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Debt-Moratorium Clouds Brewing

By on March 17, 2016

SAN JUAN — As time runs out to achieve federal legislation that could spark debt-restructuring talks with creditors, the Government Development Bank for Puerto Rico (GDB) will be the first walking the plank as more than $2.5 billion in debt payments owed by the cash-strapped commonwealth begin hitting over the next few months.

The island’s fiscal agent faces about $10 million in interest payments due April 1, followed by $422 million on May 2—mostly corresponding to debt issued in 2011, during the administration of former Gov. Luis Fortuño. In fact, most of the GDB’s roughly $4.2 billion in outstanding notes date back to the previous administration.

SAN JUAN, PUERTO RICO - JULY 01: The Puerto Rican Capitol building is seen as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico. Governor of Puerto Rico Alejandro García Padilla said in a speech recently that the people of Puerto Rico will have to make sacrifices and share the responsibilities to help pull the island out of debt. (Photo by Joe Raedle/Getty Images)

(Photo by Joe Raedle/Getty Images)

Given the current state of affairs and absent timely federal action, the Alejandro García Padilla administration could be pressed to enact legislation declaring a moratorium on payment of public debt to ensure the government’s essential operations, two sources told this newspaper. Creditors, in turn, would most likely sue for relief.

Yet, as the administration holds back on pulling the trigger on such a measure, the GDB could find itself up the creek, particularly in the run-up to the May debt payment.

Holding pattern at La Fortaleza

The administration has said it would stand ready to declare a moratorium on its debt service—if necessary. The governor has repeatedly stated he would choose essential services over debt obligations if the government has no cash to pay for both. “As of today, there isn’t a date for it to happen,” Public Affairs Secretary Jesús Manuel Ortiz told Caribbean Business on Monday.

When asked whether La Fortaleza is waiting for Capitol Hill before moving forward on this front, Ortiz said, “It is a possibility. Obviously, all our focus is on achieving legislation in Congress.” The administration would announce additional emergency measures to the extent it is ready to do so, he added.

For his part, Height Securities analyst Daniel Hanson stated earlier this week that “as liquidity strains and political factors put at least a portion of the May 1 GDB payment at risk, the timeline may prove complicated for Congress, which is likely to be in the throes of debate about Puerto Rico when the GDB payment comes due.”

The government bank is already making its moves to try to tackle its woes. In fact, it has been doing so for more than a year, by implementing a series of measures aimed at improving its dwindling liquidity position. Most recently, on March 10, the bank posted a notice for institutions interested in acquiring roughly $32 million in loans made by the GDB to various hotel projects.

The entity in charge of receiving future debt payments from the GDB is no longer Banco Popular, after the local bank decided last month to step aside from being the trustee for more than $4.2 billion in outstanding GDB notes. Wilmington Trust succeeded Popular as new trustee of this debt, effective March 7.

The writing has been on the wall for quite some time over the bank’s deteriorating fiscal health, with officials already foretelling it may not have enough money to meet in full its upcoming payments.

One would ask if the bank could get some type of forbearance from its creditors. After all, the Puerto Rico Electric Power Authority (Prepa) did so a year ago, when it entered into forbearance agreements with a majority of its creditors. With consent of at least 60% of its bondholders, bond documents could be amended to enable the forbearance while restructuring talks were held until a deal was reached.

GDBsideBut the GDB is a different story. Its trust indenture doesn’t provide the opportunity to promptly achieve such relief actions as forbearance. It also lacks a mechanism to bind holdout creditors and, as happens with the rest of the commonwealth, there is very little leverage to have creditors voluntarily sitting down at the negotiation table.

This was evidenced last year, when the GDB engaged in discussions with a group of its creditors, seeking an exchange of existing notes for new paper and more favorable payment terms for the bank. But talks were suddenly ended in October, after failing to reach a “mutually acceptable arrangement,” the bank stated at the time.

It further said it would focus on achieving a broader, voluntary exchange offer for most Puerto Rico creditors—a process that has yet to gain traction, with advisers for all sides going back and forth over several proposals that have been brought to the table. These include two from the government, with a third offer soon to be released, as previously reported by Caribbean Business.

A familiar idea

Far from being an ace in the hole, two Puerto Rico lawmakers have already introduced legislation to declare a debt moratorium, and a former chief of staff under García Padilla, Ingrid Vila Biaggi, has supported it as well.

For Popular Democratic Party Rep. Manuel Natal, a moratorium could avoid a government shutdown in the summer, without further increasing taxes. In 2014, he introduced House Bill 2003, which would authorize the governor to use his fiscal-emergency powers to declare a moratorium on debt not secured by the commonwealth’s full faith and credit. Puerto Rican Independence Party Sen. María de Lourdes Santiago also introduced early this year a similar bill in the upper chamber, although tying it up to solving the island’s political status quo. Both measures are still pending in their respective legislative committees.

“None of the GDB bonds have [the commonwealth’s guarantee] for their repayment, so the bank’s debt service would be automatically suspended [with HB 2003], including the $420 million due in May,” Natal told Caribbean Business, although acknowledging litigation could still follow any moratorium legislation.

Proponents argue that the commonwealth may constitutionally enact legislation for a moratorium to protect public welfare and essential services to residents, while naysayers question the validity of any such local law, along with the consequences it may have on the commonwealth’s reputation in the capital market.

Despite the concerns that have been brought up, the ever-worsening cash crunch and the possibility of no timely congressional action would surely test the García Padilla administration on pulling the trigger on this maneuver.

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