to manage those debts and we can always reach a reserve. But there are various ways to achieve the objectives. I’m not afraid of that.”
When Caribbean Business asked: “Wouldn’t it be wise to turn in audited statements before reaching deals with creditors?” Bacó replied: “Of course, that is why my target is Dec. 25; they have to be ready by then.”
The lack of audited financial statements are a bone of contention in Puerto Rico’s debt crisis that traces back to the beginning of the García Padilla administration. The chorus of critics echoing their discontent includes creditors and members of Congress. U.S. Sen. Orrin Hatch (R-Utah), who presides over the eight-member task force on Puerto Rico’s economic development, has been adamant in his insistence that audited statements are essential to establish a credible debt-sustainability analysis. In the time since putting Puerto Rico on his radar in hearings prior to the enactment of Promesa, Hatch has sent more than one missive to Gov. García Padilla demanding a credible audit. The senator is not alone in his demands.
“There is a general skepticism in the creditor community about possibilities and probabilities because we don’t even have financial statements for these entities. How do we agree to anything until we get a sense of what is really needed,” Ambac Financial Group President & CEO Nader Tavakoli told Caribbean Business in May.
“We are not going to subscribe to anything without a federal oversight board. We want the oversight board to get down there and assess the situation. And not presume there is all of this debt restructuring that needs to happen. We are happy to look at anything that is constructive, but our focus right now is on the congressional bill,” he said at the time.
“We are not under the premise that the debt is unsustainable; that is why we want a control board to get down there,” Tavakoli said.
Creditor groups—not only those from the GDB, but also general-obligation (GO) bondholders, Senior Cofinas (Spanish acronym for Sales Tax Financing Corp.) and monoline bond-insurance companies foremost among them—see Title II as an essential component in Promesa because it will help to decipher the level of unsustainability of Puerto Rico’s debt service.
The Lazarus bank
Bacó’s resuscitation initiative is a task of miraculous proportion because he must make his case to revitalize the GDB before an audience that is bound to denounce the institution’s violation of the tenets of good banking. Founded in 1942, the bank’s insolvency is a work in progress that has been years in the making. The fuse for its implosion was set more than 10 years ago when short-term debt spiked to fund public corporations and the central government’s unbalanced budgets, a term known as deficit financing. Worse still, no sufficient revenue streams were pledged to repay debt.
“To fill the gaping hole left by the departure of Section 936 funds, the bank had to develop multiple financing vehicles,” explained former GDB President & Chairwoman Melba Acosta during a recent exit interview. “In essence, the bank sought ways to free the general fund from the liquidity pressure it couldn’t sustain.” It was only a matter of time before the bank faced insolvency.
Then the coup de grâce—in 2014, this little piggy went to market with a $3.5 billion GO bond deal—sold mostly to nontraditional investors—of which $2 billion went to pay off debt owed by the GDB. The bank’s top brass was concerned about the precipitous drop in liquidity but they thought they had one more ace up their sleeves—to go to market in 2015 with another $3 billion bond deal. They were mistaken.
In interviews that took place in 2015, Acosta explained that the confluence of events—a delay in the approval of hikes to the petroleum-products tax, or la crudita, and the failure to pass a structurally balanced budget in timely fashion, among others—made access to the market impossible.
As reported previously by this newspaper, Acosta’s campaign to seek legislation enabling hikes to la crudita set off political infighting with Senate President Eduardo Bhatia and the House Treasury Committee Chair Rep. Rafael “Tatito” Hernández in 2015. The rancor and disdain for the bank that prevail to this day will not help Bacó’s GDB crusade.
“Who are those enemies of the bank? They are like individuals who take out a mortgage loan on a house that is double what my house is worth and maxed out credit cards without repayment sources and then they dedicate themselves to criticizing Banco Popular—close Banco Popular, that Banco Popular is no good; to close Banco Popular so that we don’t have to repay the loans,” said Bacó in a rather combative tone. “Where do those legislators leave the creditors—the credit unions? I believe that the political scenario and four-year cycles have blinded some legislators who do not understand the importance of the bank; and I am going to give them the benefit of the doubt.”
Cash disbursements at the bank are ring-fenced by a couple of executive orders that were issued by the governor in April, pursuant to Act 21, or the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act. The local legislation gutted the bank of its role as fiscal agent, transferring that task to a newly created entity, the Puerto Rico Fiscal Agency & Financial Advisory Authority. A total of 28 former GDB employees were transferred to the island’s new fiscal agent, bringing down the bank’s payroll to 204 employees.
