Stuck in a Holding Pattern

SAN JUAN – While most Puerto Rico creditors play the Promesa waiting game, debt-restructuring talks remain at a standstill. Everyone is sitting and waiting to see what cards they will be dealt.

Early last month, Gov. Alejandro García Padilla said he had ordered officials to engage in “good faith negotiations with creditors” to access the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) restructuring mechanisms.

But efforts are now geared toward finishing the revision of the administration’s long-term fiscal & economic growth plan, at least two sources with ties to the government said. The goal would be to release the plan before the end of September, along with a new commonwealth financial report.

“As everybody expects numbers to change, the government has been trying to come up first with a structure. If the numbers vary, creditors can bring up the issue, and the government will make the respective changes,” said one of the sources. “All creditors know the government is updating the [fiscal] plan.”

Yet, driven by the uncertainty of times to come, most creditor groups are waiting for the establishment of the federal law’s fiscal board, whose seven members were appointed by President Barack Obama on Wednesday. Other motives are keeping negotiations dormant such as a looming change in the island’s government administration, and a chance to let the board know their own fiscal and economic blueprints for Puerto Rico.

Then there are some creditor camps—such as the Sales Tax Financing Corp. (Cofina by its Spanish acronym) and mutual funds—that would be showing interest in resuming talks with the government without having to wait for the federally appointed board.

“The [government’s] strategy is to publicly release its plan. The government would not need to make another offer. Creditors would know where they stand based on the revised numbers,” the source added. “There are trust issues, as well. Some [creditors] think the U.S. Treasury is pushing a strategy to affect them. This has also held talks.”

A Treasury team has been based on the island for weeks, assisting the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA) on the plan’s revision, sources had told Caribbean Business.

The federal government wants the administration to concentrate on revising the long-term fiscal plan’s revenue estimates, another source tied to the government said. Treasury’s worries are centered on misstated numbers and protecting underfunded pension systems—both of which would affect the economic terms of any restructuring deal that the commonwealth proposes.

Moreover, the García Padilla administration seeks shared ground with creditors as to what they will present to the fiscal board on the economic development end, the other government source noted. For instance, federal healthcare funding parity, industrial tax credits and increased foreign investment would be some of the fronts being eyed.

“That gives [creditors] more money from which to recover, and economic development that allows bond prices to stabilize,” this source stressed.

As many creditor groups anxiously wait for Promesa’s fiscal board to be put in place, some would be having jitters that a lack of speed and prudence driving the process will adversely affect their credits. Some were hopeful that prearranged negotiations would be put on a fast track under the federal law.

Willing to talk

“[Millstein & Co.’s Jim] Millstein is sometimes seen as the bad cop and some [creditors] will like to see more engagement from Citi’s bankers if they are to re-engage in talks,” said one source with knowledge of the situation, in reference to the García Padilla administration’s restructuring brigades.

One group that would have had put aside these differences are Cofina creditors. They are one of the few creditor clans still talking debt-restructuring options with the local government, at least three sources told Caribbean Business. Cofina divides in two classes—senior and subordinate. As recently as this week, talks between Cofina creditors and government advisers took place, one source told this newspaper. “They are very much interested in reaching a consensual deal.”

“Senior Cofinas have been easier to negotiate with,” another source said.

Within the creditor camp, one source also acknowledged the discussions. “But if you ask me whether there has been a real concerted effort to get to some deals, I am not seeing any evidence of that,” the source added.

Meanwhile, a handful of general- obligation (GO) creditors, who also hold paper backed by the island’s sales tax, would be paying close attention to what happens with the Cofina creditors.

Mutual funds, which mostly own GOs and Cofina subordinate paper, would also be willing to negotiate. “They wanted to keep negotiating. They had a proposal with something akin to growth bonds [first proposed by the government], and they wanted to present that to the [commonwealth],” one source said, although a meeting has yet to take place.

The monolines

“[Municipal bond insurers] are very distant,” said one of the sources. With stakes in the game being driven by high anxiety, few credits are more anxious than bond insurers, or so-called monolines.

Take for instance National, which is on the hook for almost $4 billion on gross par outstanding.

Out of the monolines involved with Puerto Rico debt, National could be the one drawing the short end of the stick, said another source with knowledge of talks. “They are also the toughest to negotiate with,” the source added, noting National’s role in restructuring talks at the Puerto Rico Electric Power Authority.

“Claims on financial guarantee insurance policies issued by National on the affected credits total $173 million,” stated Bill Fallon, CEO of National. He is making reference to the amount of money National had to pay affected creditors following the commonwealth’s roughly $800 million default on July 1.

Other bond insurance companies, such as Ambac, Syncora and Assured Guaranty, would have a less dire wait, with debt loads in the immediate future that are less onerous.

Ambac, which has already paid net claims of approximately $53 million related to the July 1 default, is scheduled to make a payment of $15 million on Jan. 3. The company has a $2.2 billion exposure to the commonwealth.

