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Another Rumble in the Jungle

By on April 28, 2016

In what is beginning to look a lot like a very expensive prize fight between the commonwealth’s advisers and creditors, the Alejandro García Padilla administration seems to be playing Muhammad Ali’s rope-a-dope style. The governor’s restructuring brigades were hoping to land a haymaker before the final bell, but the knockout was not delivered by the U.S. Congress when it failed to markup a measure—the Puerto Rico Oversight, Management & Economic Stability Act (Promesa)—to enable a federal oversight board and orderly restructuring mechanism for Puerto Rico.

The moment House Natural Resources Chairman Rob Bishop (R-Utah) announced that Promesa would not go to markup prior to May 16, he put the onus on the two sides to figure out how to avoid default on the Government Development Bank’s (GDB) debt-service payment of $422 million come May 2.

Forget Congress; there is a way around default. As this newspaper reported on April 19, the GDB may have reached a forbearance agreement with a group of creditors to cover $120 million of the main payment, while it hammers out deals with other creditors tied to Puerto Rico’s cooperatives. There is reportedly another $100 million that the Highways & Transportation Authority could pay the bank and be used for the May payment. In Wall Street parlance, all this is chump change.

Be that as it may, the commonwealth’s restructuring brigades, led by Millstein & Co.’s founder & President Jim Millstein and Puerto Rico’s CFO Melba Acosta, know they have a severe liquidity crisis. A default is a default by any other name.

Among the uppercuts they may land prior to the stroke of midnight on May 2 is a measure of last resort to have one of the big monoline bond insurers relend the money from the shortfall created by paying the debt. Most observers will point out that none of the bond insurers is on the hook for GDB debt. It does not matter—what analysts are pointing to is the bigger picture that has bond insurers on the hook for some $780 million in general-obligation debt that hits on July 1, as well as other debt.

The last thing the monolines want is to have to foot that bill in a summer of our discontent that will see the commonwealth facing some $1.5 billion in debt-service obligations.

Given this scenario, the entire creditor community will be looking to chip in to avoid a GDB default, which could start a barrage of litigation that will make a Connor McGregor UFC fight a game of tiddlywinks by comparison.

They will try to avoid that bloody scenario at all costs. One Caribbean Business source with knowledge of negotiations explained that it is quite possible the monoline bond insurers would come to an agreement to have the GDB make its payment, “essentially tanking its reserves, only to have the relending of notes with maturities that could be pushed out to late 2017.”

The GDB avoids default and everyone lives to fight another day, hoping against hope that either Congress will act, which becomes increasingly less likely with the passing of every day, or the U.S. Supreme Court will render the commonwealth’s Debt Enforcement & Recovery Act enforceable. As we hope for others to save us, it would be worth contemplating a job-creation measure that will keep us from being at the mercy of others ever again.

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