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Following Declaration of Emergency, GDB Seeks Deal With Creditors

By on April 11, 2016

SAN JUAN — Following Gov. Alejandro García Padilla’s executive order imposing restrictions on the cash-strapped Government Development Bank (GDB), commonwealth advisers are seeking to cut a deal with a majority of holders of the bank’s roughly $4 billion in short-term debt.

“We are in constant communication with the GDB creditors; we have made an interim proposal, they are under NDAs [nondisclosure agreements]. They have come back and made a proposal to the GDB,” said Richard Cooper, partner at Cleary Gottlieb, a New York-based law firm retained by the government. No additional details on the GDB creditors’ counteroffer were given during a recent press roundtable with the administration’s fiscal team.

The bank is facing a $422 million payment on May 2, for which it lacks the cash to meet in full.  

“It’s hard to know where [talks] would go, but we are trying our hardest to get a resolution before May 1, at least an agreement in principle with a large enough group — we’ll see,” Cooper said, while adding they also talk with the cooperatives camp “on a constant basis, exchanging views.”  

GDB President & Chairwoman Melba Acosta stated earlier this week that the bank had resumed talks with its creditors in a bid to secure some sort of deal ahead of the May payment. This includes the possibility of striking a forbearance agreement that keeps the commonwealth out of court if it misses that payment.

When asked by Caribbean Business about such relief mechanisms, Cooper said they continue to evaluate measures that would “alleviate some of the pressures that a default would have.”

But he mentioned how the recently enacted Puerto Rico Emergency Moratorium & Financial Rehabilitation Act, along with the executive order placing restrictions on the bank’s operations, “would stabilize things….[and] address most of the concerns.”

Melba Acosta Febo (GDB) Government Development Bank President & Chief Financial Officer of the Government_ANA_5531

GDB President & Chairwoman Melba Acosta

Acosta noted how the island’s recent fiscal developments, including the moratorium legislation and the GDB executive order, have prompted creditors to sit down at the negotiating table.

Acting under the Puerto Rico Constitution’s police powers, the law authorizes the governor to suspend debt-service payments for all commonwealth entities, whenever he deems necessary, as well as a stay against any litigation that may arise. It also allows the governor to place restrictions on the bank’s operations, and amends the receivership process under its charter law. If the GDB is placed under receivership, a temporary “bridge” bank could now be created to carry out some of the bank’s functions and honor deposits.

While limiting cash disbursements and dispensing the bank from required minimum reserves, among other changes, the GDB executive order signed last week doesn’t impose a moratorium on its debt obligations yet, as the administration seeks to foster talks with the bank’s creditors, government officials say.

Yet, Acosta conceded that even if the GDB reaches a deal with a large group of creditors, a partial moratorium could still be imposed by the governor on the $422 million debt payment due May 2. What’s more, previous talks between the bank and its creditors over a debt-exchange deal have failed to result in any agreement amid onerous terms for the island, government officials have said.

Despite having received counterproposals from some creditor groups, these wouldn’t solve the bank’s debt woes nor the island’s unsustainable debt burden, Acosta has stated.

As first reported by Caribbean Business, one of the García Padilla administration’s main reasons for moving swiftly on the enactment of the moratorium law is that it empowers the governor to establish restrictions on the GDB’s operations amid growing concern about the bank’s dwindling liquidity levels. The latter stood at roughly $560 million as of April 1, mere days before the García Padilla administration enacted the moratorium legislation.

For weeks, various public entities — particularly a large number of municipalities — had been seeking for weeks to withdraw their funds, creating a run on the bank that further deteriorated its fiscal health.

Meanwhile, a group of GDB creditors is suing the bank in federal court, seeking it stops transferring funds out, except for those that cover essential services. Federal Judge Francisco Besosa ordered the bank to respond no later than April 15.

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