“We only have payments of about $15 million, assuming that the debt-service reserve fund is paid, so we have a relatively light payment. And then in July, it is a bigger payment,” Ambac CEO Nader Tavakoli told Caribbean Business during a telephone interview that took place several days ago.

The monoline’s top executive is optimistic the oversight board will go in the direction of fiscal responsibility and undo some of the measures undertaken by the García Padilla administration.

“Our definite perspective on this, as I have said before, is that oversight boards that have achieved success in the past have done so by fiscal responsibility and getting the jurisdiction access to the capital markets,” Tavakoli said. “And I think that this oversight board will not do differently. They will bring a prudent approach to the interaction between the jurisdiction and the creditors and investors.”

Importantly, Promesa’s board has the discretion to require payment of interest. “If you do simple math and look at their payables and receivables, it is clear that they are either accelerating certain payables or otherwise disposing of cash,” said a creditor representative who chose anonymity. “So we are confident that the Promesa board will find some cash and that they will be able to make at least the interest payments and perhaps even some principal payments.”

As for Assured, President & CEO Dominic Frederico recently said: “Whether the current government will be willing and able to provide reliable, audited financial information so the board can do the job remains to be seen. Once that information is available and all parties can reliably analyze the financial condition of the various obligors, the chances for successful consensual settlements will improve.”

Frederico went on to say that although the approved Promesa bill is better than its predecessors, “it does leave room for a potential judicial cramdown, stays creditor legal actions and, critically, does not provide any economic assistance to the island.”

Assured has more than $5 billion in exposure to Puerto Rico. Syncora and FGIC are the other two monolines that insure commonwealth debt, although with lesser exposures.

Locals brace for fiscal board

“We are not negotiating with the government, nor do we think it would be productive to do so at this moment,” said Jorge Irizarry, adviser to Bonistas del Patio, a creditor group that comprises local bondholders. This camp would rather wait for the board to be established, banking on a friendlier negotiation environment and newer financial information, he explained to this newspaper. Bonistas del Patio says its members could hold as much as $14 billion of Puerto Rico’s debt.

“I understand nobody is negotiating at these moments, and [the government] would not negotiate either,” Irizarry said. “There is no information and this is a lame duck administration. A new governor is coming in and the two most likely [candidates] have said they will do differently. Let’s see.”

Irizarry wants to know first the board’s composition and the plans it would undertake once it begins its work.

“There is also a new administration coming in [January 2017], where governing boards change and advisers, as well. It makes no sense to negotiate now,” Irizarry noted.

Another local creditor constituency is credit unions, or cooperativas, which own a large share of the Government Development Bank’s (GDB) outstanding debt, among other credits.

As previously reported by Caribbean Business, debt-restructuring talks at the bank have been on hold since early summer. Moreover, the bank did not cover a $28 million interest payment due Aug. 1 and, as of presstime, was leaning toward missing a $10 million payment due Sept. 1. Failure to receive interest payments on their GDB notes hinders cooperativas, which largely depend on these as a source of liquidity.

“It is very difficult for the GDB to make that [Sept. 1] payment,” one government source said, pointing to the cash inflow situation at the liquidity-strapped bank.

GOs in holding pattern

Although GO bondholders have aggressively pushed several restructuring proposals over the past two years, they have been viewed skeptically as the intellectual authors of a strategy that seeks to cement their credits as pre-eminent.

“GOs vary a lot, so they are more complex to deal with,” said one of the sources, who added that a big GO group was involved in talks with the government prior to the island’s July 1 default.

“The talks are frozen stiff as it pertains to the GO Ad Hoc Group,” added a creditor lobbyist with ties to the Democratic Party, making reference to a key GO group, which mainly comprises hedge funds. “As of last week, there were no conversations. They were open to set up a deal prior to the arrival of the board, but the government is waiting for the board to arrive. And until that happens, [the García Padilla administration] is taking the position that there is no need to negotiate. Talks are totally frozen.”

Earlier this year, sides were about six-cents-on-the-dollar apart in terms of the haircut, or reduction to principal. “It was the government’s turn [to present its counteroffer], and it would have most likely inched closer in terms of the haircut,” another source said.

Then a short-term nondisclosure agreement (NDA) expired and talks broke up. “The government intended to sign [an extension to the NDA]. But [GOs] didn’t want to, because with the passage of Promesa, the prices of their bonds were going up,” the source added.

Under these NDAs, participating parties needed to stop trading the bonds upon which they exchanged privileged information. “They wanted to keep trading,” the source stressed. “So government advisers recommended to wait some time past July 1 before resuming talks.”

Another source said the GO group would be willing to negotiate with Secretary of State Víctor Suárez, who is also director of FAFAA. “They trust the guy. He is an honest person and would be a fair person with which to have discussions,” the source noted.

So they would prefer to negotiate with him rather than Millstein? “Yeah. Suárez is someone they feel comfortable with,” this source added.

For his part, García Padilla continues to stress, “Make no mistake. We will not cut a bad deal for the people of Puerto Rico.” At the end of the day, this would largely depend on the cards that are dealt.

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

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