Thursday, December 5, 2019

Unsecured Puerto Rico creditors may reject GDB restructuring deal

By on August 23, 2018

SAN JUAN – The Official Committee of Unsecured Creditors, of all Puerto Rico Title III debtors except Cofina, has filed a notice stating it intends to oppose the Government Development Bank’s (GDB) debt-restructuring deal, in part, because negotiations were not conducted “on an arms’ length.”

Before the bankruptcy process, as fiscal agent and banker to agencies, the GDB was the leader, the committee said, of the financial maneuvers that led to the island’s current fiscal crisis, which led to the bank having ceased operations more than a year ago.

However, the committee said former GDB officials, who they believe were responsible for the institution’s debt and ultimate demise, remain involved in Puerto Rico’s restructuring efforts, including the planned restructuring.

“Indeed, current and former GDB insiders are now board members of the Oversight Board, officers of AAFAF [Fiscal Agency and Financial Advisory Authority], managing directors of AAFAF’s financial advisor, or the executive director of a GDB bondholder group supporting the transaction, the so-called ‘Bonistas Del Patio.’

“These individuals would prefer that this Court ‘bury’ GDB before the Committee and other interested parties have the opportunity to perform the autopsy,” the committee said.

The committee said GDB’s restructuring plan proposes to offset the public funds deposited with GDB by the debtors against GDB’s outstanding loans to the debtors; transfer all of the GDB assets to the new GDB Recovery Authority for the exclusive benefit of GDB’s bondholders; release GDB and its current and former directors, officers and other representatives from any liability, and impose on the Commonwealth the obligation to repay hundreds of millions of dollars on account of federal funds deposited with GDB.

The committee claims the deal violates the automatic stay, which can only be lifted by the court.

According to the GDB’s new fiscal plan, which was certified on April 20, as of Dec. 31, GDB received deposits of about $3.5 billion and owed unsecured bond debt, including accrued interest, of more than $4 billion. As of July 1, it held approximately $624.8 million in cash and cash equivalents.

The GDB’s restructuring calls for creditor groups to exchange their old claims for new notes with a face of value of 55%, secured by all the assets of a new governmental entity called the GDB Debt Recovery Authority, which will receive almost all the liquid assets held by the GDB, including its municipal loan portfolio, a portion of its public entity loan portfolio, its real estate owned assets and unencumbered cash.

However, non-municipal entities in the restructuring would not receive notes backed by Recovery Authority assets, the committee stressed.

“The disfavored Non-Municipal Government Entities will have any deposits held by GDB set off against purported loan balances owed to GDB, and those holding net claims against GDB will receive, pursuant to the GDB Restructuring Act, a pro rata share of interest in the Public Entity Trust (the “PET”) that holds a single asset – GDB’s alleged claim against the Commonwealth. This unliquidated interest in the PET (it may be worthless because neither the Commonwealth nor the GDB’s fiscal plan makes provision for payment of such yet-to-be-allowed claim will be deemed to be in full satisfaction of any and all claims Non Municipal Government Entities may have against GDB. In other words, the Title III Debtors’ deposit claims against GDB are being subordinated to the claims of GDB’s bondholders and other favored unsecured creditors,” the committee said.

Under the GDB restructuring, the commonwealth will be assuming approximately $312 million in liabilities to the federal government on account of funds granted to the commonwealth and municipalities as a result of federal programs and deposited at the GDB.

The deal also exempts former GDB officials from any liability despite evidence their actions contributed to the fiscal crisis, the committee reiterated, adding that its allegations go in hand with the final report prepared by Kobre & Kim, which was hired by the island’s fiscal board to investigate the causes of the public debt.

While the independent investigator’s report accepts that GDB officials were well-educated and well-credentialed for the job, they make a series of mistakes that ultimately led to the GDB’s downfall, the committee pointed out, adding that the institution was not only fiscal agent of the commonwealth since 2001 and authorized bond issues, but it also lent money to agencies.

However, the group said, the GDB lacked the ability to monitor the agencies and public corporations’ accruing deficits, as well as information that would have helped it to monitor how bond proceeds or loan funds were used.

“The evidence further demonstrates that as lender, GDB extended financing for the purpose of helping the Puerto Rico-Related Entities meet their operating deficits. GDB’s lending standards were also, at times, not as rigorous as one would expect given GDB’s concurrent responsibilities as fiscal agent. This was compounded by the fact that GDB did not hold those borrowers strictly accountable when they could not repay their obligations as originally agreed,” the independent investigator said.

For instance, “GDB made over $2 billion in loans to (the Highway and Transportation Authority) between 2008 and 2013. Many of those loans were, according to former GDB officials, used to cover HTA’s budget deficits,” the investigator added.

According to the report,  GDB funding became an expected method for public entities, such as the utilities, to balance their budgets.

“For example, according to a former Finance Director for Prepa [Puerto Rico Electric Power Authority], Prepa’s annual budgets were set with the assumption that Prepa would receive funding from GDB: the budget would first be decided, and then Prepa would approach GDB with a request for financing,” the report reads.

It followed then that the utilities had little need to implement more self-sustaining measures, such as “higher consumer rates, and collecting sufficient revenues, to support their own operations without resorting to new bond issuances or GDB loans. To compound the problem, GDB’s provision of short-term cash injections to certain Puerto Rico-Related Entities while they waited to access the capital markets appears to have increased the debt load of certain Puerto Rico-Related Entities, in a way that arguably had the effect of benefitting GDB as creditor relative to others,” the report said.

The lending practices impacted the GDB’s actions as a fiscal agent, the report said. On 2011, Prepa approached the GDB with a proposal to draw a $260 million line of credit from a private bank to avoid putting at risk its oil supply. One month earlier, however, the power company had proposed it obtain a different line of credit, of $150 million, to be drawn from a different private bank.

“That earlier proposal did not mention any existing overdraft or potential need for a meaningful amount of additional liquidity in the foreseeable future. Understandably, certain GDB officials expressed surprise at the subsequent request for the $260 million credit line. But GDB nevertheless approved it,” the report said.

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