Puerto Rico Gov’t Doubles Down on Congressional Action
By: Luis J. Valentín & Philipe Schoene Roura
If the run-up to blow the Puerto Rico Government Development Bank’s (GDB) May 2 debt-service payment—defaulting on roughly $370 million of the $470 million due—is any indication of the shape of strategies to come, the commonwealth is in for a grueling summer without congressional relief.
Sources with knowledge of the minutia underpinning the restructuring of Puerto Rico’s debt have let on that some advisers within the Alejandro García Padilla administration could be playing a very dangerous game of “overblowing” the crisis with the hope that the U.S. Congress would be pressed to act on its behalf—now.
At least two sources said one camp tied to La Fortaleza was of the thinking that a larger default on May 2, despite its consequences, would improve the likelihood of having a more favorable Puerto Rico Oversight, Management & Economic Stability Act (Promesa) making it to markup in the U.S. House Natural Resources Committee and be put on a fast track to passage in the Senate.
They believe that announcing deals with GDB creditors would only hurt the commonwealth’s chances to put Congress once and for all in a position to act.
A markup hearing on Promesa is not expected at least until mid May, as the bill is still struggling to achieve enough support on both sides of the aisle.
“I had, and have all the time, alternatives to gain a few months and drop the crisis on the next governor. I decided not to do so. I had to choose and opted for defending citizens’ services and addressing once and for all the fiscal crisis,” García Padilla told reporters early this week.
In the wee hours of Friday, April 29, officials and advisers went back and forth at La Fortaleza over how the commonwealth should face the May 2 deadline, at least two sources told Caribbean Business. On the table, a couple of deals that would mitigate the GDB’s looming default—and greatly reduce litigation risk—were being discussed.
One camp increasingly warned against the negative effects these deals could have on congressional prospects and the media fight being waged with some creditor groups that fiercely oppose the proposed federal action for Puerto Rico.
After much deliberation, García Padilla green-lighted both deals, which had been sitting in the pipeline for more than a week amid staunch opposition from some government advisers, sources added.
Yet, other options that could have downsized—and some say even averted—the GDB’s default fell off the table.
Sources said La Fortaleza has decided not to transfer about $100 million to the bank, resulting from a recent extension to the PR5 and PR22 concession contract between the P.R. Highways & Transportation Authority (HTA) and Metropistas, a local subsidiary of Spanish firm Abertis.
Instead of using the money to pay down the HTA’s mammoth $2 billion loan that has long been sitting on its books, as already suggested by the GDB, La Fortaleza has dodged the request made ahead of the bank’s May payment, and continues to state it has yet to decide the use of these funds.
The governor’s office has yet to respond to Caribbean Business’ inquiries made last week on whether it had already decided not to use the money for the GDB.
In a long-shot scenario, other sources said municipal-bond insurers were willing to cover the gap by lending short-term liquidity to the commonwealth, as previously reported by Caribbean Business (April 28, 2016), in a bid to avoid a default not only in May, but also on July 1, when more than $1.5 billion is due across government credits—payments for which monoline bond insurers are significantly exposed. La Fortaleza did not entertain this idea much or similar relending mechanisms.
The GDB pushed maturity on roughly $33 million that was originally due May 2, after reaching a deal with a group of local credit unions, named G25. On Sunday, May 1, in a broadcast message, García Padilla announced he had declared a moratorium on the bank’s debt-service payment, as the island stood ready to default on as much as $370 million.
Mere hours after the governor’s TV message, another deal was announced by the GDB with a group of hedge funds that own about one-fourth of the bank’s roughly $4 billion in debt, as reported by CB Online on April 19. The bank met, in full, interest payments worth $22 million—a move aimed at protecting local bondholders and credit unions, officials said.
In addition to a 30-day forbearance on about $120 million that was due May 2, the GDB and the hedge-fund group agreed to a general debt-exchange framework that would include a “two-step restructuring” of the bank’s debt. All creditors would first exchange their GDB debt for new paper, amid haircuts, or reductions to principal, of 43.75%. Once, and if the commonwealth’s broader restructuring plan takes place, they would take a 53% haircut.
All in all, the commonwealth missed roughly $370 million of its $470 million debt-service tab due May 2, of which $120 million is covered under the 30-day holiday granted by the GDB’s hedge-fund group.
GDB President & Chairwoman Melba Acosta told Caribbean Business on Wednesday that more local credit unions are on the brink of extending maturity on their GDB notes, initially due May 2, would be extended by a year.
“There will be a number of lawsuits,” the governor warned, noting that the island would fall at the mercy of court judges’ decisions that could potentially affect government operations.
However, some observers believe the probability of an immediate legal response by affected creditors has been significantly reduced. “We do not expect litigation over the GDB in the near term, but we also do not expect terms offered to certain creditors to translate into an actual debt exchange away from a more universal Puerto Rican debt workout,” stated Daniel Hanson, an analyst at Washington, D.C.-based Height Securities.
Acosta said earlier this week that as part of talks leading to the May debt payment, they reached out to “other large holders, some of them local banks, which were invited to join the deal or negotiate with us.
“Unfortunately, they didn’t want to,” she said. Some believe the largest litigation threat remained with the group of hedge funds, which is already in court with the bank, as it holds further debt-restructuring negotiations with commonwealth advisers amid the 30-day forbearance period, particularly over treatment of interest within the commonwealth’s broader debt-exchange offer.
“An agreement with such a slim likelihood of real implementation and founded on the interests of a minority ends up being a simulation. Even if that simulation has the purpose of lobbying Congress for debt restructuring powers that allow imposition of principal ‘haircuts,’ this exercise lessens the restructuring negotiations and unnecessarily delays them,” the G25 co-op group stated Thursday about the terms being discussed between the bank and the hedge fund group.
Meanwhile, Hanson said, “Congress is unlikely to be catalyzed by [the May 2] default, and the GOP will continue to work through its internal struggles with the proposed aid legislation.”
Some observers see the commonwealth’s strategy as foolhardy, especially against the backdrop of a U.S. Congress that is erring on the side of caution in their postures on Promesa.
“You are going to add some ornaments to be able to get six Democrats in the Senate to back the bill and get it over the top,” said one lobbyist on Capitol Hill. “That will be tricky because you have to do that in a way that doesn’t scare away support in the House when it goes back for concurring with the Senate amendments.”
The source, who chose to remain nameless, has been advocating for President Barack Obama and García Padilla not to hold back with all the executive actions that could be taken. “They have been holding back in order to contribute to the sense of crisis to force Congress to act, but Congress isn’t acting. They are going through the motions, but there isn’t a pathway to the Oval Office right now,” the source said.
General-obligation bondholders are aggressively lobbying the conservative members of the lower chamber to keep Promesa away from markup. This group is locking horns with other creditors, namely holders of Sales Tax Financing Corp. (Cofina by its Spanish acronym) senior bonds, who insist on equal hierarchy of their sales tax-supported credit.
“There are two options: either Congress acts and gives us a restructuring mechanism that works…or we have to embark on a restructuring process through voluntary negotiations that would be complicated,” García Padilla said.
The commonwealth is running out of options as it heads for the finish line, weighed down and exhausted by the pressure of a $1.5 billion-plus debt wall that must be cleared on July 1. In that sense, Puerto Rico’s debt-service track is a lot like Olympic steeplechase—hurdles become taller and the runner—an economy that has been in a free fall for years—is out of gas.