Commonwealth to Present Moratorium Legislation
SAN JUAN — While advisers for the Puerto Rico government and creditors talk over restructuring a large chunk of the island’s $70 billion debt, the Alejandro García Padilla administration is about to present legislation that would deal with the more than $2 billion in debt payments hitting this summer, according to Caribbean Business sources.
The measure would declare a moratorium on Puerto Rico’s debt service, including the $422 million owed by the Government Development Bank (GDB) on May 2, as well as the roughly $1.5 billion due across the board on July 1. As of Tuesday, La Fortaleza intended to present the moratorium legislation as soon as Friday, but the administration suddenly decided to postpone it, government sources said. Nevertheless, plans still call for presenting the measure, they added.
On the creditors’ front, advisers for the commonwealth and its creditors continue to negotiate terms for a voluntary debt-restructuring plan that can secure substantial support from all sides, but the sides have entered into nondisclosure agreements, according to sources.
“The goal is not to continue negotiating publicly and not to keep releasing proposals. The goal is to use conversations with creditors to come up with something that will have substantial creditor support,” one source with knowledge of the negotiations told this newspaper.
Caribbean Business previously reported that the commonwealth government sought to announce a revised offer to creditors at some point during the past two weeks, but plans were suspended amid ongoing negotiations between the sides. One government source added that creditor groups asked the government not to publicly release the proposal until all sides are closer on their demands.
Sources have said details on the bombshell legislation being worked on by La Fortaleza were still being fine-tuned, but in general, it would broadly cover the island’s debt and would most likely include a mechanism to deal with the financially battered GDB, which is facing a large debt payment and does not have enough cash to pay in full.
To this effect, the administration is considering “an FDIC-like [Federal Deposit Insurance Corp.] approach,” with the government bank seeking “to protect depositors and access to its asset value, while figuring out some restructuring of the third-party creditor debt,” said one government source with knowledge of the matter. “Traditionally, the FDIC does a good bank/bad bank act, moves assets and deposits into a good bank, then leaves behind the third-party debt.”
Sources added it remains to be seen if there would be enough support among Puerto Rico lawmakers to make way for La Fortaleza’s moratorium measure and establish the mechanism needed to provide relief to the bank.
When asked by Caribbean Business about the GDB, the governor warned there is insufficient cash to meet the May payment, which “could bring an avalanche of lawsuits and, before reaching that point, we would have had to have taken preventive measures to protect the Puerto Rico government.”
As for when exactly the government would move forward on these preventive measures, García Padilla said earlier this week that he could not publicly disclose his strategy. Yet, he noted that some of the measures will be taken sooner than others and will “generate all types of reactions.”
The commonwealth’s move to present debt-moratorium legislation in the face of the summer debt cliff would come amid strong debate in Congress over draft legislation presented by Republicans in the House to tackle the island’s fiscal crisis. The measure calls for a strong federal fiscal-oversight board, while providing access to a debt-restructuring mechanism, subject to the board’s approval.
And although the administration remains optimistic that changes could still be introduced to the bill in order to achieve legislation that is favorable to Puerto Rico, time is not on their side and all possible measures continue to be evaluated. “To avoid a humanitarian crisis, we are already late. Congress is late,” García Padilla said Monday.
“It would be great if Congress provides some tools to address Puerto Rico’s issues, but if they don’t, the creditors and the commonwealth are going to have to solve it by themselves…. There is not going to be some magic endpoint,” a government source told this newspaper.
While acknowledging for months the possibility of enacting such emergency measures as declaring a moratorium on debt service, La Fortaleza’s efforts had focused on achieving congressional action that could help the commonwealth deal with its fiscal crisis and looming debt payments.
Not public this time
With the commonwealth administration on the brink of seeking local debt-moratorium legislation, restructuring advisers continue to meet with representatives of all creditor groups, with “very active” negotiations among the sides, at least two sources told Caribbean Business.
The government’s last proposal, made public earlier this year, sought to exchange about $49 billion of debt for two new types of securities, while calling for initial haircuts hovering around 45%, depending on the credit. Counterproposals have been delivered by some of the affected creditor groups, including those holding general-obligation and Sales Tax Financing Corp. bonds.
Following the release of the government’s last offer, advisers for all sides have been going back and forth over terms in an effort to reach some sort of consensus among the competing interests of all involved. While the last two government proposals and a few of the counteroffers that followed were all made public, it would not be the case from now on—not until broad support is achieved among all sides, sources said.
As for the latest developments on Capitol Hill and how they could affect ongoing creditor talks, one government source said creditors had hoped Congress would “change the playing field in some way” that would give them more leverage in negotiations.
“I think the recognition has dawned on creditors that there is no magic bullet,” said one government source, adding that active dialogue is taking place. Nevertheless, a long road still needs to be covered before reaching much-needed consensus between the commonwealth and all the creditor groups.
Executive Editor Philipe Schoene Roura contributed to this story.