Friday, September 22, 2017

Oversight Board to Approve GDB’s Financial Deal



By on June 24, 2017

Now that more than 50% of the Government Development Bank’s (GDB) participating bond claims are on board with a restructuring support agreement (RSA), the question is whether the Financial Oversight & Management Board will ratify the accord so it can be implemented through Title VI of the federal Promesa law.

“No controversy there that I am aware of…. They like the deal,” a source close to the oversight board said. Once the board approves it, the deal has to go through U.S. Bankruptcy Court.

Entrance to Puerto Rico’s Government Development Bank. (File Photo)

Nonetheless, the Mayors Association, which comprises Popular Democratic Party (PDP) mayors, said it will try to put a stop to the agreement by filing a legal recourse before U.S. Bankruptcy Judge Laura Taylor Swain because, while municipalities are neither bondholders nor bank creditors, they are, in an unusual move, being treated as such.

The island’s 78 municipalities have about $2.5 billion in loans from the GDB and about $3 billion in deposits, which they are not allowed to access. These loans and deposits are being used to back up the bank’s RSA. The transaction between the RSA and its bondholders involves a bond exchange mechanism for the bank’s $3.76 billion debt, in which three types of tranches would be issued by a special-purpose vehicle. Haircuts would hover from 25% to 45%, depending on the tranche, and GDB assets, particularly the municipal loan portfolio, would pay for these bonds.

San Juan mayor says no deal yet

San Juan Mayor Carmen Yulín Cruz Soto, one of the biggest critics of the GDB’s deal, noted that the GDB debt-restructuring agreement requires 66 percent and not 50 percent of GDB bondholders to sign on to the deal so it can be ratified. “They do not have the percentage for approval. I think they are misleading the public and trying to exercise pressure,” she said, referring to the Fiscal Agency & Financial Advisory Authority’s announcement on the deal.

In fact, however, the process under the Promesa law calls for Financial Oversight & Management Board approval of the RSA as a “qualifying modification,” after which the GDB will need more than 66.6 percent of its voting creditors to be in favor of the deal.

Cruz Soto told Caribbean Business that at a recent meeting with mayors, GDB officials said none of the mayors had agreed to the deal, so it would be “interesting to know” which mayors signed on to the agreement. “I don’t think mayors know that our money is going to be stuck there for 23 years,” said the PDP mayor about the deal.

According to Cruz Soto, lawyers have told mayors that it is “totally illegal” for the GDB to keep the money that municipalities use to finance services. “They are using the money that belongs to municipalities to pay bondholders…. This is a good deal for the GDB but bad for municipalities,” she said.

Cruz Soto said she wrote to the oversight board asking members to reject the deal, but has not received a response.

The Mayors Federation, which comprises New Progressive Party-controlled municipalities, unanimously agreed during a meeting in May to support the RSA after La Fortaleza made certain promises to them, according to a statement from Arecibo Mayor Carlos Molina.

Meanwhile, Bradley Meyer, a partner at Ducera Partners law firm, recently told Caribbean Business that municipalities will be treated fairly in the deal because they will be able to participate in the exchange.

Lawsuits will continue

This has not stopped the legal claims. The municipality of Añasco sued the GDB in local courts, demanding the $4 million being held at the bank, which the town needs to pay its creditors and suppliers.

Isabela Mayor Carlos Delgado Altieri also said the Mayors Association is going to bring legal action before Bankruptcy Judge Swain to seek the devolution of funds belonging to municipalities, most of which are in dire financial situations.

“We all have money in the bank but we are being treated like bondholders. We have not been included in any negotiations. This is the only money that we have and we cannot get to it,” he said.

Delgado Altieri hopes that just as Judge Swain stopped the disbursement of Sales Tax Financing Corp. (Cofina by its Spanish acronym) funds, she will allow towns to stop payment to the GDB of money from the municipal sales & use tax so that money could be freed up for municipalities to use.

His town, he said, has about $8 million with the bank that it cannot access. Starting next year, municipalities will lose some $350 million in subsidies from the central government, forcing many to start charging for basic services such as trash collection.

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