Wednesday, July 26, 2017

GDB’s Future Hinges on Government’s Fiscal Plan

By on January 25, 2017

SAN JUAN – The lack of a fiscal plan for the Puerto Rico government that determines what will happen to the $6.5 billion in debt that public agencies and corporations owe to the Government Development Bank (GDB) is perhaps one of the greatest challenges in defining the future of the commonwealth’s former fiscal agent.

Clearing out within the central government’s fiscal plan how this debt will be treated—which could include a reduction or even wiping it out—opens the door to determine what could happen to the bank, incoming GDB President Christian Sobrino told Caribbean Business.

Incoming GDB President Christian Sobrino (CB/Juan J. Rodríguez)

Incoming GDB President Christian Sobrino (CB/Juan J. Rodríguez)

“Having a public and municipal financing portfolio, [GDB’s future] will depend a lot on what is determined in the fiscal plan. Any repayment or cutback done to the bank will have to be included there,” said the official, who added that this portfolio will be revalued.

With liquidity below $200 million, the also economic development adviser to Gov. Ricardo Rosselló added that the bank is only disbursing “internal transactions,” according to the current rule of law. Before the end of the month, new liquidity and disbursement committees will be formed to determine cash outflows at the GDB in a way that protects “the longevity of the bank.”

On the other hand, although the GDB works on its own fiscal plan, as requested by the P.R. Oversight, Management & Economic Stability Act’s (Promesa) fiscal control board, Sobrino indicated that along with the Fiscal Agency & Financial Advisory Authority (FAFAA), they have yet to decide whether it will be delivered as part of the government’s fiscal plan or presented individually.

Nevertheless, he assured that work is being done on “establishing a fiscal and action strategy for the GDB,” and warned of the complexity of presenting “a responsible scenario” for the entity.

On the latter, the official pointed out possible repercussions that any decision would have across the government. This includes the risk faced by the more than $9 billion in deposits belonging to municipalities and other public entities that remain frozen in the GDB.

What does the GDB do today?

Despite having lost most of its key functions, the GDB maintains its municipal finance division and certain banking operations related to the limited disbursements made by the bank, which has about 150 employees.

According to Sobrino, the entity “shut down its treasury,” while “its focus right now is to support the FAFAA group.” The latter acts as Puerto Rico’s fiscal agent and is tasked with debt negotiations and ensuring any government entity complies with Promesa.

As for operational costs, the official said work is being done to comply with Gov. Rosselló’s executive order that mandates cuts in spending. He added that the GDB continues to receive about $11 million each month, as provided by the current government budget. However, this has not been the case with money from the petroleum-products tax known as la crudita.

“It has not been received, and my understanding is that they were not disbursing it under the previous administration,” Sobrino said. The Highways & Transportation Authority shall transfer to the GDB certain excess revenues generated by la crudita that would ease off the nearly $2 billion owed by the authority to the bank. This would inject an additional $11 million each month, officials have previously said.

Another measure to raise much-needed liquidity at the GDB was to seek buyers for several of the bank’s properties. However, Sobrino assured he has no offer on the table, nor any transaction about to materialize, although he left the door open with FAFAA to evaluate any proposal to this end.

Any potential deal would also be presented to the GDB board, which currently comprises three members: Carlos Bonilla, Joey Cancel and Rafael Vélez. The new directors “will eventually be announced,” the official said.

Regarding external advice, the GDB uses FAFAA, Dentons and Rothschild advisers, although “to the extent that we have conflicting interests and we have to look for someone different, we will do so,” the official said.

Open channels with creditors

As for the bank’s outstanding debt, which amounts to nearly $4 billion, Sobrino said the communication channels remain open with creditors, including the GDB ad hoc group, which comprises various hedge funds, and the island’s credit unions.

Both creditor groups held negotiations with the bank during the past administration that resulted in certain agreements over the bank’s debt. However, following the signing of Promesa and the lawsuit filed by members of the ad hoc group against the GDB, negotiations between the bank and its creditors have remained at a standstill.

As for the restructuring framework accepted in principle last year by the GDB and the ad hoc group, FAFAA Director Gerardo Portela told Caribbean Business that the administration is open “to listen to all terms and conditions that they have offered in the past and whether they have changed.” However, he warned that the fiscal plan must be finalized before being able to negotiate economic terms.

On the agreement struck with a group of credit unions to defer for a year debt-service payments the GDB had to meet last May, Sobrino said a decision has yet to be made on this area, while it evaluates “all options we have on the table.”

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