Local Credit Union Group: Puerto Rico and Hedge Funds an ‘Unholy Alliance’
SAN JUAN — After agreeing to delay for a full year a $33 million payment originally due May 2, a group of local credit unions voiced concerns over debt-restructuring terms being discussed between the Government Development Bank (GDB) and several hedge funds that own about a quarter of the troubled institution’s $4 billion debt.
For G25—a group of local credit unions that own GDB notes—restructuring the bank’s debt “cannot be achieved blindly, without acknowledging the full financial realities of each group of bondholders, especially those comprising a majority,” according to a statement released Thursday.
Failure to consider any proposals that take into account these realities would “reveal an unwillingness to protect the capital of traditional investors (both in Puerto Rico as well as in the U.S.), and a tactical affinity in negotiating with hedge funds, leading to an alignment of interests,” the group further noted.
Mere hours after Gov. Alejandro García Padilla declared a moratorium on the bank’s debt-service obligations, the GDB announced it agreed to a general restructuring framework with the hedge fund group, which owns about $900 million of the bank’s debt.
A “two-step restructuring” would see all creditors—including local credit unions—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.
“An agreement with such a slim likelihood of real implementation and founded on the interests of a minority ends up being a simulation,” the co-op group went on. “Even if that simulation has the purpose of lobbying Congress for debt-restructuring powers that allow the imposition of principal ‘haircuts,’ this exercise lessens the restructuring negotiations and unnecessarily delays them.”
Caribbean Business reported Thursday that in the runup to Monday’s partial default, some advisers in La Fortaleza were of the opinion that striking deals with GDB creditors could run counter to the commonwealth’s prospects to achieve immediate congressional action over the island’s fiscal crisis.
Puerto Rico missed about $370 million of its $390 million GDB debt-service tab, of which $120 million is covered under a 30-day forbearance agreement reached with the hedge fund group. The bank paid, in full, interest payments worth $22 million—a move aimed at protecting local bondholders and credit unions, according to government officials.
GDB President & Chairwoman Melba Acosta told Caribbean Business on Wednesday that more local credit unions would accept pushing maturity on their bonds for a year, after failing to receive this week about $30 million worth of principal. “There are more co-ops that will be joining. Probably next week, we are going to have a second closing with some other co-ops,” she said.
G25, represented by lawyer José Sosa-Lloréns and banker Fernando Viñas, says it will continue debt-restructuring negotiations with the GDB.
GDB Restructuring Terms
According to the G25 statement, the terms being discussed would respond to hedge funds’ interests, while the proposed haircuts would not represent losses for this creditor group, after having acquired their bonds at discount. Moreover, a reduction to principal could even translate to double-digit gains for hedge funds, the group further noted.
“To traditional investors, who typically bought their bonds at par in their original issuance, principal haircuts represent material losses, both of capital and current income,” read the statement, while warning against the negative impact it could have on the island’s already-battered economy.
The credit union group argued that the GDB would have to offer bonds carrying principal premium and/or higher yields if traditional investors were to receive “a truly comparable transaction” — one that takes into account the actual capital invested by each bondholder.
G25 downplayed “unworkability” claims over such an approach, as well as conflicts with bankruptcy principles, particularly given that it would take place under a voluntary process “governed by the parties’ freedom of contract.”
Finally, in addition to debt restructuring, G25 stressed that a comprehensive solution must include economic development policies and a revamped government structure that can lead to a much more effective operation. By itself, “debt restructuring will only generate a ‘mega-deal,’ the effects of which will be brief and insufficient.”