A group of investors sued the Government Development Bank for Puerto Rico Monday to protect their interests after the governor said the bank can't make its $423 million debt payment due May 1.
Brigade Capital Management, LP, Claren Road Capital Management, LLC, Fore Research & Management, LP, and Solus Alternative Asset Management LP
The suit came after Gov. Alejandro García Padilla and key advisors met with Puerto Rico legislative leaders Monday morning about sending a bill for a debt payment moratorium to the legislature. According to the El Vocero news web site the moratorium would stop payments from the Puerto Rico Sales Tax Finance Corp. (COFINA) but not general obligation or guaranteed debt payments. A spokeswoman for Puerto Rico House of Representatives President Jaime Perell- Borrás said the bill hadn't been drafted as of Monday afternoon.
The asset managers are in continuous discussions with the GDB concerning the May 1 debt payment, and chose to sue to prevent the bank from collapsing.
"One doesn't want a run on the bank" and a freeze on withdrawals and payments would prevent this, a source close to the GDB suit litigants said Monday.
The creditors pointed to a March 28 filing in a separate case, in which U.S. District Judge José Antonio Fusté cited a report from the Puerto Rico Commissioner of Financial Institutions that stated the GDB was "insolvent."
Davis Polk & Wardwell LLP and Vicente & Cuebas are the law firms representing the litigants.
The suit would allow withdrawals "needed to maintain services essential to the public safety of the citizens of Puerto Rico or to pay the ordinary course operating expenses of GDB such as utilities, rent and employee wages," according to a press release from the litigants.
On Friday GDB President Melba Acosta Febo, in a statement posted to the GDB site, denied rumors that the GDB was about to be shut down or privatized. She acknowledged that the GDB financial status was delicate and that the GDB was evaluating several options.
It has been reported that it would be up to the Puerto Rico Treasury Department to put the GDB into receivership, if it was necessary. On Sunday, Treasury Secretary Juan Zaragoza G-mez resigned his seat on GDB board of directors.
"The GDB notified me that it's not in a good economic position, which is of public knowledge and responds to unscrupulous loans without repayment sources and short-term notes that were issued by past administrations," he said in an email statement released by a spokeswoman. "Also, the GDB notified me that measures were being taken such as negotiating with its creditors to try to favorably resolve this situation, especially that related to notes due in May. In response to this formal notice I resigned from the GDB's board of directors to avoid any conflict of interest."
The GDB owes a $423 million payment on notes May 1, according to Moody's Investors Service.
"The commonwealth's fiscal, economic and humanitarian crisis is causing widespread chaos for the government, our creditors and the island's residents on a daily basis," Acosta Febo said in a statement. "The lawsuit filed today by a number of the commonwealth's creditors against the Government Development Bank, which seeks an injunction to bar GDB from fulfilling its official duties as depositor of the central government and other governmental entities, is further evidence of the toll the inaction from Congress continues to take on all involved."
No bills have yet emerged from the U.S. Congress as Democrats and Republicans debate proposals to address Puerto Rico's debt and economic crisis.
García Padilla was scheduled to meet with all legislative members of his party, the Popular Democratic Party, at 3 p.m. on Monday to discuss a debt payment moratorium bill, according to a source in the Puerto Rico Senate.
On Monday El Vocero reported that Puerto Rico's government had just set up accounts in private banks, diverting money that had been going to GDB accounts. The accounts are to handle things like payroll and essential services.
El Vocero also reported that the GDB on March 7 had changed the trustee handling its note payments to Wilmington Trust National Association from Banco Popular.
As of late August 2015 the GDB owed $4.61 billion in debt.
According to a document from the GDB, the bank had $618 million in liquidity as of Feb. 29. As of March 1, it had $669 million in legal reserve, of which $386 million was excess reserve.
A GDB spokesman in 2015 said that the GDB going below its reserve requirement wouldn't necessarily trigger action to put the bank into receivership. The Federal Deposit Insurance Corp. doesn't regulate GDB.
