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Puerto Rico Gov’t Working On New Proposal to Creditors

By on May 11, 2016

SAN JUAN — The Puerto Rico government is already working on a new version of its broad debt-restructuring offer to creditors, as commonwealth advisers continue efforts to achieve some sort of relief measure, such as a forbearance agreement, ahead of its more than $1.5 billion debt payment due July 1, including roughly $780 million in general obligation bonds (GOs).

Last week, Gov. Alejandro García Padilla was briefed on the revised proposal, which would be soon presented to creditors, Government Development Bank (GDB) President & Chairwoman Melba Acosta told Caribbean Business on Wednesday.

Melba Acosta 1

Government Development Bank President & Chairwoman Melba Acosta

When asked about changes to the commonwealth’s latest debt-exchange offer, the GDB chief said sides are working under nondisclosure agreements, which prevent them from publicly commenting about terms at this moment.

Throughout this week, advisers for the commonwealth and various creditor groups have held several meetings, including those representing GOs, Sales Tax Financing Corp. (Cofina by its Spanish acronym) senior and subordinate bondholders, and municipal bond insurers with exposure to Puerto Rico debt. Moreover, Caribbean Business learned that new counteroffers from some creditor groups, including GOs and Cofina subordinate debtholders, have been presented to commonwealth advisers, but terms have yet to be made public.

García Padilla met on Tuesday with a group of creditors in New York to “communicate firsthand the need for Puerto Rico to reach a broad restructuring that will provide a sustainable level of public debt,” La Fortaleza stated, but did not specify which creditors the governor met.

Caribbean Business learned that no negotiations took place during the meeting, which was organized by Jubilee USA Network, a religious alliance that “seeks to build an economy that serves, protects and promotes participation of the most vulnerable,” according to its website.

Acosta said Wednesday that the commonwealth’s revised offer would take into consideration, to the extent possible, concerns brought by creditors following the release in April of the administration’s last offer. Higher recovery rates and a debt instrument tailored for local bondholders were among the changes to this proposal, which was presented to creditors on March 23 and released publicly a few weeks later.

By earmarking roughly $49 billion of the island’s tax-supported debt, the commonwealth intends to have creditors exchanging their paper into two types of instruments — a “superbond” deal 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.

Moreover, the idea is to have a more predictable, steady debt service of about $1.8 billion a year, as the commonwealth’s restructuring team continues to target a debt-service level hovering at around 15% of the island’s annual revenue.

Meanwhile, administration officials have already warned that if Congress fails to enact legislation that grants Puerto Rico access to a debt-restructuring mechanism before July 1—or creditors don’t agree to voluntary deals that can provide the island with relief ahead of the payment—a moratorium would be declared in order to protect essential services amid the government’s cash crunch.

Talks with GDB creditors

As she had told Caribbean Business last week, Acosta said Wednesday that more local credit unions are on the brink of joining a deal in which maturity on their GDB debt, initially due May 2 and totaling roughly $30 million, would be extended by a year.

The GDB has already pushed maturity on roughly $33 million in notes that were due May 2, after reaching a deal with a group of local credit unions named G25. Another deal was later announced by the GDB with a group of hedge funds that owns about one-fourth of the bank’s roughly $4 billion in debt, as Caribbean Business reported April 19. In addition to a 30-day forbearance on about $120 million that were due May 2, the bank and the hedge fund group agreed to a general debt-exchange framework that would include a “two-step restructuring” of the bank’s debt.

Acosta said Wednesday that commonwealth advisors continue to negotiate restructuring terms with the hedge fund group, particularly the treatment of interest when and if the administration is able to strike the broader restructuring plan. Moreover, she said efforts will continue to bring all of the creditors onboard the deal, a key condition for it to materialize.

The credit union group G25 recently stated concerns over the restructuring terms being discussed between the bank and hedge funds, as they would respond to the latter’s interests, with proposed haircuts not representing 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.

The commonwealth missed roughly $370 million of its $470 million debt-service tab across credits due May 2, of which $120 million are covered under the 30-day holiday granted by the GDB’s 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.

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