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Puerto Rico Gov’t Seeks to Resume Talks with Creditors

By on August 9, 2016

SAN JUAN —  Following Promesa’s passage and Puerto Rico’s default on July 1, Sales Tax Financing Corp. (Cofina by its Spanish acronym) creditors are still talking debt-restructuring options with the local government, at least two sources told Caribbean Business.

However, the two Cofina clans — seniors and subordinates — remain the only major creditor groups that have continued restructuring discussions with the administration of Gov. Alejandro García Padilla.

On Tuesday, the governor said he had ordered his fiscal team and restructuring advisers to engage in “good faith negotiations with creditors,” in order to access the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) debt-restructuring mechanisms.

Garcia-Padilla-Feature

Gov. Alejandro García Padilla

After the federal law’s passage and the roughly $800 million default July 1 on general obligation (GO) debt, restructuring talks with most creditor groups came to a screeching halt. For instance, the Ad Hoc Group of GO Bondholders — which mainly comprises hedge funds — were not be willing to sit at the negotiating table until the fiscal control board is established, one source told this newspaper.

“They are angry because clawed back funds were not used for the July 1 GO payment,” a government source said in reference to the roughly $270 million held in accounts at the Government Development Bank and Banco Popular with no use assigned to them yet, officials have said.

“In deciding what can be a good, acceptable deal for Puerto Rico, with the help of federal agencies, we will be considering the effects of our continued tax base erosion due to severe outmigration,” García Padilla said while on a teleconference from the City University of New York.

In doing so, public services enjoyed by Puerto Ricans on the U.S. mainland would be the benchmark for the investments that would be called for by the local government in order to improve Puerto Rico residents’ quality of life, the governor noted.

“Make no mistake. We will not cut a bad deal for the people of Puerto Rico,” García Padilla stressed.

As for Cofina, sources said both seniors and subs have been inching closer on their proposals, which have kept them at odds to date. This has improved the likelihood of striking a debt-restructuring deal before the federally appointed fiscal control board comes into play.

Although fears remain over having their pledged portion of the island’s sales-tax “clawed back,” or taken over, by the government, the García Padilla administration has yet to move toward that direction and has shown few signs it will do so. Cofina creditors have kept receiving their debt payments as they come due, most recently a $276 million due Aug. 1.

“If they could [claw back Cofina revenue stream], they would have done it,” a source with knowledge of the matter told Caribbean Business. “There has been some initial contacts and Cofina seniors remain interested in continuing negotiations.”

However, there is a perception among Cofina creditors that the government is holding out, the source said. “You don’t have to wait for Promesa; you have people willing to negotiate now,” he noted, adding that Cofina seniors would be willing to stretch out payments over a longer period during a fiscal year, providing the local government with extra cash during the first months of the year.

GDB talks halted

Meanwhile, debt-restructuring talks at the Government Development Bank (GDB) have been on hold ever since some hedge funds that own part of the bank’s debt sued the troubled institution earlier this summer.

“The Puerto Rico government decided not to continue these talks because one of the conditions was precisely not to sue,” one government source said.

Moreover, the GDB failed to meet a $28 million interest payment due Aug. 1, hindering an agreement reached more than three months ago with a group of local credit unions that helped ease down the bank’s looming debt-service obligations. Upon striking that deal, the GDB said it would seek to continue making interest payments despite the restrictions placed by the governor on the bank’s cash disbursements.

Although the government’s budget for fiscal year 2017 earmarks funds to prop up the bank’s liquidity, Treasury has yet to disburse those funds to the GDB amid a limited cash flow.

When asked Tuesday by Caribbean Business whether budgeted funds, including those for the GDB, are being disbursed, Treasury Secretary Juan Zaragoza said they were, but on a limited basis. “It would be prorated monthly. In July, we didn’t pay anything…we began in August,” he said.

Caribbean Business Executive Editor Philipe Schoene Roura contributed to this report.

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