Puerto Rico's efforts for a consensual debt restructuring suffered a setback Wednesday, as talks between the Government Development Bank for Puerto Rico and a group of investors broke down.
Evercore director of municipal research Howard Cure said the break down, “is indicative of the difficulty that the commonwealth is going to face in trying to negotiate settlements and exchanges prior to an actual default. At this point you may assume that various creditors would still prefer to take their chances in a courtroom.”
The GDB was attempting to persuade investors to exchange their notes for senior guaranteed Puerto Rico Infrastructure Finance Authority notes, according to its posting on the Electronic Municipal Market Access website. The note holders also would have committed to purchasing an additional $750 million in PRIFA notes.
In the press release, GDB President Melba Acosta Febo said: “While we are disappointed that we were unable to reach a constructive and mutually beneficial agreement with the Ad Hoc Group of GDB creditors, the GDB and the Working Group for the Fiscal and Economic Recovery of Puerto Rico continue to make progress towards a comprehensive voluntary exchange offer that addresses the commonwealth’s indebtedness in a holistic manner and through which creditors across the commonwealth will agree to amended payment terms through consensual negotiations.”
Acosta Febo continued, “As we have said in the past, we strongly believe that a voluntary adjustment of the terms of the commonwealth’s debt that allows the measures contained in the Fiscal and Economic Growth Plan to be implemented is the best way to maximize recoveries for creditors. The GDB and the Working Group are engaging constructively with key stakeholders to achieve a comprehensive path forward, and we have begun the process of signing non-disclosure agreements and initial due diligence with a number of creditors.”
Under the proposed debt exchange the PRIFA notes would have been secured with the proceeds of a rise in oil taxes adopted earlier this year. On a preliminary basis, the PRIFA notes would have had an 8.5% coupon and a 10% yield to maturity.
According to Markit, a GDB note with a February 2017 maturity has been trading in recent weeks around 45 cents to 47 cents on the dollar. In the proposed deal that the note holders ultimately rejected, the note holders would have exchanged their notes for PRIFA notes at prices equal to 130% of their market value. A 30% markup on 47 cents would mean the new PRIFA par value would be about 61 cents on the dollar of the GDB notes’ original par value.
In addition, there were preliminary plans to have PRIFA bonds mature from 2020 to 2037, which would have extended the maturities held by investors on some and perhaps all of their securities.
The bonds would have been callable probably from 2018 onwards at a price assuring a 12% yield-to-call interest.
If a court impaired the effectiveness of the guarantee of the PRIFA notes, which were supposed to be senior to other PRIFA debt, then the note holders could have exchanged the PRIFA notes for the old GDB notes.
If the commonwealth were not to make due payments on its general obligation bonds or if the commonwealth were to seek bankruptcy for the PRIFA bonds, these events would be considered a default on the PRIFA bonds.
As of August the GDB had $4.7 billion in bonds and notes outstanding, of which $267 million was insured.
Puerto Rico debt holders now believe that their debt has superior claims to the expenses of the various Puerto Rican government bodies, said Municipal Market Advisors Partner Matt Fabian. Until investors see that their debt is subordinated to expenses either through defaults or court orders, investors will have little incentive to negotiate with Puerto Rico’s government.
MMA has said that plans to handle Puerto Rico’s public sector debt will more likely be worked out in courts than voluntarily.
Because the government’s financial crisis is so severe and the outcome so unclear, it is hard for Puerto Rico to create a new security for exchanges that will clearly pass through the impending tumult unscathed, Fabian said. The point of a debt exchange for the debt holders, particularly for the hedge funds, would be to sell the security. Because of this, it would have to be fairly immune to further credit deterioration.
