Puerto Rico Government Reaches Deal With Credit Unions to Avoid Defaulting on Debt

The Government Development Bank (GDB) is seen in San Juan, November 30, 2015. (PHOTO CREDIT: Reuters/Alvin Baez/File Photo)
The Government Development Bank (GDB) is seen in San Juan, November 30, 2015. (PHOTO CREDIT: Reuters/Alvin Baez/File Photo)

Puerto Rico’s Government Development Bank said it has reached a deal with credit unions to avoid defaulting on about $33 million of debt due on Monday.

The GDB, Puerto Rico’s primary fiscal agent, said in a statement on Friday that it was still negotiating with other creditors in hopes of avoiding default on another $422 million due on Monday. The terms of the deal struck with the credit unions, according to the statement in Spanish, are also “available to other … creditors of the GDB, including other institutional bondholders.”

The credit unions will exchange their debt for new notes due on May 1, 2017.

GDB’s indebtedness, about $4 billion in total, is part of a $70 billion debt load in Puerto Rico, the U.S. territory facing a decade-long recession, 45 percent poverty rate and shrinking population. GDB, which acts as a liquidity source for the island’s public entities, is negotiating with hedge funds including Fir Tree, Solus and Claren Road in hopes of staving off a default that could threaten services and operations on the island.

Optimism for a deal has been low, with Gov. Alejandro Garcia Padilla saying this week that “there will be a default on Monday,” and a source close to talks telling Reuters there is “no indication” of progress on a deal.

But the accord with credit unions is a sign that talks are still alive. Height Securities analyst Daniel Hanson, who follows Puerto Rico closely, said on Friday he remains bullish for a deal with other creditors by Monday. “The idea that GDB has $4 billion of debt due in the next five or six years is problematic, but there’s a really strong inventive to find way to stretch that debt out,” he said.

A default at GDB would likely mean turning its operations over to a receiver who, under Puerto Rico’s fiscal emergency law passed this month, would have authority to shift the bank’s deposit accounts to a new, bridge entity, while leaving the burdensome debt liabilities at a GDB shell.

The legality of those measures would likely be challenged by creditors in costly lawsuits that could perpetuate economic uncertainty on the island of 3.5 million.

A default would also ratchet up pressure on Congress to legislate a fix for Puerto Rico. Lawmakers remain locked in dispute over a draft bill that would put Puerto Rico’s finances under federal oversight and allow it to restructure debt.

SOURCE: Reuters, Nick Brown