Can the Puerto Rico Gov’t Avert Default in May?
By Luis J. Valentín & Philipe Schoene Roura
Entering the stretch run toward doomsday—a May 2 deadline on a $422 million debt-service payment owed by the cash-strapped Government Development Bank (GDB)—the Puerto Rico government’s restructuring brigades are seeking separate deals from various creditor groups that could mitigate or even avert what Gov. Alejandro García Padilla called on Wednesday as an unavoidable default.
As previously reported by Caribbean Business, the commonwealth is closing in on forbearance agreements with some GDB creditors entitled to the May payment, sources say. But even if timely achieved, these deals would only cover about half of the $422 million, which could prompt the government to miss the remainder of the payment, officials have stated.
Two sources told Caribbean Business that a last-resort scenario could find municipal bond insurers covering the gap, by lending the cash to the commonwealth so it can avoid a default in May. Although none of the three monolines insure the GDB debt that hits in a few days, they have huge exposure across Puerto Rico’s other credits, particularly on the more than $1.5 billion in debt payments due July 1. If the government misses payments on insured debt, monoline bond insurers need to foot the bill. That was the case early this year, when the commonwealth partially defaulted on $36 million due Jan. 4 on P.R. Infrastructure Financing Authority bonds.
“You could see the GDB making a payment with monolines relending the full remainder of the portion not covered by the [GDB] creditors, just to avoid a default,” said one source with knowledge of the negotiations.
The administration has repeatedly stated it has no cash to meet its summer payments in full—which include about $780 million in general obligation bonds (GOs)—while standing ready to default to avoid affecting essential services to residents.
Skeptics believe the government is pushing the crisis discourse to prompt favorable and timely congressional action. The House Natural Resources Committee recently delayed a vote on a bill that would grant Puerto Rico with access to a broad debt-restructuring mechanism, while establishing strong fiscal oversight on the island.
Monolines to the rescue?
“The monolines don’t want to see a scenario that begins a domino effect that would lead to having to cover payments come July 1. There is genuine interest on their end to see the payment made and then help replenish reserves through new notes,” one source said.
The GDB may execute a maneuver similar to the one employed by the Puerto Rico Electric Power Authority (Prepa) during a critical juncture in July 2015. As previously reported by Caribbean Business (July 1, 2015), the deal struck by Prepa at the onset of fiscal year 2016 had the utility making a scheduled payment of $415 million. To provide liquidity for working capital and other purposes, Prepa announced at the time that the three bond insurers had agreed to buy newly issued bonds, amounting to roughly $128 million.
“On that occasion, the utility tanked their reserves when they made the payment and then they had relending in a wire transfer bring the reserves back up,” the source said.
When asked Monday by Caribbean Business about the possibility of having a relending mechanism that could help the bank avoid a default on its May payment, the bank’s president & chairwoman, Melba Acosta, said, “It is not in discussion…. We are talking more about forbearance agreements.”
Alternatives to tackle May payment
Earlier this week, Acosta said the commonwealth is “talking with different groups” about separate deals. “With some groups, we are just talking about forbearance and maybe extending maturities. With others…maybe we are doing something else,” she conceded.
“All the creditors are watching each other. So, you know, the first that reaches an agreement sets a precedence over the rest,” added the commonwealth’s lead restructuring adviser, Millstein & Co.’s Jim Millstein, who was in Puerto Rico earlier this week, along with Richard Cooper, a partner at New York-based law firm Cleary & Gottlieb.
As reported on April 19, the GDB may have reached a tentative deal with one of its creditor groups, which owns $120 million of the May payment and about a fourth of the bank’s roughly $4 billion debt. In addition to a forbearance agreement, this group would be willing to exchange its GDB debt for new paper amid a haircut, or reduction to principal, in the vicinity of 50%, sources added.
The commonwealth is also engaging other GDB creditors, including a group of local cooperatives that hold about $30 million of the GDB’s May payment, sources said, in an effort to strike forbearance agreements with them.
But even if all these alternatives materialize, “we are talking about roughly half of the payment. So we are probably going to use the [recently enacted] moratorium law,” warned Acosta, who traveled to New York this week to continue debt-restructuring talks.
Meanwhile, the public-private partnership contract to control PR-5 and PR-22 between Metropistas, a local subsidiary of Spanish firm Abertis, and the P.R. Highways & Transportation Authority (HTA), was recently extended, a transaction that would provide $100 million to the cash-strapped authority.
When asked by Caribbean Business whether the administration would use the money to pay down the HTA’s mammoth $2 billion loan sitting on the GDB’s books, La Fortaleza Chief of Staff Grace Santana said it is premature to talk about the use of these funds since the financial closing has not taken place.
“Once we are certain the financial closing took place, then we will use the funds based on a recommendation from the GDB and Office of Management & Budget to the governor [as provided by the public-private partnership law]. When we are certain about this, we will talk about its uses,” Santana said.
On Wednesday, Metropistas stated it had paid HTA the $100 million from the contract extension.
As of early Thursday, La Fortaleza had yet to respond to Caribbean Business’ inquiries on how it plans to use the money, and whether it will be transferred to the GDB before Monday in an effort to help the bank come up with more cash to cover its debt payment.
Looking at the bigger picture
The commonwealth’s latest efforts to tackle the GDB’s debt woes are “a piece of a larger restructuring process…what we have called the superbond,” Acosta said.
To date, the so-called “superbond” is the administration’s only card on the table—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.
“Whatever we do in this GDB restructuring cannot negatively affect the ultimate restructuring. So we are making sure that the numbers do make sense, and that in any way, they don’t actually negatively put us in a worse position with the whole restructuring,” the GDB chief said Monday.
“Sometimes you could think that 47 [cents on the dollar] is a big number, a big discount, but you have to look at how much these notes are being traded right now. You have to look at the larger amount, and how it impacts the rest,” Acosta said, in reference to the GDB notes, which have been trading for months at dismal prices.
Plans call for having any debt restructuring deal reached with GDB creditors become a part of the superbond, if it is achieved down the road. “That’s the idea. That eventually whatever deal comes through, whatever happens [with the GDB], ultimately [the deal] is part of the superbond. Maybe the terms are different on the wrapping,” Acosta explained.
“Every little piece adds up with every other piece to a [debt] level that has to be sustainable overall. We can negotiate with individual credits, as we are doing right now with GDB holders, but we have to be mindful of the big picture,” warned Millstein, who continues to believe that once there is an agreement over economic terms, the structure would follow.