Puerto Rico GDB debt restructuring moves toward mandatory 45% cut

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Puerto Rico's Government Development Bank is moving closer to a debt restructuring with a 45% cut in the value of bonds, deeper than an earlier negotiated agreement.

Puerto Rico’s government announced Tuesday that the Fiscal Agency and Financial Advisory Authority, the GDB, and “a significant portion" of the other parties to the restructuring support agreement have agreed to amend the existing August RSA.
Under the earlier RSA the bondholders would choose one of three new bond types. The types would be equal between 55 cents and 75 cents on the dollar of the original bond values. This deal was never formalized through a bondholder vote, as required by the Puerto Rico Oversight, Management, and Economic Stability Act for negotiated deals.

As of March 2017 the GDB had $4.1 billion in bond debt outstanding. In contrast to other Puerto Rico entities that are in Title III bankruptcy under the Puerto Rico Oversight, Management, and Economic Stability Act, the GDB is undergoing a consensual reorganization.

In September and October, due to the effects of Hurricanes Irma and Maria, “loss of communication, impairment to municipal revenues and liquidity and the impact to GDB real estate owned assets, FAFAA, GDB and the RSA Requisite Bondholders agreed on revising certain RSA milestones,” according to a March 21 draft of the GDB fiscal plan.

If the new terms are adopted, bondholders would get new bonds with a 7.5% annual coupon payable from available cash. If there is insufficient cash to pay the bonds, then the interest would be paid pro rata. Any unpaid interest would be paid in new bonds and these would be payable later.

The new bonds would have a maturity in August 2040.
If the deal goes forward, any available cash of the bond issuer would be directed to bondholders within five days from the closing date to reduce the principle outstanding.

The amendment also specifies that loans that public corporations owe to the GDB would now be owed to the new Recovery Authority that will be paying the bondholders. This was not in the original GDB restructuring support agreement, said Christian Sobrino Vega, Gov. Ricardo Rosselló’s non-voting representative on the Oversight Board.

The new deal also has terms for the municipalities. If approved, each municipality would be authorized to apply the amount of deposits it had at the GDB against the balance of any loan it owed to the GDB.

According to the press statement from the governor’s office, “to provide municipalities with immediate liquidity, the amendment to the RSA gives each municipality the opportunity to receive immediate payment, before consummation of the transaction, of 55% of such municipality’s undisbursed certified excess CAE [Special Additional Property Tax revenue] held at GDB in exchange for releases.” The CAE revenue stream is dedicated primarily to paying municipalities debts. Historically, there has been excess held by the GDB delivered to the municipalities once a year. With the financial crisis at the GDB, this has been frozen.

Most of the amendment announced Tuesday will require approval by at least 50% of each bondholder group and at least 66% of the voting creditors in each group.

The new RSA splits the GDB bondholders into three groups: the Puerto Rico financial cooperatives, the other bondholders residing in Puerto Rico; and those who are based outside of Puerto Rico. The amendment says it is following the original RSA’s provisions on bondholder approval of the deal.

Approval of the amendment would also require the Puerto Rico legislature to pass amendments to an existing GDB law, and the Puerto Rico Oversight Board would have to sign off on it.

Moody’s Investors Service lead Puerto Rico analyst Ted Hampton said it was encouraging that the GDB negotiations were advancing.

Hampton said some of the other Puerto Rico debts may ultimately have deals reached through negotiations in the arbitration process. This is despite the fact that they have already entered the Title III process of court-supervised bankruptcy.

If the GDB deal goes through, the GDB debt holders may get a significantly better recovery rate than the general obligation holders, an odd development, according to Hampton.

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