The Government Development Bank for Puerto Rico may offer a voluntary exchange for up to $4 billion in outstanding notes to help deal with an impending liquidity crunch.
GDB officials have held informal talks with some holders of the notes and are racing to put together an offer in the next few weeks, El Vocero reported on its website Monday and Wednesday, citing GDB President Melba Acosta Febo and her spokeswoman. GDB officials didn't respond to the Bond Buyer's request for confirmation.
The GDB is mainly communicating with hedge funds, El Vocero reported.
The holders of notes would be offered increased rates in exchange for extended maturities. The GDB believes a portion of those who receive the offer would accept it, according to El Vocero.
The note offer would be another means to deal with an impending liquidity crunch over the next few months. In early May the government issued a financial report that indicated that the commonwealth could pay off its debts in the rest of the fiscal year, which ends July 1. However, the report cited concerns over its ability to pay off all its debts in July and August.
On Monday the GDB announced that its total net liquidity on May 31 had decreased to 24% from a month earlier to $778 million.
Since late 2014 the government has been preparing a possible $2.9 billion bond that the Puerto Rico Infrastructure Finance Authority would sell. An increase in oil taxes would support the repayment of the bonds. PRIFA would use about $2 billion of the raised funds to pay off the debt of the Puerto Rico Highways and Transportation Authority to the GDB. The GDB would then be flush with funds and able to pay off a variety of its own and other Puerto Rico government debts.
On Monday, Puerto Rico chief of staff Victor Suárez Melendez said he was optimistic that the government could still sell the PRIFA bond but that conditions were not yet appropriate for its sale.
Also on Monday Suárez Melendez said the government was looking into having the central government borrow from other semi-autonomous Puerto Rico public funds and entities.
The GDB's notes exchange would be another approach to dealing with the commonwealth's liquidity crunch in the coming months.
From a credit perspective an issuer attempting to move short-term debt into long-term debt is never a good sign, said Howard Cure, director of municipal research at Evercore.
In considering the proposal the note holders will have to consider the prospects for improved conditions in Puerto Rico in whatever the period would be before the new securities would mature.
Cure said Evercore had no GDB notes.
Bel Air Investment Advisors Director of Municipal Research Michael Ginestro said he was concerned that the GDB's net liquidity level at the end of May was $600 million short of its September projection for the date.
