Puerto Rico parties agree to GDB deal modification

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The Puerto Rico Oversight Board, Government Development Bank, Puerto Rico Fiscal Agency and Financial Advisory Authority, and the Unsecured Creditors Committee agreed to a settlement of their dispute over an existing GDB restructuring deal.

The agreement will provide a yet-to-be-determined amount of funds to the Puerto Rico Electric Power Authority and the Employees Retirement System. The "mutually agreeable resolution" ends an attempt by the unsecured creditors to scuttle the restructuring of $4.1 billion of GDB bond debt previously agreed to by bondholders.

The parties are calling on Puerto Rico bankruptcy Judge Laura Taylor Swain to approve a stipulation that will modify the existing GDB debt deal.

At a hearing Friday morning in a federal courthouse in New York City, GDB lawyer Matthew Kremer told Swain that the lawyers who struck the deal don’t believe it to be a “material change” to the existing GDB deal.

Bondholders approved the existing GDB deal in a vote that extended from mid-August through mid-September. Kremer told Swain that he didn’t believe the new terms, found in the stipulation, would require a re-solicitation of votes. Further, it wouldn’t require changing the planned schedule for the GDB restructuring, he said.

Kremer is Counsel at O’Melveny & Myers.

Speaking for the Unsecured Creditors Committee, attorney Luc Despins said the GDB deal was one of the most complex legal cases that he’d been involved with. He said the deal would leave the “Title III debtors” in a better position.

Despins is a partner at Paul Hastings.

Though Despins didn’t specify which Title III bankruptcy debtors he was referring to, the stipulation explicitly refers to the deposits of PREPA and the ERS at the GDB as “Title III Debtor Designated Deposits.”

Lawyers representing the board, GDB, FAFAA, and the Unsecured Creditors Committee urged Swain to approve the stipulation. She said she would review it.

The proposed GDB deal would eliminate the GDB and have claims against it be made against two entities. GDB bondholders, municipal and private depositors, and some other contingent creditors would exchange existing claims for new bonds from a newly created GDB Debt Recovery Authority. Any claims from the central Puerto Rico government or other Puerto Rico authorities against the GDB would be handled by a Public Entity Trust.

While the existing deal, without the stipulation, is multifaceted, a key part of it says that existing GDB bonds are to be exchanged for new bonds valued at 45% less.

The proposed stipulation has four key parts. The second part deals with the survival and transfer of legal claims if the GDB were to be completed. In the fourth part the unsecured creditors give up certain claims regarding the GDB deal.

In the first part, the GDB agrees that upon the execution of its restructuring to transfer $20 million to the Public Entity Trust. If the GDB on the closing date, after satisfaction of Cash Adjustment obligations, has extra money, then up to $10 million of that money would also go to the Public Entity Trust.

Together, this $30 million would be called the “Settlement Cash.” PREPA and ERS are to be given first dibs on this sum at the Public Entity Trust.

The stipulation’s third part states that the amount owed by Puerto Rico to the GDB, and that will be owed to the Public Entity Trust after the deal, will have the amount reduced by federal funds on deposit at the GDB (about $312 million). Also, remaining claims by the GDB (to be held by the Public Entity Trust) against the central government will remain valid, except that those claims will not be allowed in an amount greater than $578 million.

For comparison, as of February 2017 the central Puerto Rican government entities owed the GDB and Municipal Finance Agency a total of $6.4 billion. These entities included the ERS and other bodies that go beyond what stipulation defined as the Puerto Rico central government.

The third part also states that after the GDB satisfies all contingent and unliquidated claims against the GDB, it will contribute to any balance that remains to the ERS and PREPA until they have received amounts equal to 55% of their deposits at the GDB.

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PROMESA Government Development Bank for Puerto Rico Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico Employees Retirement System Puerto Rico