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Creditors Alert Promesa’s Fiscal Board About GDB

By on September 22, 2016

SAN JUAN — A group of Government Development Bank (GDB) creditors is urging Promesa’s fiscal control board to stop the bank from favoring some of its creditors and foster debt-restructuring talks toward reaching a deal that is fair to all involved.

Davis Polk, advisers for the Ad Hoc Group of GDB Bondholders, which holds about one-fourth of the bank’s roughly $4 billion debt, wrote a letter Sept. 21 to board members and copied the GDB.

They raise flags over improper transfer of assets at the bank, and call out the Cooperatives Supervision and Insurance Corp.’s (Cossec by its Spanish acronym) proposed deal with local credit unions. They argue that the administration of Gov. Alejandro García Padilla hasn’t followed Promesa’s provisions nor its debt moratorium act, which they claim is unconstitutional.


Gov. Alejandro García Padilla

Earlier Thursday, attorneys for Brigade Capital, Fir Tree, Solus and others–all of which are Ad Hoc Group members, holding about $750 million of GDB paper–asked federal Judge Franciso Besosa during a hearing to rule on the validity of the local moratorium legislation. They seek to prove cause for lifting Promesa’s temporary stay on litigation against the commonwealth.

See Federal Judge Listens to Arguments Against Promesa Stay

“There is a hearing today at the [federal district] court from some bondholders demanding to be paid before investing in Puerto Rico,” García Padilla said during a press conference Thursday. These creditors are questioning whether it is necessary to restructure the island’s debt, he added.

See García Padilla says he is available to negotiate with creditors

Preferential treatment

“The commonwealth’s desire to prefer certain bondholders over others has continued despite Promesa’s passage,” reads the GDB creditor group’s letter, a copy of which was obtained by Caribbean Business.

For instance, it points out how the proposed exchange transaction between credit unions and Cossec, which would involve GDB notes, runs counter Promesa and only benefits one of the bank’s creditors. Yet they are “comforted” with the fiscal board passing judgment on the matter.

See Green light to Cossec on hold

The letter also raises flags on cash outflows at the GDB after the restrictions placed by the governor in April. The ad hoc group says it asked bank advisers for more information on the matter. They are “concerned” this could have further deteriorated the bank’s fiscal condition and that the commonwealth is failing to comply with its own “facially unconstitutional” moratorium legislation.

Stalled negotiations

According to the creditor group, after about a year of negotiations with GDB advisers, talks have stalled ever since the federal law’s passage, and were further disrupted by the administration’s maneuvers under its moratorium act.

The group says it is on standby for orders from the board as to “how best become engaged in the upcoming restructuring process.” Also, they claim to be ready to engage in talks with GDB and are hopeful about the bank’s new chief, Alberto Bacó Bagué, who “will bring about an increased focus on GDB’s negotiations” and is committed to returning the bank to the market.

See A new strategy with GDB creditors

The letter notes how the GDB is one of only two commonwealth issuers that has agreed to an “indicative term sheet.” Yet, the tentative deal reached with the ad hoc group in late April faced several milestones, including 100% participation from GDB creditors and further negotiation over key terms.

The proposed “two-step restructuring” entailed a first exchange of GDB debt for new notes, amid haircuts, or reductions to principal, of 43.75%. Once, and if, the broader commonwealth-debt restructuring takes place, there would be a second exchange, and the haircut would be 53%.

The GDB’s municipal loans, which have been described as one of the bank’s best by officials, would have been used to guarantee the new GDB notes.

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