The news about the Puerto Rico economic scene this last week ended with a short but dramatic television speech by the governor on Sunday at 5pm. As expected, he reiterated in general terms the liquidity crisis and that the government would default on its payment of GDB notes due to congressional inaction and lack of local “tools” to stop the economic and humanitarian crisis. The only detail given was that the government would default on only $367 million, since an agreement had been reached with most of the financial cooperatives of the Island that would allow to delay a $33 million payment. He also announced that $22 million would be paid in interest.
The big surprise was a release early Monday morning of what appears to be an official working document entitled “Indicative Terms of GDB Restructuring”. The document summarizes a proposed two-step restructuring of all GDB notes subject to negotiations in good faith, the execution of what is called “definite documentation” and an exchange of notes involving 100% of GDB note holders.
The deal requires that GDB “old notes” be swapped for “new interim notes”, to include Face Discounted notes and Par Notes. It required that such exchange be done by agreement or pursuant to a “statutory binding mechanism”. The haircut expected from the new Face Discount Note holders, is stated at 56% of face amount on the old notes, with interest at 5% paid in cash and PIK, according to an increasing five-year table.
The new notes would be secured by a first lien on GDB’s municipal loan portfolio with a face amount of $1.9 billion (the “first lien collateral”). The first lien tranche would be open only to the GDB Ad Hoc group whose members are said to be fully participating in the transaction.
Interesting conditions include a collective action clause allowing for supermajority of bondholders to agree to amendments on the terms of the notes, and a rule for use of cash flow by GDB using a lock box mechanism and that collateral would only be available to bondholders upon “limited acceleration events”, basically defaults with a cure period included.
Finally, a 30-day forbearance agreement would have to be signed with the Ad Hoc group related to the non payment of interests and principal on 1 May.
This last minute announcement of a two-step restructuring of GDB notes, begs the question of whether this proposal should be considered a serious opportunity for negotiations, which could lead to resolving the immediate needs of GDB, or if the move is simply just another tactic that the government has put on Congress to grant the Island the restructuring mechanism it needs.
The summary restructuring term sheet requires an 100% “agreement” by note holders for the two-step exchange of notes to take place, or that it be done according to a “statutory binding mechanism”. The first requirement is almost impossible to achieve. The second provision probably means a chapter 9 type restructuring method for the territory, that does not exist and that Congress is set against. Even though such requirements give the proposal a sense of the unreal, at the same time, Congress, conservative groups and hedge fund lobbyists should have received the message that this administration is not ready to back down. At least not yet.
If you are interested in the subject, we recommend our online seminar Understanding Puerto Rico’s Economic Crisis: Executive, Judicial, and Congressional Responses and Proposals – 2.9 CLE Credit Hours [COME-2016- 909] – Approved by the Supreme Court of Puerto Rico