Puerto Rico GDB reaches debt deal

The Government Development Bank for Puerto Rico reached a debt restructuring deal that reduces bond principal by 25% to 45%.

Gov. Ricardo Rosselló announced the restructuring support agreement in a written statement Monday morning.

The deal would be an improvement over what the Puerto Rico Oversight Board is offering for all Puerto Rico debt, at least during the next nine fiscal years. In that time the board’s approved fiscal plan indicates that there is enough money to pay 24 cents on the dollar of debt service. If the debt terms are unchanged and this pattern continued until all existing bonds matured, it would imply a 76% haircut on the bonds.

The GDB agreement on its $4.1 billion of debt was reached with a “significant portion of its major stakeholders,” the Puerto Rico Fiscal Agency and Financial Advisory Authority said in the statement.

The stakeholders plan to use Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act, which sets out a process for bond holders to approve restructuring deals, to modify the debt terms.

For the deal to be carried out it will have to be approved by the GDB creditors (including a certain portion of its bondholders), the Puerto Rico Oversight Board, and the United States District Court for Puerto Rico.

The primary creditor groups that negotiated the deal were a GDB Ad Hoc Group of Bondholders, local credit cooperatives, and the local bondholder group Bonistas del Patio. The Ad Hoc Group was composed of funds managed or advised by Avenue Capital Management II, L.P.; Brigade Capital Management, LP; Fir Tree Partners; and Solus Alternative Asset Management LP. Alianza de Cooperativistas and Grupo ES represented credit cooperatives.

“The agreement is an example that the government is regaining the credibility it had lost over the past few years,” Rosselló said. “We are satisfied with this agreement that will result in the best interests of the people of Puerto Rico.”

Bonistas del Patio spokesman Rafael Rojo said “while we are voluntarily accepting to sustain significant losses, up to 45% of the savings that Puerto Ricans worked for, it is because we are Puerto Ricans first, and we recognize the circumstances in which Puerto Rico is today.”

According to the Puerto Rico certified fiscal plan, as of February the GDB had $3.2 billion in bond debt plus an additional $742 million in unpaid principal and interest.

The GDB reached an initial restructuring agreement with the Ad Hoc Group in May 2016.

If Monday’s deal goes through, bondholders and municipal depositors would be given new bonds from a newly developed special purpose vehicle entity. Certain other public entity depositors would be given access to a public entity trust.

The SPV would offer three tranches of bonds, which bondholders and municipalities could choose among. Tranche A and B would offer a first lien on assets and would be entitled to amortizing principal payments from available cash on a pari passu basis, according to the deal’s term sheet. Tranche A bonds would be issued with a 55% upfront exchange ratio and a 7.5% coupon. Tranche B bonds would have a 50% upfront exchange ratio and a 5.5% coupon.

Tranche C bonds would have a second lien on the SPV’s assets and would have their principal paid after available cash is used for tranche A and B bonds. It would have a 75% upfront exchange ratio and a 3.5% coupon.

The GDB would transfer assets to the SPV, including its entire municipal loan portfolio, real estate assets available for sale, proceeds of certain public entity loans, and excess cash. Total book value will be $5.3 billion, according to the term sheet.