Wednesday, December 8, 2021

GDB RSA Faces Significant Milestones

By on May 20, 2017

SAN JUAN — Gov. Ricardo Rosselló’s announcement that the Government Development Bank (GDB) had struck a term sheet that is on the verge of achieving the majority threshold that could send it down a path to Title VI of Promesa faces several milestones, the most pressing of which must be achieved over the next two weeks. The deal must rally the support of more than 50% of the GDB creditors as a precursor for certification by the Fiscal Oversight & Management Board to send the deal down a path to Title VI, where a two-thirds alignment of creditors would be required.

The Restructuring Support Agreement (RSA) is the product of a month’s long haul of talks between the Rosselló administration’s financial and legal advisers and legal representatives of several GDB bondholder groups, who convinced the government that there was a route different than the liquidation proposed in the former fiscal agent’s fiscal plan.

Entrance to Puerto Rico’s Government Development Bank. (File Photo)

“The key here was coming up with a formula that got the credits into a value range that was amenable to all of the different GDB bondholders,” said a source with knowledge of issues involved in structuring the deal. “So, you need to offer basically surrounding net present values to all different creditors. If you stray from that you would have a problem for it to be approved for Title VI. So, with that restriction in mind, what we tried to do was design tranches for different needs.”

The proposed deal contemplates a bond exchange that breaks down into three separate tranches with combinations of reductions in principal, maturities and coupon value. Tranche A credits have 55% face value while offering 7.5% coupon and Tranche Bs have 60% face value while offering a 5.5% coupon—both are pari passu.

The next hierarchy, Tranche C credits, recover 75% face value while offering a 3.5% coupon. Tranche C is a waterfall structure with a longer expected maturity—these start to get paid only after Tranches A and B are paid off.

The governor put the term sheet into context during a press conference, which was held at La Fortaleza last Monday morning. “We demonstrated that not everything has to follow the road in which talks are discontinued and that we can indeed strike deals if we work them properly. Holders of GDB [notes] are mostly from Puerto Rico: credit unions, Bonistas del Patio and municipalities, which also benefit from this transaction,” Rosselló said.

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“The three types of bonds would allow municipalities or other [GDB] creditors to go to the market and exchange [the new instruments] for money. In the case of towns…they would evaluate which one is better, or be it a combination, and most certainly would go to the market to access liquidity that could help them,” the governor added.

Rosselló explained that GDB assets would be divided into two trusts, one to which “credit unions, individual noteholders and municipalities would have access.”

The bond exchange will be paid through a Special-Purpose Vehicle (SPV) that draws from revenues segregated from several government entities (See list below).

The RSA stipulates that “all municipalities for which excess CAE [contribución adicional especial] deposits that have not been disbursed for fiscal years 2015, 2016 and 2017 (estimated at $38 million in the aggregate) shall receive 55¢ on the dollar recovery to be paid in cash by the GDB on or after the Closing Date, provided that such Designated Depositors enter into a Settlement Agreement waiving the balance of any such claims and otherwise releasing GDB and the Issuer from any claims or causes of action.”

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John Mudd, a bankruptcy lawyer, sees a problem with the RSA, noting that municipalities, many of which have deficits, may not be able to fulfill their end of the bargain. He said that after the oversight board approves the process of having the RSA go through Title VI, the deal needs to pass other hurdles. “You have to get two-thirds of the value of the bonds and 50% of the bondholders for the deal and then you will have to go to Judge Laura Taylor Swain to seek her approval,” he said.

The government is relying on certain sources of revenue, such as loans, for the Special-Purpose Vehicle, which consists of a bond issue. “There are a lot of municipalities with fiscal problems. What if they don’t pay? What will happen next? Mudd asked.

According to the RSA: “The GDB will act as initial Asset Manager for a period not to exceed twelve (12) months from the Closing Date (such period, the “Transition Period”). A designated back-up servicer (the “Back-Up Asset Manager”), which shall be a “qualified” and “independent” (as such terms are defined in the Definitive Documents) firm of recognized national standing with the requisite expertise and Spanish-speaking capability, and which is acceptable to the GDB, FAFAA [Fiscal Agency & Financial Advisory Authority] and the RSA Requisite Bondholders, will be engaged not later than the Closing Date to assume the responsibilities of the Asset Manager as soon as practicable and in any event before the end of the Transition Period, at arm’s-length, market terms in form and substance satisfactory to the GDB, FAFAA and the RSA Requisite Bondholders. The Back-Up Asset Manager will be selected by a competitive RFP (request for proposal) process prior to the solicitation of holders of Participating Bond Claims, and GDB shall use commercially reasonable efforts to effectuate the transition of its duties as Asset Manager to the Back-Up Asset Manager as soon as practicable.”

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Prior to the presser at La Fortaleza, restructuring brigades from the creditor camp were hard at work trying to rally support behind the deal. A source with knowledge of negotiations told Caribbean Business that “Tranche A seems to be the most favored for nonlocals; Tranche B remains to be seen, but you probably will have locals, and Tranche C, which was designed for co-ops because co-ops have a different problem from your typical bondholder. They have an issue with their capital reserves and the value on their balance sheet. So, that Tranche was created for them where they would only get a 25% haircut, but they would have a second priority on collateral and a lower coupon.”

—Reporters Eva Lloréns Vélez and Luis J. Valentín contributed to this story.

Entities Contributing to the SPV

  • Medical Services Administration: $282,447,692.
  • Office of Management & Budget: $260,332,550.
  • Treasury Department (Hacienda): $211,465,445.
  • Health Insurance Administration (ASES): $182,197,247.
  • Comprehensive Cancer Center: $120,482,398.
  • Municipal Revenue Collections Center (CRIM): $111,832,989.
  • Education Department: $91,580,469.
  • Transportation & Public Works Department: $82,869,714.
  • Corrections & Rehabilitation Department: $82,488,844.
  • Agricultural Enterprises Development Administration: $61,797,848.
  • Municipal Finance Corp. (Cofim): $57,251,415.
  • Agriculture Department: $50,294,124.
  • Justice Department: $49,493,959.
  • Police: $47,108,240.
  • Office of Courts Administration: $32,405,848.
  • Health Department: $29,860,922.
  • State Capitol Superintendence: $27,299,047.
  • University Medical Services: $11,246,786.
  • Recreation & Sport Department: $9,327,980.
  • Economic Development Bank: $7,499,798.
  • National Parks Co.: $7,049,130.
  • Housing Department: $6,080,003.
  • Catastrophic Diseases Fund: $3,274,708.
  • Veteran’s Attorney’s Office: $292,133.

Total Assets: $1.8 billion.

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