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García Padilla Declares Moratorium on GDB’s Debt Obligations

By on May 1, 2016

SAN JUAN — In a televised message Sunday, Gov. Alejandro García Padilla announced he has declared a moratorium on the Government Development Bank’s (GDB) debt service, as the commonwealth stands ready to partially default on as much as $250 million due May 2 on the bank’s debt.

The cash-strapped institution would have faced a $400 million payment on principal, with an additional $22 million in interest. But during the past few days, the GDB pushed maturity on roughly $33 million after reaching a deal with local credit unions, followed by an agreement struck with a creditor group to enter into a 30-day forbearance agreement that would cover about $120 million of the bank’s May payment.

The GDB already stated it will pay about $22 million in interest due May 2, as well as roughly more than $40 million in debt payments across other commonwealth credits that also hit on Monday.

Photo Caribbean Business/Luis J. Valentín

(CB Photo/Luis J. Valentín)

“Pursuant to Act 21 [Puerto Rico Emergency Moratorium & Financial Rehabilitation Act], I ordered a moratorium on the debt service payment due by GDB [on May 2]. In light of Congress’s inaction, we were forced to enact Act 21 to protect the education, health and public safety and other essential services of our citizens from creditors,” the governor said. “Let me be very clear, this was a painful decision.”

García Padilla reiterated there is simply not enough cash to pay for both government services and the commonwealth’s debt service. “Both, Congress and our creditors, are fully aware of this situation. They know that only a congressionally approved restructuring process can provide a comprehensive solution. So far, no action has been taken. The crisis escalates each passing day,” he stressed.

The García Padilla administration has been lobbying Capitol Hill for months to achieve a broad debt-restructuring mechanism. For their part, the Republican majority delegations in both chambers of Congress have been skeptic of granting access to such a restructuring regime and instead have leaned toward establishing strong fiscal oversight on the island.

“We have proven with blood our shared values with the U.S. Now, Congress must show this commitment is mutual,” the governor stressed.

A bill being pushed in the U.S. House Natural Resources Committee seeks to strike a balance between both demands, but has yet to garner enough support to secure passage.

agp serio feature

Gov. Alejandro García Padilla

“We are fully aware that the opponents of the people of Puerto Rico are powerful. They have unleashed a brutal campaign of racial discrimination and lies against us. They have convinced some congressmen that what the people of Puerto Rico need is not a fair restructuring process but further austerity,” García Padilla said.

“We would welcome an oversight board that would assist the elected government of Puerto Rico in balancing its budgets and improving its fiscal discipline,” he went on to say. “But we strongly oppose a board that overrules an elected government by deciding how our taxpayer money is spent or who gets paid first, or that is permitted to veto, amend or repeal our laws at will and without any accountability to the people of Puerto Rico.”

Hours before the governor’s message, hundreds voiced their discontent in a protest held in Old San Juan against the potential establishment of a fiscal control board for Puerto Rico by the federal government.

Mitigating GDB’s default effects

Following the governor’s broadcast message, the GDB announced a separate deal with a group of GDB creditors comprising hedge funds, which own some $120 million of the May payment and about a fourth of the bank’s roughly $4 billion debt, as previously reported by Caribbean Business.

The Puerto Rico government announced late Friday that the bank had reached an agreement with a group of local cooperatives that pushes, for a year, payment on roughly $33 million that was originally due May 2, as part of the bank’s $422 million May debt payment.

The deal will see participating local co-ops exchanging their GDB notes — worth roughly $33 million — for new ones, essentially pushing the maturity for a year, with payment now due May 1, 2017.

The commonwealth’s restructuring brigades have been seeking separate deals from some GDB creditors entitled to the May payment in a bid to obtain some relief. However, even if reached on time, these deals would only cover about half of the $422 million in a best-case scenario, which would prompt the government to miss the remainder of the bank’s payment, officials have warned.

Under this scenario, the governor declared a moratorium on the GDB’s debt-service payments, as allowed under the recently enacted moratorium law. García Padilla had already declared an emergency at the financially troubled bank, with an executive order that placed restrictions on GDB’s cash outflow.

Plans call for having any debt restructuring deal reached with GDB creditors become a part of the commonwealth’s superbond proposal, if it is achieved down the road. To date, the so-called “superbond” has been the administration’s only playing card—a “global” structure whereby the island’s different credits are streamlined into a single “currency” by pooling in the various revenue sources that secure the repayment of these credits.

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