Saturday, September 23, 2017

Investors Offer to Buy GDB’s $2B Municipal Loan Portfolio



By on July 1, 2017

SAN JUAN — A group of foreign investors has let the Puerto Rico government know that it is interested in buying the Government Development Bank’s (GDB) municipal loan portfolio, which amounts to more than $2 billion.

However, after recently presenting a proposal to the administration of Gov. Ricardo Rosselló Nevares, as well as several mayors, the group is waiting for a response, despite the initial interest shown in the transaction, according to Randy Rivera, president of Premier Investment & Financial Services Group.

“This proposal has a myriad of virtues and we really do not know why it has not progressed,” said the banker during an exclusive interview with Caribbean Business.

GDB says advisers are working on documentation for fiscal aboard’s approval of RSA: discussions with municipalities underway. (File Photo)

For his part, GDB President Christian Sobrino said that although he received the proposal from Premier and shared it with the bank’s creditors, the investor group had yet to offer information solicited as to the identity of the investors behind the transaction.

“So far, they haven’t been able to tell who the investors are, where the money comes from,” said Sobrino, who added that because the GDB is under a restructuring support agreement (RSA), the bank is unable to dispose of its assets without the approval of a majority of its supporting creditors.

Premier was established late last year and is overseen by the local Financial Institutions Commissioner’s Office.

Rivera assured they have legal documentation that proves that the group of investors—which he described as “foreign”—has up to $10 billion in legally acquired and unencumbered funds.

He explained that the funds would initially go to buy the municipal loan portfolio and the remainder—as much as $750 million—would be available for future municipal financing.

At market value

The president of Premier said the proposed deal would contemplate a sale of the municipal loan portfolio at market value, which would need an analysis to determine the present value of these assets.

“That due diligence will determine, among other things, what the fair market value of that portfolio is. That’s what Premier will be willing to pay. I think that’s fair,” the banker said.

As for GDB’s Sobrino, he believes it is “problematic” that the group did not include in the proposal a suggested price, as well as an exclusivity clause demanded by Premier.

Rivera explained should Premier’s transaction occur, the money received by the GDB would be immediately available to pay the bank’s noteholders. The group would also be willing to pay the more than $700 million in municipal deposits trapped at the GDB.

What’s more, municipalities would be able to retrieve funds from loans that had been granted, but not disbursed.

“I think [creditors] are going to prefer that, and the central government should prefer this,” said Rivera, who warned that the transaction would require some legislative work, particularly to ensure the tax collection structure that serves as a repayment source for the GDB’s municipal loans.

‘Compatible’ with the RSA

When asked whether the transaction is compatible with the GDB’s RSA, the president of Premier said it would be “very easy to combine both solutions.”

“The RSA is an exchange of claims for bonds. If you execute [Premier’s proposal], the negotiation with the creditor would be, ‘I’ll give you [this money] upfront, because I have it in cash, and the difference would be in a bond.’ It would improve [the RSA] because they would have immediate cash,” Rivera stressed.

Sobrino said that to conduct a transaction such as Premier’s, it would have to be “a tremendous deal that offers the municipalities and [GDB’s] noteholders a better return than what is envisioned under the RSA.”

As for the RSA, Sobrino indicated that after recently surpassing the 50% creditor approval’s threshold, advisers to the island’s fiscal control board and the Financial Advisory & Fiscal Agency Authority are working on the documentation that will be presented to the entity created by the federal Promesa law.

The commonwealth seeks to have the board approve the RSA as a “qualifying modification,” as defined under Title VI of the federal statute. The deal involves an exchange mechanism for the bank’s debt load, through three new tranches. Haircuts would hover from 25% to 45%, depending on the tranche, and GDB assets, particularly the municipal loan portfolio, would pay for these new bonds.

“We believe that the exchange for municipalities constitutes a speculative…and losing transaction,” Rivera said about the RSA, in which municipalities would trade their deposit claims for one of the three proposed tranches.

Sobrino said that recent discussions with municipalities have taken place in a bid to secure their approval. “Some [mayors] have shown interest, others haven’t,” the GDB president said.

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