Bacó asserts it is a gargantuan mistake to “insist in destroying the bank,” as it will harm Puerto Rico’s prospects to return to economic growth, particularly affecting municipalities and key social-interest housing projects. He lamented how the GDB has lost much-needed talent, mostly over the uncertainty that for months has clouded the bank’s future.
“Everything possible has been done to destroy the bank. Again, I don’t know why,” Bacó said. “The bank could be the revolutionary leader because the bank itself is already fighting for its survival.”
He went on to invite naysayers to try to better understand the institution, buy into his vision to revitalize the GDB and “hold accountable those who truly were responsible” for the bank’s demise.
Besides delivering a long-term plan for the GDB and audited statements, injecting liquidity into the cash-strapped bank would contribute greatly to bringing the bank back to its feet. The GDB’s liquidity currently tops $160 million, according to Bacó. For starters, the bank will soon begin to receive the $120 million earmarked in this fiscal year’s general-fund budget. “[Treasury Secretary Juan] Zaragoza said that this Friday [Aug. 19], the first payment will be made,” Bacó said, explaining that the budgetary allocation was divided in 11 monthly payments of roughly $11 million each.
However, as of this writing, the GDB had yet to receive the $11 million payment, sources told this newspaper.
Then there is the idea of depositing at least half of the $22 million received monthly from la crudita. “[Zaragoza] reaffirmed as well that half the payments of la crudita, which are around $22 million [monthly], would continue to be destined to operational use at [the Highways & Transportation Authority], and the other half would go to the GDB. This would provide additional liquidity,” Bacó said.
Meanwhile, some of the GDB’s real estate remains on the market, as the bank continues its efforts to monetize some of its assets. Yet, Bacó assured no loans are being sold at this moment.
There are also “other creative ways to capitalize the bank,” and Bacó intends to explore each one of them. “You can add a small tax for the capitalization of the GDB. Now, everyone has to understand that it is important. We could amend some of the laws through which some extraordinary benefits are being granted and use a small percentage to recapitalize the bank,” he said, noting as possible vehicles such tax-incentives laws as Acts 20 and 22.
In the long run, bringing back the more than $1 billion in government funds that once flowed through the GDB would be key to prop up the bank’s liquidity position. Earlier this year, these funds began to be deposited in private banks, landing a mortal blow to the GDB’s cash levels. “Once we have audited statements and achieve a deal with our creditors, it would be logical to have those accounts back at the GDB,” Bacó said.
“But as long as we preserve the liquidity in the $150 million vicinity, the idea is to disburse money to depositors that have priority, as provided by the executive orders. And if we have a larger liquidity, maybe we could ease down the executive orders, so that other depositors with needs and that haven’t been receiving payments, begin to receive them,” he added, in reference to the cash-outflow restrictions under which the GDB has been operating since April.
With his broad plan in place, Bacó wants to resume talks with the bank’s creditor groups, under a new negotiation strategy. He also sets out to revamp the GDB’s governance, while calling for a larger role for the private sector in the bank’s operations. For instance, he noted that there are government development banks that are run much like public-private partnerships.
“I think that the main creditor groups could have representation on the board of directors of a new entity that could be the result of a collaborative effort between the private sector and the public sector, which would have the largest investment and use and thus, majority representation,” Bacó told this newspaper.
The bank’s board—which still has three empty seats—now comprises Economic Development Bank President Joey Cancel, private-sector representatives Carlos Bonilla and Rafael Vélez, and Bacó, who is also acting as chairman. As first reported by Caribbean Business, the under-the-radar appointments of Vélez and Bonilla were made by La Fortaleza on May 17, while Cancel’s took place on Aug. 3.
“I have proposed other names, and the governor wants to complete the board even though those with ill-will are saying no one would want to serve on the board,” Bacó said, commending the governor for the latest board appointments, which were not publicly announced by La Fortaleza. “We all share the same vision,” he noted.
Bacó sees the GDB as a pillar of the economic-development vision he has been drawing for the island at the Economic Development & Commerce Department. “So that is why it is important for me to keep both hats,” he said, in reference to his current dual role inside the García Padilla administration.
Although he wants to stay for the long run, Bacó acknowledged the governor has the last word over his tenure, which could last one day or five months. “I’m with his team…I’m available—it’s tough,” he said during the interview.
“But I am certain that an institution like that—well-capitalized—can begin to grow, to generate wealth and that way, commence to pay its creditors more,” Bacó said, adding that he is confident he could steer the ship for awhile, and then some more.