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Senate Passes Moratorium Legislation

By on April 5, 2016

SAN JUAN — As first reported by Caribbean Business, the Alejandro García Padilla administration presented Monday night legislation that would enable the governor to declare a moratorium on the commonwealth’s debt payments, while providing a new receivership process to deal with the financially battered Government Development Bank (GDB), which only had roughly $560 million in liquidity as of April 1, according to the bill.

The Puerto Rico Emergency Moratorium & Financial Rehabilitation Act, or Senate Bill 1591, was passed in the upper chamber past midnight. While plans called for both chambers to approve the bill during the night, the House decided to debate the measure on Tuesday, reconvening at 11 a.m.

Legislative sources told Caribbean Business the bill still lacked enough votes to secure passage over concerns from some majority lawmakers in the lower chamber, including Rep. Rafael Hernández.

Acting under the Puerto Rico Constitution’s police powers, the legislation seeks to empower the governor to declare a moratorium on the debt service of the commonwealth and its instrumentalities, as well as a stay against litigation that may result from triggering the mechanism. That authority would cover all types of commonwealth debt, including the GDB’s and general obligations.

As for the bank, the measure would amend, or “modernize,” the receivership process not only of the GDB, but also that of the Economic Development Bank. If the GDB is placed under the new receivership process, a temporary “bridge” bank could be created to carry on some GDB functions and honor deposits, the bill reads.

Lastly, a new entity called the Puerto Rico Fiscal Agency & Financial Authority would be established to essentially take over the GDB’s roles of acting as the island’s fiscal agent and financial adviser. The entity’s board would comprise only one member, and in addition to its fiscal agent duties would “take charge of the commonwealth’s [debt-] restructuring efforts,” the bill further states.

Following a meeting earlier Monday between majority lawmakers and García Padilla in La Fortaleza, Chief of Staff Grace Santana said an agreement was reached to present and consider the bombshell legislation as quickly as possible.

When asked about the bank’s restructuring, Santana said one of the possibilities was dividing the bank “into various entities,” but that it wouldn’t take place within the next few months, although the governor would have the authority to trigger this mechanism.

“What we are doing tonight has never been done in Puerto Rico. Obviously, there are concerns, but we have no doubt we are doing what we need to do,” Senate President Eduardo Bhatia said.

A group of GDB creditors that combined hold a substantial amount of the institution’s $4 billion debt sued the bank Monday, seeking it stop transferring assets out, except for those that cover essential services. While government officials downplayed its effect on the measures being discussed to deal with the GDB, two people with knowledge of the matter said it could affect the government’s action plan with respect to the bank.

The chief of staff said that, as of Monday, the governor hadn’t been informed that the GDB was insolvent. “We are identifying alternatives in anticipation of [this scenario] to avoid insolvency and the receivership process under law,” she said.

Earlier Monday as well, Santana, Bhatia and House Speaker Jaime Perelló denounced the poor fiscal practices of the previous administrations in issuing short-term debt without repayment sources, calling the maneuvers irresponsible. When asked by a reporter if the administration would refer any finding on foul play over these debt issuances to the Justice Department, Santana conceded it was a possibility that hadn’t been discarded.

Caribbean Business first reported that the administration was on the brink of presenting the legislation seeking a moratorium on Puerto Rico’s debt service, including the $422 million owed by the GDB on May 2, as well as the roughly $1.5 billion due across the board on July 1. Last week, La Fortaleza intended to move forward on the measure as soon as Friday, but failed to deliver the bill to the Legislature at the time, government sources said.

As for the GDB, the administration had been leaning toward splitting the bank into good/bad entities, “an FDIC-like [Federal Deposit Insurance Corp.] approach,” with the government bank seeking “to protect depositors and access to its asset value, while figuring out some restructuring of the third-party creditor debt,” a government source with knowledge of the matter said. “Traditionally, the FDIC does a good bank/bad bank act, moves assets and deposits into a good bank, then leaves behind the third-party debt.”

Nevertheless, the process would now call for some sort of “bridge bank” in an effort to ensure public deposits and avoid disruptions to government operations.

The commonwealth’s move to present debt-moratorium legislation before the summer debt cliff comes amid debate in Congress over draft legislation presented by Republicans in the House to tackle the island’s fiscal crisis. The measure calls for a strong federal fiscal-oversight board while providing access to a debt-restructuring mechanism, subject to the board’s approval.

And although the administration remains optimistic that changes can still be introduced to the bill to reach favorable legislation for Puerto Rico, time is not on its side.

Meanwhile, on the creditor front, advisers for the commonwealth and its debtholders continue to negotiate terms for a voluntary debt-restructuring plan that could secure enough support from all sides, but these have entered into nondisclosure agreements, sources said.

Caribbean Business previously reported that the commonwealth government sought to announce a revised offer to creditors at some point during the past two weeks, but plans were suspended amid ongoing negotiations between the parties. A government source added that creditor groups asked the government to not release the proposal publicly until all sides were closer to seeing their demands met.

SAN JUAN, PUERTO RICO - JULY 01: The Puerto Rican Capitol building is seen as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico. Governor of Puerto Rico Alejandro García Padilla said in a speech recently that the people of Puerto Rico will have to make sacrifices and share the responsibilities to help pull the island out of debt. (Photo by Joe Raedle/Getty Images)

The Puerto Rico Capitol (Photo by Joe Raedle/Getty Images)

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